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Hedge Funds Tread on Mutual Fund Turf

Hedge funds are now trying to beat mutual fund companies at their own new game.

While mutual fund managers, in their quest to attract assets and turn some kind of a profit for investors in this hairy market, have been tirelessly getting into the hedge fund arena, hedge funds are now offering their services to fund customers. As hedge fund specialists, these new competitors may have an advantage that fund companies simply don't.

The expanding registered hedge fund arena now includes products from relatively small firms or novice managers at mutual fund firms right alongside those of some heavy-hitting global managers with decades of expertise employing alternative investment strategies.

So far this year, 21 different advisors have registered limited liability companies, a form of hedge fund or hedge fund-of-funds that, unlike loosely regulated traditional hedge funds, must register with and abide by the rules of the Securities and Exchange Commission.

Some investment managers have registered multiple offerings, in some cases three or four funds that employ differing hedge fund strategies. A few managers have even found their way into the registered hedge fund arena by way of innovative open-end mutual funds that are testing the waters and investors' appetites.

In recent weeks, two more players have announced they will offer SEC-registered hedge funds.

Hedge fund giant Man Investment Products of Chicago, the subsidiary of Man Group of London, which claims to be the largest hedge fund manager in the world, has registered its first U.S. SEC-registered hedge fund-of-funds, the Man-Glenwood Lexington Fund. The fund will be sub-advised by Chicago-based Glenwood Capital Management, Man's hedge fund-of-funds subsidiary with $4.7 billion under management. Since 1983, Man has launched 200 alternative investment products around the globe, and raised $11 billion. It currently manages $20 billion.

Evergreen Investment Management Company of Boston, a unit of Wachovia Corp. of Charlotte, N.C., has registered two hedge fund-of-funds, the first product of its kind for Evergreen, although the firm has been managing $500 million worth of other types of alternative investments since 1996.

The Evergreen Hedged Specialists Fund will invest in 10 to 15 U.S. equity hedge funds that specialize in varying market sectors. The Evergreen Managed Strategies Fund will invest in 15 to 30 hedge funds that in turn invest in U.S. and international equities as well as debt securities. Both funds have a $50,000 minimum initial investment. Evergreen manages $215 billion, including the assets of its 101 Evergreen funds.

Alternative Investment Partners of Chappaqua, N.Y., has just introduced an open-end mutual fund that will employ hedge fund strategies, the Alpha Strategies I Fund [see MFMN 4/29/02]. Hedge funds will "become a rapidly growing segment of the mutual fund industry," predicted Steven Samson, CEO of Alternative Investment.

Hedge fund firms can quite possibly do a better job than "traditionally long-only, single-style mutual fund management firms," Samson said. Four hedge fund firms will sub-advise the new fund, and a portfolio research consulting firm that specializes in hedge fund-of-funds will assist in sub-adviser selection and ongoing portfolio analysis.

What's the appeal of the alternative investment arena? More and more advisers yearn to offer investors investment vehicles whose returns don't correlate to the sickly returns of the stock market. The CSFB/Tremont index of 391 hedge funds lost a minimal .03% year-to-date through July 31, while the S&P 500 index lost 20.6%, and the average U.S. diversified stock fund fell 19.93% over the same period.

Moreover, investment managers are salivating at the sheer growth of the traditional hedge fund marketplace, which has ballooned to now include about 6,000 hedge funds with $550 billion in assets, according to VAN Hedge Fund Advisors International of Nashville, Tenn., a hedge fund data provider.

Timing of the Plunge

There was nothing magical about the timing of Evergreens entry into this marketplace, said Bob Storey, SVP and head of Evergreen Investments' high-net-worth group. "We've been planning to introduce these for some time," he said. "We are real believers in alternative strategies that offer compelling risk/return profiles. These [volatile] markets have brought risk back into the equation."

The two hedge fund-of-funds will be sold to high-net-worth investors through Wachovia Securities' wealth management group, Storey said.

With so many managers hoping to snare a sizeable slice of the SEC-registered hedge fund marketplace, will all that enter the now-fledgling marketplace succeed? Gaining access to the best managers for clients will be the key, Storey said. "In any business, like alternative investments, you are going to see stronger performers survive as others get weeded out. Your ability to access the best managers goes hand in hand with performance. That will separate the successful managers from the also-rans," he said.