FoHF 40 Act assets hit $20bn despite negative performance

For the table of SEC-registered FoHFs ranked by master fund launch date, please click here

By Niki Natarajan

Classic mutual fund players such as Legg Mason and New York Life’s MainStay Investments have teamed up with FoHF experts to tap into the hedge fund allocation skillset. New York Life took a stake in Private Advisors in 2010 (InvestHedge, October 2012), while Legg Mason bought Permal in 2005 allowing both FoHFs to explore both the RIC and UCITS retail channels. Permal’s first RIC is analysed on page 28.

All eyes are now on K2 Advisors, following its alliance with mutual fund giant Franklin Templeton to launch their first RIC.

Meanwhile Alternative Strategies Group has continued to pick established fund of hedge funds brands to create alternative investment portfolios that include substantial allocations to hedge funds picked primarily from the HFR managed account platform, as well as from the dbX platform.

Its ASGI Corbin Multi-Strategy Fund, launched on 4 January 2011, raised $33 million and is sub-advised by Corbin Capital Partners, while the ASGI Aurora Opportunities Fund, launched 3 January 2011 and managed by Aurora Investment Management, raised $51 million.

The ASGI Aurora Opportunities Fund saw its assets grow by nearly 92% with an expense ratio of 2.15% and turnover of 28%, giving a return of -5.16%. Meanwhile the ASGI Corbin Multi-Strategy Fund, which invests in 34 managers, returned 1.48% with portfolio turnover of 33.34% and expenses of 2.25%.

The latest recruit to the ASGI platform is Mesirow Advanced Strategies, which was selected to manage the ASGI Mesirow Insight Fund and its tax-exempt feeders. Unlike its sisters, this fund already existed as the Wells Fargo Multi-Strategy 100 Master Fund I. Effective 1 December 2011, the Wells Fargo Multi-Strategy 100 series became the ASGI Mesirow Insight Funds, which invest in names such as Waterstone, Brevan Howard Emerging Markets, Tiger Veda, MKP and Ascend II.

A year ago, InvestHedge launched the RIC Watch page to look at the underlying holdings of funds of funds registered with the SEC. The series debuted with the Grosvenor Registered Multi-Strategy Master Fund. Over the reporting year, the fund went from $534 million under management with 49 managers to $562 million with 51 managers. Among the new names added since April 2011 are: York European Opportunities Trust, Adelphi Europe Partners, Zaxis Offshore, Viridian Fund and Linden Investors.

Names that have disappeared from last year’s line-up include TCW Special Mortgage Credit Fund II, Citadel Wellington, Galante Partners, Impala Transportation Fund, Kingford Capital Partners and Spring Point Contra Partners.

Egerton Capital Partners seems to have been replaced by Egerton European Dollar fund, while the Nisswa Fund has been rebranded the Pine River Fund. To give additional tail-risk protection, Grosvenor has also added the Capula Tail Risk Trust. For the reporting year the Grosvenor Registered Multi-Strategy Master Fund was down 0.54%, with expenses of 1.32% and a portfolio turnover rate of 21.75%.

A lot can be learned from the hedge fund buying habits of FoHFs by looking at the manager rosters. Looking at funds added to the portfolios with a first acquisition date between 1 April 2011 to 31 March 2012, across 24 FoHF products, 15 fund of hedge fund advisers invested $1.64 billion in 237 hedge fund names (including new share classes). These 237 hedge fund vehicles, not previously included in the RIC portfolios with assets totalling $11.64 billion, are managed by 163 hedge fund managers.

Some FoHFs do not include the date of fund purchase. So while the total amount of new assets invested is not definitive, the total includes the new portfolios of recent launches, such as NT Equity Long/Short Strategies Fund and Permal Hedge Strategies Fund, and helps to give a picture of the buying trends of funds of funds. This is useful at a time when more and more investors are only buying a handful of brand-name hedge funds directly and might not always be shown some of the sexier, newer names.

It is also useful to see what hedge fund names FoHF investors select when creating new products. A year ago, Anchorage Capital Partners, Artha Emerging Markets Fund, Brevan Howard, Cobalt Partners, King Street Capital and Seligman were among the most popular names in the RIC FoHF portfolios.

Today, many pension funds are buying these names directly, using consultants such as Albourne Partners for due diligence, which is why it is very interesting to see how many of the 237 names (see table, page 26) are not mainstream picks. The York Capital Management range was the most popular ‘new’ pick among the FoHFs, with the York Credit Opportunities Unit Trust appearing in both the Permal Hedge Strategies Fund and JP Morgan Access Multi-Strategy II funds.

As can be seen from the York range preferences listed above, credit investing continues to be popular, with Mariner’s Tricadia Credit Strategies and GCA Credit Opportunities Fund favoured by O’Connor and the latter also found in the new Lazard Alternative Strategies 1099 Fund. Paulson Credit Opportunities and Monarch Debt Recovery Fund can be found in Permal Hedge Strategies, while the Wexford Credit Opportunities Fund appears in the Advantage Whistler Fund.

In the emerging markets space FoHFs are allocating to Avantium Liquid EM Macro Fund, the Contrarian Emerging Markets Offshore Fund, and Amiya Global Emerging Opportunities Fund. For those wanting Asia exposure more specifically Marshall Wace GaveKal Japan Market Neutral Fund, OZ Asia Overseas Fund, Dymon Asia Macro Fund and Fortress Asia Macro Fund were popular additions.

For equity long/short specific allocations Discovery Global Focus Fund, Expo Health Sciences Fund, JAT Capital Offshore Fund, JHL Capital Group Fund, Lakewood Capital Partners, Tiger Global, Turiya Fund, Value Partners Hedge Fund and Viking Global Equities came up in a number of portfolios.

While for global macro and or CTA exposure Morgan Stanley, UBS’ O’Connor and Permal all bought BlueTrend. Other macro/managed futures picks include Winton Futures Fund, Kohinoor Core Fund, Rubicon Global Fund, DE Shaw Oculus International, WCG Offshore Fund and Whiteside Energy Offshore.

AQR, Atlas, Cerberus, Stone Lion Fund, Soroban Fund, Third Point Offshore Fund, Valinor Capital Partners, Pershing Square, Litespeed Partners, Scoggin Capital Management, QFR Victoria Fund and JHL Capital Group Fund are among the names that have appeared in more than one new portfolio in the 12-month period since April 2011.

The Two Sigma range of funds were popular with GenSpring Family Offices, Morgan Stanley and JP Morgan, while 119 other hedge fund names appeared as first-time buys, proving that portfolio overlap among funds of funds is less of a problem now that hedge fund brands are being bought directly by pension funds.

The reporting period ending 31 March 2012 was a time of RIC rationalisation as firms simplified their registered investment company offerings into single master funds with institutional or dedicated tax-exempt feeders. The underlying hedge fund portfolios for the different feeders are the same and managed at the master level, while the feeder funds are simply specially crafted asset-collection buckets for different types of investors, which differ by the fees and tax structures applied.

Master/feeder structures are used in Europe in the UCITS and SICAV vehicles to collect assets from multiple jurisdictions. For the US market, tax-exempt investor feeders like TEI or TI funds are set up to feed into the master fund for tax-exempt investors, such as 401(k), individual retirement accounts (IRAs) and now the popular less fee laden, institutional share class.

On the filings it is the master filing that has the portfolio of managers and the turnover. Due to the different fees charged for the different investors, the expenses and returns are slightly different than the master. The table of SEC-registered FoHFs compiled by InvestHedge (page 22) shows only the total assets for the master funds to avoid double counting, but the individual portfolio returns and expenses are listed for every vehicle, in italics for the feeders.

Expense transparency in the RIC world means that costs and charges can be monitored. In the period ending 31 March 2012, the average total expense ratio was 1.79%, down from 1.87% for the year ending 31 March 2011 (InvestHedge, December 2011). On average, the total expense ratios for the master funds are lower, at 1.66%, although at 3.34% the highest total expense ratio of the universe is for the tax-exempt version two of the Excelsior Multi-Strategy Hedge Fund of Funds feeder, which was launched on 1 July 2007.

Unsurprisingly, the higher the expenses, the lower the performance, which means that for the $8.6 million Excelsior fund performance was -2.52%, while for the $388 million Excelsior Multi-Strategy Hedge Fund of Funds Master the expense ratio was 1.45%, resulting in returns of -0.68%. This fund’s portfolio turnover was 34.6% compared to the average turnover of the universe of 45 master RICS of 19.51%.

At 2.69%, the $221 million O’Connor Funds of Funds: Multi-Strategy had the highest expense ratio for a master fund. This fund, launched on 29 March 2011, returned -3.26% but saw its assets balloon by nearly 302% from $55 million, making it the greatest grower in terms of assets for the period. With 27 managers the fund, which had no managers a year ago, has had a portfolio turnover rate of 13.73%. All the seven O’Connor FoHFs, which collectively have $1.33 billion under management, are managed by UBS Alternative & Quantitative Investments. This family has seen its collective assets drop by 8.51% for the reporting year.

In terms of performance the O’Connor funds collectively, on average, are down -3.45% for the year ending 31 December 2011, with the $95 million O’Connor FoHF: Equity Opportunity down the most at -5.17%. The $98 million O’Connor FoHF: Event was only down 1.38% for 2011.

The O’Connor FoHFs have collectively made 150 allocations but to some 70 individual managers. Many of the funds have allocations to the same names, but despite the overlap there is not a single fund that is in all seven FoHFs.

Hedge funds favoured by UBS’ FoHF business, which have been given portfolio allocations of 8% or more include: Coatue Qualified Partners, Shannon River Partner II and Visium Balanced Fund (Technology); Atlas Institutional Fund, Southpoint Qualified Fund (Long/Short Strategies and Equity Opportunity); MSG Partners, Pennant Windward Fund and Soroban Fund (Equity Opportunity); Davidson Kempner Partners, Mason Capital and Senator Global Opportunity (Event); and GCA Credit Opportunity in the O’Connor FoHF: Long/Short Credit Strategies fund.

The average expense ratio for the funds is 2.02% with the average portfolio turnover at 26.16%. The $221 million O’Connor FoHF: Multi-Strategy, which invests in 27 names, has the highest expense ratio of 2.69% of the family of funds; while the O’Connor FoHF: Equity Opportunity has one of the highest portfolio turnover rates of 53.59%.

The $126 million Salient Absolute Return Master Fund, which launched on February 2010, has one of the highest portfolio turnover rates of nearly 55%. The fund returned -2.11% with expenses of 1.42%, for the year ending 31 December 2011.

The O’Connor FoHF: Multi-Strategy is the fastest-growing RIC, having seen its assets grow by 301%, followed by the $110 million Ironwood Institutional Multi-Strategy Fund, which saw its assets grow by 254% to the year ending 30 April 2012. The fund, managed by Ironwood Capital Management, invested with 27 managers. It was up 1.09% with portfolio turnover of 3.92% and expense ratio of 2.07%.

The lowest expense ratio of 1.15% of the universe for the accounting period was for the $38 million feeder fund Arden Sage Multi-Strategy TEI Institutional Fund, which returned -2.81%. The $273 million master fund, now managed by Arden Asset Management after its takeover of the Robeco Sage FoHF business, recorded expenses of 1.24% and performance of -3.28%. As of 1 June 2011, Arden Asset Management has taken over the Robeco Sage portfolios, which have now all been rebranded and rationalised in the Arden Sage Multi-Strategy series, which has $273 million in the Arden Sage Multi-Strategy Master Fund that is invested with 64 underlying hedge fund managers.

Arden Asset Management has also taken the plunge in the global macro RIC space with a planned strategy-specific launch called the Arden Macro Fund, according to a recent N-2 filing. Morgan Stanley Alternative Investment Partners has also announced similar plans with the AIP Macro Registered Fund, which will complement the firm’s existing multi-strategy funds and long/short equity specific range. Strategy-specific RICs are likely to raise assets from investors wanting more control over their own asset-allocation decisions; and global macro is currently a popular strategy among institutional investors.

Morgan Stanley first launched its RIC in July 2002. The Morgan Stanley Institutional Fund of Hedge Funds now has $498 million, having lost 44.8% of its assets for the year ending 31 December 2011. The fund, which invests with 40 managers, was up 0.11% for the year with portfolio turnover of 0.73%. The Morgan Stanley range of seven funds, including four master funds, currently has $1.46 billion in assets. The funds have 147 allocations to managers with many of the equity hedge funds, including Lansdowne UK Equity Fund, Lansdowne Global Financials, Amiya Global Emerging Opportunities Fund – a favourite new name for some (see table) – Pelham Long/Short Fund and Seligman Tech Spectrum Fund, duplicated in the equity portion of the multi-strategy funds.

The average performance of the Morgan Stanley RIC family was -0.69%, brought down by the performance of the Morgan Stanley Global Long/Short fund range, for which the master fund A was down -4.78% and the feeder -5.67%. For the year ending 31 December 2011, all of the Morgan Stanley multi-strategy funds had positive returns. Performance for equity long/short strategy RICs was on the whole weak, with the $497 million Mellon Optima L/S Strategy Fund down 4.03% for the year ending 31 March 2012.

The average Morgan Stanley fund expenses and portfolio turnover are 1.75% and 20%, respectively, while the Alternative Investment Partners Absolute Return Fund STS feeder had the highest expenses of 2.54% of the family resulting in performance of only 0.55%, and the $232 million Morgan Stanley Global Long/Short Fund A had the highest turnover at 22%.

The average manager allocation among the Morgan Stanley funds is 29, which is in line with the average of 30 for the entire 45 master RIC FoHF universe. That said, the $686 million Alternative Investment Partners Absolute Return Fund, which was launched in January 2006, has 51 managers that in 2001 produced collective returns of 0.96% with a portfolio turnover of 18% and total expenses of 2.3% for this master fund.

A year ago, the average number of funds in a RIC portfolio stood at 16. For 2011, the average number of managers was 30, while the median size was 25. At 90, the $1.44 billion Hatteras Master Fund has the greatest number of managers in its portfolio and yet this does not include the 25% of the portfolio invested in private equity managers. This fund returned -2.49% for the master fund and, due to the lower expense ratios, the institutional versions had significantly lower returns.

The $235 million Hatteras Core Alternatives Fund with expense ratios of 2.33% and 2.43% for the $312 million tax-exempt feeder returned -3.52% and -3.62% respectively, while the $237 million Hatteras Core Alternatives Fund had an expense ratio of 1.55% and returns of -2.77%, while the $625 million tax-exempt institutional feeder had an expense ratio of 1.57% and returns of -2.80%.

Hatteras is followed by the largest RIC in the universe, the $6.36 billion GMAM Absolute Return Strategies Fund I, which invests with 82 managers. The internal investment vehicle of the General Motors pension fund returned 0.36% for the year ending 31 March 2012, with portfolio turnover of 9%, having added 15 new names but overall having two fewer names than a year ago. Given the internal nature of the fund and the absence of costs involved in marketing externally, the General Motors RIC has one of the lowest expense ratios: 0.78% of the universe. The recently launched Morgan Creek Global Equity Long/Short Institutional feeder technically had the lowest expense ratio of 0.68% of the universe, but also has yet to garner significant assets under management.

Technically, the $482 million Aetos Capital Distressed Investment Strategies Fund is the most concentrated portfolio, with just nine managers. The fund, launched on 21 August 2002, saw performance of -2.6% with a portfolio turnover of 2.69%. In total, the three Aetos funds, including Aetos Capital Multi-Strategy Arbitrage and Aetos Capital Long/Short Strategies Fund, which collectively have little more than $2 billion in assets, invest in a total of 39 managers. The average expense ratio for the three funds is 0.89%, with average portfolio turnover of 10.36% and average returns of -1.35%.

The majority of the asset growth from the universe came from the newer RICs launched in late 2010. SkyBridge Multi-Adviser Hedge Fund Portfolios, launched on 16 August 2002, was one of the few established RICs, however – with the exception of the JP Morgan Access Multi-Strategy Fund – that saw significant inflows in 2011.

For the year ending 31 March 2012, the former Citigroup FoHF, which also won the InvestHedge Award for five-year performance to 2011, was up 1.01%.

The SkyBridge Multi-Adviser Hedge Fund Portfolios’ performance on an annual basis has been quite volatile, with returns of 8.24% for the year ending 31 March 2008 and -15.05% for the year ending 2009.

For the years ending 31 March 2010 and 2011 the fund has been up 23.21% and 17.92%, respectively. The $2.3 billion SkyBridge saw its assets grow by 86.29% largely on the back of significant historic performance.

The fund currently invests with 75 managers and has expenses of 1.78% and a portfolio turnover rate of 19.66%. For the year ending 31 March 2009, it had portfolio turnover of 41.45% and more than 38% for 2010 and 2011, although expenses have gradually been coming down from a high of 2.9% for the year ending 31 March 2008.

The success in raising assets for both the SkyBridge Group and JP Morgan will go in part to explain their interest in launching the SkyBridge GII Fund and the JP Morgan Access Multi-Strategy Fund II. The latter launched on 1 October 2011 and has already raised $111 million. The underlying portfolio of 21 managers returned 4.19% since inception, with total expenses of 2%. This compares to the $889 million sister portfolio, launched on 6 April 2004, which invests in 47 managers that to 31 March 2012 was down 0.95%.

JP Morgan Access Multi-Strategy II has 15 managers in common with JP Morgan Access Multi-Strategy Fund, but instead of this fund being a legacy-free version of the first one it is invested in the offshore or international versions of the 15 names, as well as five new names that the funds do not have in common: Pershing Square International, Perella Weinberg Partners Xerion Offshore Fund, Winton Futures Fund, Bocage Global Resources Offshore Fund and Southpaw Credit Opportunity Fund.

Eighteen of the names in the JP Morgan Access Multi-Strategy Fund, including QVT, Apollo Asian Opportunity Fund, Deephaven Event Fund, Taconic Opportunity Fund, ValueAct Capital Partners, Strategic Value Restructuring Fund, Black Bear Fund I, Copper River Partners and Black River Commodity Multi-Strategy Fund, are either in liquidation or side pockets.

In terms of asset allocation, the biggest difference between the two JP Morgan funds is the amount invested in event-driven core strategies of 12.07% for the new fund and 17.42% for the original fund. Version two has 8.71% invested in event-driven distressed, compared to 5.4% in the old fund and, apart from more than 3% more allocated to global macro managers in the newer fund, the rest of the asset allocation is roughly the same.

The original fund has 14 names that are not in the new portfolio, including Corvex Partners, Perry Partners, Deerfield Partners, Brevan Howard and Caxton Global Investments, as well as six names in the relative value part of the portfolio.

In terms of performance, the average performance for the year ending 31 March 2012 was -1.93%, while the median performance was -2.51%. For the 45 master funds only, the median performance for the year is -2.11%, while the average performance is down -1.66%. For this period, net of fees, the InvestHedge Composite, made up of the performance of more than 2,100 individual FoHFs, was -2.66%.

The difficulty with comparing the performance of the RIC universe to the general global FoHF industry is that many of them have different year-end dates and account for their performance differently. Additionally the InvestHedge FoHF Composite is made up of performance of more than 2,100 funds, while the RIC average is for only 80 names.

For the year ending 31 March 2012, the worst-performing master fund, at -6.44%, was the $75 million Advantage Advisers Whistler fund, which was launched in July 1999. This fund, which had portfolio turnover of 7.33%, had below-average expenses of 1.62% and a portfolio of 21 managers. It seems to have suffered outflows of more than $50 million for the year, equivalent of a drop of more than 40% from the assets of $126 million in the previous year – a trend that is likely to have exacerbated the fund’s downward performance.

The top-performing fund for the period ending 31 March 2012 was the $399 million Multi-Manager Master Portfolio, run by GenSpring Family Offices, which was up 1.55%. During the year, GenSpring Family Office renamed and repositioned the portfolios, changing the name from Growth Capital Portfolios to Multi-Manager Portfolios. It also revised the investment objective of the portfolios to seek long-term capital appreciation, while attempting to reduce risk and volatility.

In June, the adviser separated illiquid holdings into a discrete liquidating structure. At 31 March 2012, the Multi-Manager Portfolios, over seen by chief investment officer Jean Brunel, invested 18% into credit strategies, 29% into equity strategies, 7% into event-driven strategies, 9% into global trading and 35% into multi-strategy managers with 2% in cash.

While the GenSpring funds have been around since July 2009, they have only just been included in the annual RIC rankings. The fund, which has seen assets fall by 44% from the previous year, has the lowest master fund expense ratio of 0.31% of the entire RIC universe.

O’Connor FoHF: Technology is the oldest RIC operating in the current universe. Launched in April 1999, it now has $224 million under management and was down 1.56% for the year ending 31 December 2011. The average-sized RIC has $450 million under management and the average asset growth rate of the universe is 13.63%, but the growth rate of the universe is 9.91% with the average performance down -1.93%.

There are now 80 funds, 45 of which are master funds, and eight new entrants, 10 planned entrants and six liquidations. The liquidations include the Larch Lane Multi-Strategy Fund, Larch Lane Multi-Strategy Institutional Fund and Larch Lane Multi-Strategy Master Fund. These funds, advised by Larch Lane Advisors, which recently announced a management buyback from Old Mutual, filed N-8 forms in 2011 announcing the liquidation of the three funds.

PNC Absolute Return Master Fund, advised by Ramius Alternative Solutions, announced plans to liquidate the master fund and two feeders on 4 October 2011, while PNC Alternative Strategies Fund and PNC Long Short Master Fund, advised by PNC Capital Advisors, announced plans to liquidate the master fund and two feeders on 8 September 2011. Also in the throes of liquidation are the Hatteras Ramius funds, also sub-advised by Ramius Alternative Solutions.

The $2.8 million Old Field Master Fund and its domestic feeder Old Field Fund, both advised by Marwood Alternative Asset Management, also announced its intention to liquidate on 16 November 2010. Declining assets make the RIC structure expensive, unless assets grow or are substantial.

On the upside, the new entrants, from April 2011 to 31 March 2012, have already raised more than $300 million in new assets. The new entrants include the $111 million JP Morgan Access Multi-Strategy Fund, the $55.7 million NT Equity Long/Short Strategies Fund, the $28 million Lazard Alternative Strategies 1099 Fund and the $20 million Permal Hedge Strategies Fund.

Of the 10 planned entrants, the Arden and AIP macro series are evidence of the specialisation of the RIC universe, while Aetna, Private Advisors, Alliance Bernstein and Blackstone Alternative Asset Management are all planning their registered investment company debut (see box). The merger wave that has hit the FoHF arena is having a little impact in the registered FoHF world with some funds such the Cadogan Opportunistic Alternatives Fund, which was originally launched in 1 August 2007, becoming the Cantor Opportunistic Alternatives Fund after Cadogan Management was taken over by Cantor Fitzgerald Investment Advisors.

As of 31 March 2012, the $15 million Cantor Opportunistic Alternatives Fund was 78% invested across 13 funds, down from 25 a year ago. The majority of the fund was invested to North America, with the rest across Europe and other global markets. Sector-biased long/short equity makes up the majority of the fund (38.68%), with 33.79% in general long/short equity. Fixed-income arbitrage makes up 17.12%, with 8.44% in event-driven distressed managers; and short-biased-short equity managers comprising the remaining 1.97%. The fund has seen nearly 78% of its assets flow out and returns of -1.27%, with an expense ratio of 2.63%.

The need for 1099 tax reporting continues to shape the structures of new or proposed RIC launches. A year ago Lazard Alternatives decide to take this route with the launch of the Lazard Alternative Strategies 1099 Fund, which has raised $28 million since its launch on 1 November 2011, and returned 1.62%.

Among the proposed launches are the SCS Hedged Opportunities (1099) Fund and the Aetna Multi-Strategy 1099 Fund. The new tax-reporting friendly version is likely to have been launched on the back of the success of its $61 million SCS Hedged Opportunities Master Fund sister launched on 1 September 2010. This fund saw its assets grow by 90% by investing in 37 managers, with a portfolio turnover of 17.56%. The SCS Hedged Opportunities Master Fund returned -3.41%.

The most recent RIC announcement, which is that of MainStay Investments’ move into hedge funds, reinforces the addition of hedge funds to the mutual fund line-up. New York Life’s MainStay Investments, which has more than $65.5 billion in assets under management, is the mutual fund distribution arm of New York Life, which was founded in 1845 and is the largest mutual life insurance company in the US.

MainStay provides financial advisers access to a mix of autonomous, institutional investment managers, including the Private Advisors RICs: Private Advisors Alternative Strategies Master Fund and Private Advisors Alternative Strategies Fund. The funds are sub-advised by New York Life affiliate Private Advisors, the Richmond, Virginia-based fund of funds manager with around $4.5 billion under management.

“Institutional investors and pension funds have long relied on alternative investments such as hedge funds to diversify their portfolios and achieve returns,” said Stephen Fisher, president of the MainStay Funds. “Today, we’re seeing more and more demand among individual investors for investments that offer the benefits of hedge funds – long-term capital appreciation, less volatility and a low correlation to the equity and fixed-income markets – with more liquidity and flexibility.”

Private Advisors has had in mind a RIC version from the time of New York Life’s acquisition in 2010. “The opportunity to leverage [Private Advisors’] expertise for a registered product was in our mind as soon as we made the acquisition in 2010. Based on our confidence in Private Advisors’ team, process and performance, we never considered another manager for the fund; we thought we had the best available within New York Life,” said Fisher.

	Chris Mackay

Echoing the rationale that many established FoHFs are using to enter the mutual fund arena, Mackay added: “The regulated investment company or ‘RIC’ structure permits MainStay and Private Advisors to broaden their potential client base and reach out to prospects who might not ordinarily consider hedge funds.”

“While investors still need to be accredited, the advantages of this fund structure includes the low minimum investment ($50,000), versus traditional hedge funds ($1,000,000), Form 1099 filing versus a Schedule K-1 and more frequent liquidity dates,” continued Mackay. “The low account minimum allows accredited investors to easily incorporate hedge funds into their portfolios and thereby broaden their asset allocation with the goal of reducing risk and enhancing returns.

“MainStay has a very strong distribution capability employing over 200 dedicated professionals and covering a variety of channels including banks, wire-houses, independents and registered investment advisors.”

The schism between the retail and institutional hedge fund buyer is widening. In the widely held belief that they are maximising performance, institutional investors are eschewing funds of funds with their second layer of fees in favour of direct allocations, while the quasi retail audience is being given a larger selection of FoHF brand names and a third layer of fees in the form of a sales charge, or aptly termed ‘load’.

The growth of the RIC FoHF market is a slow and steady one, but for the reporting year ending 31 March 2012, it seems that performance has not stymied the intention to launch new products and the desire to allocate to a large number of smaller, lesser known managers.

With FoHFs fighting a public relations battle on the institutional field, largely on the basis of the second layer of fees, those US-based FoHFs looking to raise assets are starting to look at ways in which to tap into the defined contribution, 401(k) plan market as a source of investors – ironically adding a third layer of ‘sales’ fees.