LAS VEGAS (Reuters) - As a
$14.8 billion hedge fund with a reputation for savvy
mortgage trades and a record of double-digit returns,
Pine River Capital Management has long signed up
multi-billion-dollar pension and sovereign wealth funds
as investors.
Now the exclusive hedge fund is making some of its strategies
available to Main Street investors who've been warned that bets on
stocks and bonds may not see them through retirement. For as little
as $1,000, they can include hedge funds in their nest eggs.
As one of seven firms managing money in Wells Fargo's new
Alternative Strategies fund, Pine River is among the latest big-name
funds to crack its doors to private clients with look-alike products
known as liquid alternative funds after years of courting only the
super-wealthy.
"Sub-advising portfolios in the (mutual fund) space is a new and
diversified source of capital for a firm like ours," said Brian
Taylor, who founded Pine River with $350,000 of his retirement money
in 2002. "Like anything new, we are taking a measured approach, but
we believe it could be a growing part of our business over time."
In the last two years, several big name hedge funds have signed on
as sub advisers to liquid alternative funds, offering them through
mutual funds to average investors: D.E. Shaw, York Capital
Management, Jana Partners, Two Sigma Advisers, and HealthCor
Management are managing pieces of the funds sold by mutual fund
giant Fidelity. Brigade Capital Management and Graham Capital
Management manage money for a Goldman Sachs fund while Passport
Capital Management manages money for the Wells Fargo fund.
The trend provides private investors with fresh options beyond
stocks and bonds and allows hedge funds to tap a vast new pool of
capital. But it has also sparked fears that the original products -
which demand high fees - could be cannibalized, drawing traditional
investors to the cheaper ones.
Lackluster performance among traditional hedge fund portfolios in
recent years are fanning those fears, giving pension funds - the
giant pools of retirement money that have formed the backbone of
hedge fund clientele - fresh ammunition to complain about funds' 20
percent performance fee coupled with a 2 percent management fee.
"What was worth paying a 2 percent management fee and a 20 percent
performance fee for a few years ago, isn't worth it anymore," said
one investor, whose company puts billions into hedge funds and
didn't want to be named for fear of angering clients. The fee
structure among hedge funds is referred to in the industry as "the
2-and-20".
With hedged mutual funds there are no performance fees. And while
individual funds' basic fees vary, analysts said they usually cost
about 2.75 percent, a bargain compared to straight hedge funds'
overall hefty costs.
WEIGH ON PERFORMANCE
Plenty of skeptics say that mixing hedge funds' more illiquid
strategies with a mutual fund structure - where investors can pull
out money daily - will weigh on performance and ultimately won't
work.
"I love vanilla ice cream. I also love red wine vinegar. But when
you pour the vinegar over ice cream, it tastes terrible," said
Anthony Scaramucci, who runs SkyBridge Capital and hosted industry
conference SALT where liquid alternatives dominated panel
discussions and private poolside conversations. "That's like trying
to combine alpha and daily liquidity."
Hedge funds for the masses are not new but until recently only
smaller, lesser known players with less impressive track records
signed up. Pine River's 6-year old fixed income fund, for example,
boasts an average annual return of 32.6 percent, having caught
investors' attention with a 93 percent surge in 2009. Last year the
fund rose 10.2 percent after gaining 34.8 percent in 2012, far more
than the average, similar mutual fund.
To be sure, the new products offer only a sliver of what many of the
original hedge funds promise to deliver. The original funds'
strategies can be labor intensive, research heavy and complicated,
focusing on non-agency credit trading, for example. Liquid
alternative funds' strategies are generally simpler, often involving
stock picks.
But the draw is powerful. Assets in open-ended alternative mutual
funds stood at $142 billion at the end of January, up 44 percent
from a year ago, data from Morningstar show. McKinsey & Company
consultants forecast that retail alternatives, including hedge
funds, will likely make up 13 percent of U.S. retail fund assets by
2015, from 6 percent in 2010.
"Being able to add some hedge fund DNA to the 401(k) market is going
to be an essential benefit for investors as well as the hedge funds
that are participating," said Averell Mortimer, chief executive
officer of Arden Asset Management, which raised more than $1 billion
for its liquid alternatives fund sold through Fidelity.
Private equity funds are also eyeing the retail space. David
Rubenstein, co-founder of industry giant The Carlyle Group, said
that there will be a time for private clients to enter his types of
funds, adding "that will be an enormous growth opportunity for
people like us."
But for hedge funds, getting into the liquid alternatives space
early could also be a defensive play, as big institutional investors
start to push back against high fees and returns that sometimes fail
to beat the stock market indices.
"Hedge fund managers should be hedging their business," said Brad
Balter, Managing Partner of Balter Capital Management which invests
in hedge funds and is now offering its own liquid alternatives fund.
(Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and
John Pickering)
