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Hedged Mutual Funds Head For High-End of Mainstream


NEW YORK - Sponsors of 401(k) plans and financial planners who otherwise would never consider investing in hedge or arbitrage funds are taking a keener look.

A proliferation of hedge fund of funds registered under the 40 Act as mutual funds has assuaged concerns over transparency, liquidity and minimum investments [see MFMN 9/2/02], according to speakers at Lake Partners' "Democratization of Hedge Funds" conference here late last month.

As Rick Lake, manager of the LASSO fund, a hedged fund, remarked, Nicholas Biddle, namesake of the Harvard Club room where the meeting was held, would probably turn in his grave at the notion of portfolio managers shorting the market, let alone making it more "democratic."

But as Robin Jackson, manager of the Schwab Hedged Equity Fund, countered: "Shorting and leveraging are becoming mainstream and making their way to the mutual fund world."

Charles Schwab & Co. in fact, hopes to raise $1 billion in the Hedged Equity Fund, which, to date, has received a great deal of interest fund from retail rather than institutional investors, Jackson said. The minimum investment is $25,000, and Schwab requires existing clients to invest no more than 10% of their total assets in the fund, Jackson noted.

"This fund is suitable for almost any investor, but we are not managing it for tax efficiency," he added.

Hedge fund assets have risen 10.6% this year and are hovering just below $600 billion [see "News Flash," page 4], whereas mutual fund assets have remained stagnant at around $6 trillion.

In addition, hedge funds earned an annualized return of 9.7% for the five years ending Sept. 30, compared to 0.6% for equity funds, according to Lipper.

While the traditional outperformance of many hedge funds versus equity funds might assume additional risk, that does not have to be the case, Lake said.

"A premium over the market isn't achieved by trying to overplay the market, but by sensible investment," Lake said. LASSO's daily volatility has actually been markedly less than that of the S&P over the past year, he noted, with an illustration showing his fund's growth outpacing the S&P 500.

For Mendel A. Melzer, a financial planner with Newport Group, hedged mutual funds are a draw for his wealthy clients.

"Here is the problem with the affluent," Melzer said. Through all of their myriad investments, "they probably own a lot of the S&P 500. They know the usual menu of traditional investment options, and it's deficient for sophisticated investors.

"They want real estate and hedge funds," Melzer said.

The hedge fund managers also noted they did not foresee an end to the bear market anytime soon [see related story, MFMN, 11/18/02]. David Tice, manager of the Prudent Bear Fund, expects the bear market to continue and the dollar to continue to decline.

"The recession has failed to purge excesses from the market," agreed Rob Greenblatt, manager of a long/short fund at Caldwell & Orkin. "Consumers are overly indebted. Ultimately, there will be a cleansing of this, but we have a long way to go."

During a financial press question-and-answer session including reporters from Barron's, The Wall Street Journal, Worth and sister publication Financial Planning, Nicholas P. Hodge, an attorney with Hill & Barlow was asked whether a movement is afoot at the SEC to "regulate hedge funds out of existence."

"No," Hodge replied. "But many may have to register under the 40 Act." As well, the SEC may "heighten requirements for blind trust funds."

As to the high fees that hedge funds typically charge, let alone the 20% of net earnings that many such fund managers collect, the panel was unapologetic.

As Dale Winner, manager of the Templeton Global Long-Short Fund, put it: "Performance fees are why star managers" join hedge funds.