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Rydex Debuts Open-End Hedged Funds

The universe of open-end funds that employ strategies typical of hedge funds grew by two last week.

Last Monday, Rydex Investments of Rockville, Md., launched the Rydex Hedged Equity Fund and the Rydex Absolute Return Strategies Fund. The launch comes at a time when many fund advisors are still cautiously testing sophisticated investment strategies on mainstream investors.

Both of the Rydex funds will employ multiple strategies and classes aimed at providing returns that don't correlate to the returns of either the stock or bond markets. Rydex has essentially taken institutional investment strategies and made them available to investors by "putting them in the retail vehicle of choice, a 40 Act mutual fund," said David Reilly, director of portfolio strategies at Rydex. "Most investors' portfolios are constrained to a long-only paradigm, but that gives you a very blunt instrument with which to address market changes." The new funds provide tools to better manage markets that have proven difficult to navigate, he added.

The Rydex Absolute Return Strategies Fund will invest in equities, bonds and commodities as well as currencies and options, and will employ market-neutral, merger arbitrage and fixed-income, duration-neutral strategies. The fund will benchmark to the returns of the broad hedge fund industry.

The Rydex Hedged Equity Fund will only invest in equities and options and will employ only market-neutral and merger arbitrage strategies. This fund seeks to provide returns similar to the returns of long/short hedge funds, a sub-sector of the hedge fund universe.

Rydex has high expectations for the funds' popularity. "These will certainly be nine-figure funds and have billion-dollar potential," said Jeff Joseph, managing director of Rydex Capital Partners, a unit of Rydex Investments. The biggest challenge he sees is from competitors. "We won't be unique for much longer."

From Rydex's standpoint, the new open-end funds are a natural progression of the firm's other investment products, including mutual funds, and the Rydex SPhinX Fund, a closed-end hedged fund-of- funds. Rydex has its roots in employing a variety of non-traditional strategies including leveraging, inverse techniques, shorting securities, investing in options and stock baskets and employing quantitative investment methods, Reilly added.

There's definitely been a convergence of strategies among hedged and mutual funds, Joseph said. Mutual funds have been looking to offer alternative investment strategies, while many hedge fund managers have been trying to break into the retail investor market. But there can be a Catch-22, Joseph said. "Hedge fund managers have had difficulty justifying getting into the mutual fund business and offering their expertise at a much cheaper cost," he said.

Traditional mutual fund advisors have also had to decide whether to build silo funds which hold to a single alternative investment strategy or go the multi-strategy route, combining several often complementary approaches into a single product.

For Rydex, its decision to tap the multi-strategy/multi-asset class approach was dictated by what its target market of registered investment advisors, wealth managers and broker/dealers wanted. "Advisors are looking for single products that are delivering a solution," Joseph said.

In addition, a single solution makes sense for the 401(k) marketplace where plan participants are not well-versed on the proper allocations, Reilly said. In many cases, so-called absolute return strategies have become an alternative to fixed-income strategies, he added.

But don't expect to see Rydex adding onto the new open-end funds with a stockpile of additional alternative investment strategies, the executives cautioned. Joseph was quick to point out that Rydex's management team doesn't have expertise in other strategies such as convertible arbitrage, managed futures, global macro, distressed securities or special situations.

That approach may, in the long run, be limiting for Rydex's new funds, critics warned. The idea behind having more than a few alternative investment strategies working within one fund means that if at any given time a strategy or two isn't working, there's a high probability that other strategies are, said Lee Schultheis, chief investment strategist of the $130 million Alpha Hedged Strategies Fund.

In addition, there can be advantages to finding a manager who has a unique investment technique, he added.

Of course, while Rydex's new open-end hedged funds may stick to a few core competencies, Rydex has shown it isn't afraid of a breadth of strategies. Its registered, closed-end hedge fund-of-funds, the Rydex SPhinX Fund, equally allocates assets among 41 different external hedge fund managers, who use nine alternative investment styles.

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