PlusFunds Group of New York has created a hedge fund for the co-called "mass affluent" that addresses the issue of transparency for investors by being based on the Standard & Poor's Hedge Fund Index.
The new fund comes on the heels of the decision by Deutsche Asset Management of New York that it will distribute its own line of hedge funds based on the S&P's new index (see MFMN 12/16/02). Although other indexes, such as the CSFB/Tremont Hedge Fund Index, already exist, S&P's new index was created specifically to help investment professionals market and investment advisors create transparent products.
After an explosion of offerings in the waning days and immediate aftermath of the 1990s bubble, hedge funds have become a product much talked about as mutual fund complexes, financial planners and broker/dealers strain to offer customers products not tied to the continuing weak equity markets. A stumbling block has been hedge funds' history as a product, limited by regulation that has only fallen to the purview of the very rich.
PlusFunds' SPhinX Fund awaits approval from the Securities and Exchange Commission before it can be made available through independent registered investment advisors for a minimum investment of $25,000. It should be available by spring.
PlusFunds signed a distribution agreement with Rydex Capital Partners, a Rockville, Md., asset manager, and is also negotiating with banks and other financial companies for distribution deals.
Diego Winegardner, a vice chairman at PlusFunds, said the product was created to meet demand from mass-affluent customers for alternative investment products.
"A broader base of investors is interested in hedge funds as a component of their overall portfolio," Winegardner said. "Given the negative performance of the equity markets for the past three years, investors are looking for some alternatives, some diversification from other markets."
Hedge Fund Hotline
Hedge fund analysts said many banks and financial institutions have been looking for ways to broaden hedge fund distribution. In October, Quadriga Asset Management launched the Quadriga Superfund to let U.S. investors get into a hedge fund for as little as $5,000.
Gunter Mathis, Quadriga's chief operating officer, said that in its first two months, the product accumulated $10 million in assets. The Austrian hedge fund firm increased its total assets under management to $500 million at the end of 2002, from $160 million the previous year.
Mathis said hedge funds have been available to people in Europe and Asia for as little as a $1,500 investment. In the United States, many institutions have been discouraged from offering hedge funds to individuals due to an SEC rule that allows the products to be offered only to large-scale investors.
"The first trouble we faced was that we couldn't call our product a hedge fund because hedge funds are only for accredited investors," Mathis said. "Our product is a managed futures fund.'"
Mathis warned that offering alternative investment products to retail and mass-affluent investors requires performance and transparency. The Quadriga Superfund, which is distributed to self-directed investors and through financial institutions including banks, has returned 9.6%.
Interest Can Only Go So Far'
"There is a wide interest in hedge funds, but interest can only go so far," Mathis said. "Investors want to earn money."
Winegardner agreed that, historically, there has not been enough transparency in the market and that this has made the SEC wary of letting non-accredited investors put money in hedge funds. The difference with PlusFunds, he said, is that the S&P Hedge Fund Index quotes values daily.
"We are unique because of our correlation with the S&P index," he said. "By giving better transparency, the fund will be viewed as an investment product that resembles other investment products that investors hold in their portfolio."
S&P's Hedge Fund Index, which was started in November, is designed to represent the hedge fund marketplace. It comprises nine hedge fund investment strategies grouped into three style categories: arbitrage, event-driven, and directional/tactical. The index comprises 40 institutional managers.
PlusFunds is working on distribution deals with banks and financial institutions that Winegardner expects to announce in the next couple of months. He said his company chose Rydex as a distribution partner because of its relationships with independent registered investment advisors.
"We want to deliver to the needs of financial intermediaries that provide service and advice to investors," he said.
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