The new year is starting off with three new funds that may be indicative of at least one of 2007's big investment trends. The hot spot right now: absolute-return funds that aim to provide hefty returns despite whether equity or fixed-income markets are booming or busting.
According to Morningstar of Chicago, since the start of 2003, 26 new open-end, absolute-return funds have debuted, bringing the total to more than four dozen with assets of nearly $16.8 billion. These funds can employ hedge fund-like strategies or leverage to boost returns, combine long and short positions, or otherwise apply a more balanced market-neutral strategy.
ThomasLloyd Funds of Pleasantville, N.Y., is starting the new year with a new moniker and a brand new long/short fund, the ThomasLloyd Long/Short Equity Fund. The fund, which launched Jan. 3, will invest in a combination of exchange-traded funds and individual stocks. The fund's portfolio can short as much as 25% of assets and leverage up to 125%. Through this method, the fund manager can, for example, invest in a broad sector of the equity market but short individual stocks within that sector, explained Charles White, the firm's chief investment strategist and fund's co-portfolio manager.
Through the end of 2006, the fund group was known as the Illington Funds. But this past April, DKM Asset Management of Stuttgart Germany bought the remaining 73% of the firm it didn't already own and renamed the company and its now wholly owned U.S.-based investment manager as ThomasLloyd Global Asset Management (Americas). The fund group's renaming followed.
"There is a blurring between traditional investments and those with modern techniques," said Sal Capizzi, CEO of the fund group, who predicts that similar alternative funds will come to market. ThomasLloyd itself plans to launch, or possibly acquire, other long/short equity funds. And the firm is seeking to hire three new external wholesalers plus one internal wholesaler, Capizzi noted.
Although the new long/short fund will be sold through intermediaries, the A-share class' front-end sales charge will be waived through Feb. 28 to encourage investors to come aboard, Capizzi said.
Old Mutual Asset Management of Boston is out with two new hedge funds-of-funds, one of which is the Old Mutual 2100 Absolute Return Fund.
With New York-based 2100 Larch Lane, an Old Mutual affiliate, as sub-advisor, the hedge fund-of-funds will invest between 60% and 80% of assets in hedge funds from well-established managers, and between 20% and 40% in hedge funds from emerging managers who often turn out to be the superstars of tomorrow, said Bill Landes, CEO of 2100 Capital Group, parent company of the firm. Industry studies have shown that fledgling managers are often capable of producing outsized returns.
While the investment managers at 2100 Larch Lane conduct due diligence to identify and oversee managers, they will make no distinction between hedge fund managers that are registered with the Securities and Exchange Commission and those that aren't. Moreover, the firm has set up a Chinese Wall between these new funds and its hedge fund manager seeding business and will not invest assets of its proprietary hedge funds with any of the hedge fund managers it has provided seed money to, as that would be a clear conflict of interest, Landes said.
Beyond the promise of absolute returns that aren't closely correlated to either the stock or bond markets, there is an increased appetite among investors for hedge funds-of-funds that can diversify among multiple managers as well as multiple strategies, Landes said. "I hope to see these become core strategies for investors," he added.
Borrowing from both traditional open-end mutual funds and hedge funds, Forward Management of San Francisco earlier this month debuted a new open-end mutual fund called the Forward Long/Short Credit Analysis Fund. The fund is novel in that it is one of the very few fixed-income funds to leverage and short securities. The caveat is that only qualified investors with a $25,000 minimum can invest. Retail investors are excluded. The fund caps its management fee at 1.59% but imposes a 20% performance fee.
"We believe we've created a hybrid product, a true hedge fund product on a 40 Act platform," said Jim O'Donnell, chief administrative officer at Forward. "We'd like to introduce other strategies on this platform," he added.
The fund's sub-advisor, Cedar Ridge Partners of New York, which manages a $50 million hedge fund, bases investment decisions on credit assessments and fundamental analysis across bond sectors, including municipals, high yield, high-grade corporates, preferred stocks and the growing credit derivatives market.
"The bear market of 2000 to 2002 changed investors' appetites. What you're seeing is a real shift from long-only strategies," O'Donnell said. The other message from investors, he added, is that they don't mind paying a performance fee as long as the investment manager doesn't lose their money.
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