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Alternative Mutual Funds Present Opportunities for Funds of Hedge Funds – March 2014

by Ben Pearson

  • 10 Mar 2014
  • HF

Historically, alternative mutual funds have not played a significant part in the fund of hedge funds industry. However, according to Preqin’s Hedge Fund Analyst it appears that this is changing; Hedge Fund Analyst has identified at least ten new multi-manager alternative mutual fund launches over the past three months (December 2013 - February 2014). Although this may not sound significant at first, it is interesting to note that this figure represents a 50% increase on the number of these funds launched in the previous three months (September 2013 - November 2013). Clearly, ‘40 Act vehicles are fast becoming a common investment strategy within a multi-manager portfolio.

The transparency, liquidity and lower investment minimums associated with alternative mutual funds are a natural fit for retail investors, as well as for institutional investors which value funds that operate within a transparent and liquid framework. A small proportion of the 361 US-based fund of hedge fund managers tracked on Preqin’s Hedge Fund Investor Profiles are responding to this demand by creating their own funds of alternative mutual funds.

Fund of hedge funds managers of various sizes are well positioned to capitalize on investor interest in the liquid alternatives space, primarily thanks to their ability to provide indirect exposure to these alternative strategies. This is attractive to investors, in particular less experienced investors or those new to alternative mutual funds. Large firms such as Arden Asset Management and Goldman Sachs Asset Management have been entering the space in recent years. These firms launched their maiden alternative mutual funds, Arden Alternative Strategies Fund and Goldman Sachs Multi-Manager Alternatives Fund, in 2012 and 2013 respectively.

Fund of hedge funds managers with assets under management of less than $1bn are also intently looking at the alternative mutual fund space as a means of customizing and varying their product range. New Jersey-based Pine Grove Asset Management is one such manager that has tailored its portfolio to meet the demands of investors seeking liquid alternatives. In Q1 2014 the firm opened up an existing fund of hedge funds vehicle with a 16-year track record to retail investment by converting Pine Grove Institutional Partners into a multi-manager alternative mutual fund named Pine Grove Alternative Institutional Fund.

In summary, fund of hedge funds managers are starting to re-think their traditional portfolio offerings in order to attract large volumes of untapped capital in the retail market, as well as to capitalize on the increasing number of institutional investors looking at liquid alternatives. Several factors, including poor performance, have spurred the fund of hedge funds community into action in an effort to increase the total fund of hedge funds industry assets under management from $786bn as at year-end 2013. With this in mind, it would be highly surprising if their foray into the alternative mutual fund space did not continue apace in the immediate future.

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