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Open-End Fund Offers Hedge Fund Access

The AIP Alpha Strategies I Fund has dared to go where no other open-end mutual fund has tread before: into the hedge fund realm. The fund is the first to offer a variety of hedge fund investment techniques packaged as an open-end mutual fund sporting continuous sales of shares, daily liquidity and transparency of all securities, both long and short.

The fund launched last September with four sub-advisors in tow; each specialized in a different alternative investment strategy. With only $12 million in current assets under management, the fund is still trying to gain traction. But the two executives at the helm are convinced that hedge funds and mutual funds can successfully be married into a solitary product offering. Both are so enthusiastic, that each of their vanity license plates, in different states, reads ALPHX, the fund's ticker.

Money Management Executive Editor-at-Large Lori Pizzani sat down with Chief Executive Officer Steve Samson and Chief Investment Officer Lee Schultheis, the co-founders of the fund's adviser, Alternative Investment Partners of White Plains, NY, to discuss this enterprising fund.

MME: What inspired you to start this unusual hedge fund-like mutual fund?

Samson: Lee and I wanted to build a bridge between a traditional hedge fund-of-funds and the mutual fund industry. With our 15 years of experience on the mutual fund side, we recognized the inherent capabilities of mutual funds that weren't being utilized. We saw the opportunity to have a fund managed by the same people who manage alternative investment strategies for conservative investment portfolios, and to open this up to individual investors, retirement plans and institutions that have become more and more comfortable with these strategies but wanted transparency.

MME: Why build your bridge to connect to the open-end fund world and not pursue a closed-end fund or other format?

Schultheis: The old school of thought was to take a mutual fund and hedge a 10% slice. But I don't think that's what people really want. That's not what's driving people into hedge funds. They want absolute returns. Guys who invest on the long-only side are depending on the stock market to give them a return. We're not.

Hedge fund slices are illiquid. It could not be an open-end fund if we invested in hedge funds directly. We wanted a fund that offered daily liquidity and daily pricing.

With registered hedge funds you can sell more to people with lower investments, but there is still the accreditation paperwork. We wanted to use real hedge fund managers with multiple hedge fund styles, but put it into an open-end format. Our fund is designed to resemble a hedge fund-of-funds, but we have all of the transparency because we brought it up to the fund level.

MME: How did you decide on which managers to partner with for this fund?

Samson: We enlisted Trust Advisors of Fairfield, Conn., as our portfolio research consultant to do the manager selection for us. They looked at various managers and helped us build the portfolio optimization strategy. Then we contacted the firms they selected.

MME: Beyond diversity of styles and good performance, what were your criteria?

Samson: We wanted managers that managed hedge funds - not a manager who also ran mutual funds and might be competitive. Each of our managers is operating a separate account for us.

Schultheis: We wanted niche managers who managed from $50 million to $100 million of their best ideas, but still had enough capacity for us. We also wanted managers with the mentality of registered investment advisers (RIAs), not strictly hedge fund managers, where liquidity and transparency becomes an issue. We talked directly to some hedge fund managers, and it became abundantly clear that it wouldn't work with them.

MME: Was name recognition an important consideration in your selection process?

Schultheis: On the fixed-income side, it is important. You want a company with economies of scale, a sound process and a strong investment discipline.

Samson: That's not as important on the equity side. Sometimes you're better off having someone who operates under the radar screen.

MME: Do you expect to add to the four sub-advisors you now have, and if so, what area of the market would you like to tap?

Schultheis: We're happy with the mix right now, but expect that we will add managers over time. We envision as many as 10 managers down the road. You can still employ long/short strategies but with different correlations, especially within convertible arbitrage and fixed-income areas. As we get larger, we may want to get into more global, macro hedging.

Samson: We also think merger arbitrage is a good style that complements the other styles. But right now, there's not a lot happening in M&A.

MME: Who handles the allocation between the managers?