Hedge fund managers are looking to the mutual fund industry for their next source of growth.
With the relentless shift to defined contribution plans from defined benefit plans, hedge fund managers are looking to DC plans to diversify their client base.
“I think this is a spectacular opportunity. The 40 Act (the Investment Company Act of 1940, which regulates mutual funds) has real, tangible benefits for retail investors, and you will see some world-class hedge funds entering the liquid alternatives space,” said Neil Siegel, managing director and head of New York-based Neuberger Berman Group LLC's global marketing and product development.
Evan Mizrachy, the San Francisco-based head of retail alternatives for BlackRock Alternative Investments, agreed, saying: “There's such a strong greenfield opportunity right now. Retail investors, including defined contribution plan investors, don't have enough alternatives in their portfolios. At the same time, institutional investors have enough hedge funds and mostly will be doing manager upgrades.”
BlackRock's three hedge fund mutual funds had combined assets of $1.6 billion as of March 31, a mere blip within the firm's $3.9 trillion of assets under management. Neuberger Berman managed $219 million in its single hedged mutual fund as of the same date, a drop in that firm's $205 billion in assets.
Still, investment consultants are not convinced that liquid versions of hedge funds are a good fit for defined contribution plans or for smaller defined benefit plans, endowments and foundations.
The requirement for daily liquidity tends to limit the hedge fund manager's investment universe, potentially diluting performance, consultants said. High fees further reduce performance.
Aggregate assets invested in hedge fund mutual funds didn't total even 1% of the $13.1 trillion in U.S. mutual fund assets as of Dec. 31, according to Investment Company Institute data. But sources aren't daunted by that.