The lines between alternative and traditional investments continue to blur as institutional and retail investors view alternative mutual funds as substitutes for hedge funds.

Traditional asset managers have been steadily crossing over into the alternatives space. Firms are developing alternative asset products or acquiring alternative asset businesses to augment their traditional fund offerings and diversify their revenue sources.

“As investors’ appetites for alternative investments continue to grow, asset managers have been broadening the options available,” said Michele Giuditta, associate director at Cerulli Associates. “Asset managers are developing alternative assets in a liquid ’40-Act mutual fund format for retail investors.”

Blackstone Alternative Asset Management (BAAM), the hedge fund business of Blackstone, is launching its first alternative investment-focused mutual fund that offers daily liquidity.

The Blackstone Alternative Multi-Manager Fund (BXMMX) is a registered, open-end mutual fund that is managed by Blackstone Alternative Investment Advisors LLC. BXMMX will allocate assets among a variety of investment sub-advisers with experience managing non-traditional or alternative investment strategies. Blackstone may also manage a portion of the Fund’s assets directly and may invest in unaffiliated hedge funds.

BAAM is the world’s largest discretionary allocator to hedge funds and has approximately $49 billion under management. Blackstone has spent the last three years analyzing and preparing to enter the market for liquid alternatives. “Our industry position and relationships allow us to offer access to a group of the highest-conviction hedge fund managers on BAAM’s roster — managers currently representing a significant amount of BAAM’s capital on a dollar and percentage basis,” said John McCormick, senior managing director and head of global business strategy for BAAM. “Our track record of structuring value-added transactions has enabled us to secure this capacity.”

Significant investments in technology and infrastructure are necessary in order to operate effectively in a daily environment, subject to 1940 Act rules. “You have to ensure that your manager due diligence and investment processes are consistent with those that have proven successful over time, and that the underlying strategies lend themselves to a successful transition to a daily, more highly-regulated environment,” McCormick said.

Mutual funds are becoming the dominant vehicle used by both advisors and institutions to access the majority of alternative strategies. Alternative mutual funds saw inflows of $19.7 billion in 2012, while Morningstar estimates that among funds in its database, $7.6 billion flowed out of single-strategy hedge funds.

“Alternative mutual funds and ETFs have grown in breadth and quality in recent years,” said Nadia Papagiannis, director of alternative funds research for Morningstar. “Institutional investors are starting to see alternative mutual funds as substitutes for hedge funds, and more financial advisors are incorporating these liquid, transparent investments into their client portfolios.”

Opportunities for hedge fund managers to cross over into the liquid alternative mutual fund space have accelerated since the financial crisis of 2008.

Cerulli research shows that most firms have built their alternative businesses internally, while one-third have expanded into alternatives through hiring subadvisors. In 10 years, managers surveyed by Cerulli anticipate that on average, alternative mutual fund assets will account for 13.6% of total mutual fund assets, up from 2.2% at the end of 2012.

“Managers should be aware of the unique distribution requirements of alternative funds versus traditional funds,” Giuditta said.