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Ex-Kinetics Execs Create Alternative Fund

Two top executives with Kinetics Asset Management have left the White Plains, N.Y., fund group best known for its once high-flying Internet fund. Kinetics' former chief executive officer and chief operating officer have spun off a new alternative investment advisory firm and registered the first of several novel open-end mutual funds that will employ various alternative investment strategies.

Like other hedge fund-like investments or hedge fund-of-funds that have come to market within the last couple of years, this new fund, Alpha Strategies I, is registered with the Securities and Exchange Commission. Unlike other alternative investments, however, Alpha Strategies I will integrate different strategies into one open-end mutual fund. It will also offer daily liquidity and will not reward sub-managers with double-digit performance-based incentive fees. Instead, the sub-advisors will carve up the lion's share of the fund's higher 2.25% management fee.

The start-up investment advisor to the fund, Alternative Investment Partners (AIP) of Chappaqua, N.Y., began operations April 1 and is headed by Chief Executive Officer Steven R. Samson and Chief Investment Officer Lee W. Schultheis. Samson had been president and CEO of Kinetics as well as chairman of the board of the funds. Schultheis had been Kinetics' chief operating officer and president of Kinetics Funds Distributor.

AIP registered Alpha Strategies I Fund with the SEC on April 16, indicating that this is to be the first in a family of funds called the Alternative Investment Funds.

The Alpha Strategies I Fund, which will have a $25,000 minimum initial investment, will target wealthy professionals, including doctors, lawyers, dentists and engineers, looking for other investment alternatives but nervous about traditional hedge funds, Samson said.

AIP will initially sell the fund through registered investment advisers. The company has also structured the fund so that it can convert into a master/feeder structure, to allow other investment companies to offer the same hedge fund investments to their own shareholders by investing into the AIP master fund.

According to the SEC filing, the Alpha Strategies I Fund will have five sub-advisors, each of which will concurrently manage a portion of the fund's total assets by employing hedge fund-like investment strategies. These will include absolute return, long/short, market-neutral, event-driven and various arbitrage strategies. The idea is to bring an array of investment strategies together into one traditional mutual fund, Samson said.

That structure is unusual, as most SEC-registered hedge funds tend to stick to just one alternative investment strategy per fund. Where advisors want to tap into multiple alternative investment strategies, they typically launch multiple funds, each with its own strategy.

Pros and Cons

While there is clearly an appetite for alternative investment products, wrapping multiple strategies into a single fund may confuse people, said Patrick Adams, president of Choice Investment Management of Englewood, Colo. Adams manages three mutual funds, including a long/short fund as well as a separate hedge fund. "I don't know how all of the strategies will work together," Adams said.

Samson insisted that multiple investment strategies is a sound approach that offers an important side benefit of liquidity. By having five different sub-advisors who invest directly in securities, Samson explained, the "managers [can] treat the fund assets as individually managed accounts," he said. That will allow the fund to offer daily liquidity because the fund's assets won't be subject to an outside hedge fund's lock-up period, he said.

Because of these lock-up periods, and due to their own significant direct investments in illiquid securities, many SEC-registered hedge fund offerings have been structured as limited liability companies, or LLCs, which offer redemption windows to investors only twice a year. A few have been structured as interval funds - essentially closed-end funds that are continuously offered and do not trade in a secondary market, but usually offer quarterly share tender opportunities.

By offering daily redemptions via an open-end mutual fund, AIP is fighting what is perceived as one of the obstacles to investors embracing hedge funds - an inherent lack of liquidity.

Bruce Lipnick, president of Asset Alliance Corp. of New York, an alternative investment asset management company, agreed that the lack of liquidity in alternative investment has served as a deterrent to typical mutual fund investors. Lipnick indicated that alternative funds that offer daily liquidity, such as AIP's new Alpha Strategies I Fund, might attract average mutual fund investors.

However, industry observers are not as optimistic about the fund's compensation system. Breaking with tradition, the Alpha Strategies I Fund will not pay any performance-based incentive fees to its chosen sub-advisors, as is standard practice among other hedge funds. Instead, the fund is opting to dole out a portion of its hefty 2.25% management fee to its sub-advisors.

"The talent in the hedge fund world demands incentive fees. The best managers can command 20% of the profits," said Todd Ladda, managing director and director of marketing at the alternative investment group of CIBC World Markets of New York.