MFS Thinking Long-Term with Alternative Investment Unit
October 15, 2007
In joining the parade of mainstream wealth managers starting alternative investments units, MFS Investments of Boston is making a long-term commitment to giving its institutional investors access to emerging hedge fund managers.
The fund unit of Sun Life Financial of Toronto said the subsidiary, Four Pillars Capital, will allow investors to put money into hedge funds running long-short equity, distressed debt, arbitrage and event-driven strategies.
MFS wanted to build an alternative investment business "that can be durable in the long run for institutional clients," said Robert Manning, MFS president and chairman.
"This is a start-up venture that may take years before it has a meaningful impact on the firm," Manning said. "We don't care if it makes money right away. If the products generate good returns and we can generate a good client experience, then the economics will take care of themselves."
Four Pillars, announced earlier this month, will focus on finding hedge fund managers who need seed capital to establish their own firms and on providing expansion capital to small hedge funds seeking to expand.
"Customers want hedge funds, but they want hedge funds that offer better transparency and better returns," Manning said. "They want a company and brand that can provide the overlay management, which is expensive for smaller companies."
This is the first time MFS has launched a unit as a separate subsidiary. Four Pillars will use MFS technology and distribution, but have its own research and trading, Manning said.
He said institutional investors are demanding alternative investments but are concerned about investing with hedge fund managers who have faced regulatory scrutiny in the past two years.
"Institutional investors are more comfortable with mutual funds because they are regulated and have the technology and support of large companies around them," Manning said. "We are transferring our technology and putting it into the alternative space, which hasn't had that overlay and control. This is going to make pension funds more comfortable."
MFS, which in 1924 introduced the first mutual fund, had more than $202 billion of assets under management at midyear. It is entering the hedge fund market as a number of competitors, including BlackRock and Bank of America, are ramping up their alternative investment capabilities.
In June, BlackRock announced it was buying hedge fund-of-funds provider Quellos Group for $1.7 billion. In August, Bank of America announced new leadership for its global wealth and investment management arm's new alternative investments group.
To lead Four Pillars, MFS hired Thomas Knott as president and Eric Lass as chief investment officer. Knott co-founded K Capital Partners, a Boston hedge fund company, where Lass managed its Credit Opportunities Fund.
Manning said he worked with Knott at a previous job and after Knott, 44, retired from the hedge fund business in 2003, Manning was waiting for an opportunity to work together again.
Four Pillars' offerings will be relatively vanilla "stay-rich strategies, not get-rich strategies," in line with the goals of the institutions that would be investing in them, Manning said.
"Hedge funds are completely misunderstood," he said. "Everyone thinks they are crazy people doing opaque things. We really are talking about more conservative products, such as long-short equity strategies, with less volatility."
As competition not only among mutual fund companies intensifies but is further challenged by the encroachment of hedge funds, more fund companies are expected to offer alternative investment funds. And as a result, some experts believe assets in such funds could soon account for as much as 10% of the industry's assets. Alternative asset funds include market-neutral and 130/30 and other types of long-short funds. "Long-short is the future of the industry," Ric Thomas, manager of enhanced strategies at State Street Global Strategies, recently told the Financial Times. "It's like the introduction of the forward pass in football."
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