Man Group, one of the world’s largest hedge fund managers, will this month offer its flagship AHL vehicle to anyone with £100 to spare.
And Man is no island; hedge fund illuminati such as Brevan Howard, GLG Partners, Odey Asset Management, RAB Capital, Thames River, AQR Capital Management and AlphaSimplex are among those to have repackaged their strategies into a mutual fund format.
For an industry once routinely referred to as “secretive”, the transformation has been nothing short of stunning. “Alternative strategies are moving into the mainstream,” says Rick Lake, co-founder of Lake Partners, a Greenwich, Connecticut-based consultancy, who refers to the process as “from aristocracy to democracy”.
The move is partly defensive. Hedge funds are battling to widen their investor base after many of their rich clients rushed for the exits in the wake of last year’s industry-wide 20 per cent losses. A political backlash against hedge funds further heightens the attractions of being onshore.
But the hedgies’ tentative embrace of the great unwashed predates these concerns. In Europe the advent of the Ucits III fund structure has widened the scope for funds that use short-selling or leverage to be sold to retail investors. In the US, legislation that improved the tax treatment of short-selling has had a similar effect.
Not to be outdone, the traditional fund industry has responded by copying some of the tricks of the hedge fund trade, with household names such as BlackRock, Schroders, Janus, JPMorgan, Pimco and Putnam among those rolling out funds that indulge in shorting, target unfamiliar asset classes or hold out the promise of “absolute returns”.
“Diversification is useful. If you run a long-only business sometimes it’s a wrong only business as markets go down,” says Mr Lake, cuttingly.
This convergence is a potential boon for smaller investors (and institutions that also prefer onshore, regulated vehicles) in their search for diversified portfolios – even though hedge funds had a terrible 2008 their losses were nowhere near as bad as that of equity funds. “The idea that diversification as we traditionally knew it failed last year is putting retail investors and their advisers on the path of alternatives and true diversifiers,” says Nadia Papagiannis, alternative investments strategist at Morningstar.
Anthony Marber, head of investor relations at Marshall Wace, a London-based hedge fund group that last week rolled out its fifth Ucits fund, a long/short equity Greater China vehicle, says industry-wide flows into hedge-style Ucits funds have thus far been modest.
The timing has not been great; Marshall Wace launched its first Ucits fund in November 2007, just as investors started to flee the markets. But he believes the very crisis that led investors to batten down the hatches will ultimately “throw into deep relief the great attractions of the Ucits space”.
“Institutional investors, not only in Europe but in Asia, are wholeheartedly embracing the Ucits format because it is regulated, requests you to control counterparty risk and demands liquidity,” says Mr Marber.
RWC Partners, another London hedge fund group, last week raised $120m (£75m, €82m) for the launch of RWC US Absolute Alpha, a Luxembourg-based equity long/short Ucits fund. More than half of RWC’s $3.5bn of assets are now in the Ucits format.
“Ucits brought new people out of the woodwork. Most of the buyers of the Ucits fund would not have bought a Cayman fund,” says Peter Harrison, chief executive. Mr Harrison says 15-20 investors subscribed to both the new Ucits fund and its equally new Caymans-based sister product, amid a desire for at least part of their investment to enjoy the daily liquidity of the onshore product.
Uptake has been greater in the US. Morningstar calculates that flows into “alternative” mutual funds are $46bn so far this year, compared with $17bn-18bn in 2007 and 2008.
Fund managers are finding a surprisingly large range of hedge fund strategies can be shoehorned into the leverage and liquidity constraints imposed by onshore funds.
John Donohoe, chief executive of Carne Global Financial Services, a consultancy, says two-thirds of hedge funds “could live within a Ucits wrapper”.
One issue that is still evolving, however, is what the fee structure should be for these hybrid funds. US fund rules make it difficult for hedge fund managers to import their traditional performance fee, which typically rakes in 20 per cent of investment returns, into onshore funds, unless all the investors are “qualified”.
Base management fees, which can range as high as 225 basis points, according to Mr Lake, are higher than for more traditional actively managed US funds, which typically charge 75 to 125 points. But in spite of this “hedge mutual funds operate with much less fee friction” than their pure hedge counterparts, Mr Lake says. As a result, Long and Short Strategic Opportunities (Lasso), the portfolio of hedge mutual funds he manages, has significantly outperformed standard hedge fund benchmarks since 2003.
Ucits does allow performance fees, which raises the ire of many, particularly given their asymmetric nature; managers keep a share of gains but do not share in the pain of losses.
In truth hedge fund managers could find themselves in a bind; if they charge significantly less for onshore products then they risk cannibalising their lucrative offshore funds. One consolation is the perceived higher “quality” of onshore money.
Louis Gave, chief executive of MW GaveKal, which manages some of Marshall Wace’s funds, says: “Because we have to give up some of the revenue we will be less profitable than on the offshore side, but it’s more sticky money. It’s more stable.”
Get alerts on Fund management when a new story is published