An Austrian hedge fund firm that has had success at home in amassing assets while requiring as little as an $1,800 investment says it plans to offer U.S. investors a hedge fund within two months that would require putting up just $5,000.
Two executives of U.S. banks that sell hedge funds, and require six-figure minimum investments, scoffed at Quadriga Asset Managements plan. "Hedge funds are made for wealthy investors," one of them said. "The Securities and Exchange Commission dictates that."
But Gunter Mathis, Quadrigas COO, recalled his start-up days in Vienna six years ago when institutional investors "laughed at us." Forced to sell to retail investors, he said, and requiring just an $1,800 minimum investment, Quadriga has amassed $220 million of assets under management, including $40 million of institutional assets in the United States.
In 1996 "we had $340,000 in assets under management, and every [institutional] investor laughed at us. We had so little under management, no bank was keen to invest with us," Mathis recalled.
"It is in our blood," Mathis said. "In 1996 it wasnt like we were so smart that we realized that hedge funds were a product that ultimately would be perfect for retail investors. We went to the individuals because we couldnt get institutions. But now we are retail people. We like to market to the retail side. We have a strong belief that on a global basis the hedge fund should be accessible to individual investors."
Hedge funds are available to individuals in Europe and Asia for as little as a $1,500 investment, but the two bank executives were unimpressed.
"The fees are high, the minimums are high, to make sure that people who can accept the risk of a hedge fund are investing in the product," said one of the executives, who asked not to be named.
Banks that offer hedge funds require minimum investments of $150,000 to $250,000, and a second bank executive said in an interview that these minimums are crucial for pairing investors with the right products.
"A firm like Quadriga is a good idea. It may work in other areas, and it may work here in the United States at some point. But for now this is a product for the wealthy," this executive said. "Wealthy investors can accept the risk associated with this product."
Mathis disagreed. Many institutions are discouraged from offering hedge funds to individuals by an SEC rule that limits a hedge fund to 499 investors, he said, but this ceiling can be evaded by selling hedge funds as "futures."
"If you have high minimums," he said, "no doubt it makes life easier. If you look at the hedge fund community, the managers have a vision of who their investors should be. They see Connecticut, cigars, and a back office. They want an exclusive little club."
"The typical hedge fund wants big money," Mathis said, "and mutual funds are afraid to sell them [to individual investors] because hedge funds take assets away from mutual funds. Right now there is pressure from retail clients who want to buy these, and no one wants to sell them."
Mathis said his product has been successful in other markets and has generated an average annual return of 29% since 1997.
"People like to say hedge funds are risky. But if they are so risky, then why do pension funds invest in them?" he said. "Hedge funds are an alternative investment, but they are perfect for individuals to invest in."
Using a strong technology platform, Mathis said, Quadriga has been able to bring hedge funds efficiently to a larger audience. Eliminating a lot of back-office work and record keeping responsibilities, he said, lets asset managers focus on managing the products for a broader audience.
Burton Greenwald, a fund analyst from Philadelphia, said that individuals eventually will begin to invest in hedge funds. It is really just a matter of time, he said.
"If you look at where mutual funds were 20 years ago," Greenwald said, "they were a product that had higher fees and higher minimums and were a product that was reserved for the wealthy. Now look how far we have come. We are smarter investors now, and people know it is smart to diversify."
Large banking companies are catching on, Mathis said. Deutsche Bank says it has raised $1.6 billion by selling low-minimum hedge funds to individuals in Germany, and Mathis said the Frankfurt banking giant is preparing to sell hedge funds to individuals in the United States this year.
"The best managers are selling these products around the world," he said. "The top people are jumping ship to start hedge funds. If you put all of these puzzles together, you realize that there is no way to stop. Hedge funds have gone from an alternative product to a strong alternative investment for individuals."