Last year, we discussed the growing number of alternative mutual funds launched by US-based fund of hedge funds managers, and how these managers have been seeking ways to capitalize on fundraising opportunities in the space. Here, we provide an update on this activity and look at how managers have expanded into the liquid alternatives space over recent months.
Hedge funds offered through the US ’40 Act mutual fund structure adhere to regulations set out by the 1940 Investment Company Act. Despite restrictions on riskier strategies and increased compliance costs associated with packaging such products to be suitable for retail investors, institutional investors recognize the benefits of seeking alternative routes into hedge funds, citing increased liquidity and transparency as primary factors (for the results of our most recent investor survey, please see the 2015 Preqin Global Hedge Fund Report). According to Preqin data, 2014 saw the largest recorded number of fund of ’40 Act hedge funds launches in a calendar year. The chart above highlights a total of 27 such funds launched in 2014, more than twice the number launched in 2013 (12). Between Q1 2014 and Q3 2014 these funds were launching in slightly greater numbers each quarter, whereas funds of hedge funds (excluding funds of alternative mutual funds) were generating fewer launches each quarter.
Furthermore, Preqin’s Hedge Fund Investor Profiles shows that at least 20 fund of hedge funds managers issuing their future search plans to Preqin for 2015 expect to allocate yet more capital directly into alternative mutual fund structures this year. At the same time, investor interest in single-manager alternative mutual funds will only be sustained by consistently positive returns on their investments; these funds should be aiming to bounce back from dampened performance in 2014, when they posted a return of 4.46% for the year after delivering an outsized return of 11.78% in 2013.
There have recently been some notable alternative mutual fund closures by fund of hedge funds managers, including Connecticut-based Simple Alternatives and New York-based Van Eck Global. However, the aforementioned fund launches data in the chart above suggests that new funds of ’40 Act hedge funds launches should continue to outpace the number of liquidations over the coming year. Indeed, at a time when fund of hedge funds launches (excluding alternative mutual funds) have been down on previous years, it is clear to see that US-based fund of hedge funds managers remain committed to the liquid alternatives space, having rolled out more vehicles focused on these investments in 2014 than ever before in a single year. The hedge fund industry overall is facing a difficult time, struggling to deliver significant gains to investors, particularly over the past 12 months; the growing number of alternative routes into the asset class may be becoming increasingly appealing to investors.