Hedge Funds Size Up Retail Demand

Terry Flanagan

Hedge funds have a certain cache as investment vehicles for institutions and high net worth individual investors. But the lines of investment strategy have blurred, some hedge funds are looking to tap into increased demand from retail investors.

The most dramatic way to do that is via converting to a mutual fund. It’s a rare occurrence, but underlying conditions lend support to the premise that there may be more in the next year or two.

Such a conversion has worked well for the $480 million Catalyst Hedged Futures Strategy Fund, which became a mutual fund in September 2013.

“There’s clearly a trend and an appetite in the retail community for alternative strategies, things that are different than simply a manager going out and picking a portfolio of stocks,” said Ed Walczak, manager of the Catalyst fund. “The retail community has begun to embrace different strategies and different risk/return profiles.”

Walczak had managed the fund as a hedge fund for eight years under the umbrella of Harbor Financial LLC before changing its identity.

“I had reached a fork in the road in considering how to raise additional assets,” Walczak told Markets Media. “I hadn’t done a lot of focus on asset raise. The fork in the road was whether to build out internally a more robust sales and marketing infrastructure, do that with third-party assistance, or join an organization like Catalyst that had established sales and marketing resources and distribution channels.”

As a hedge-fund manager, Walczak said he would take in investments of at least $100,000, whereas as a mutual fund, the minimum investment is $2,500.

To be sure, while broad investment trends can help underpin a hedge-fund-to-mutual fund conversion, each organization’s own specific set of circumstances will be be the ultimate driver.

In Walczak’s case, “I was a relatively small shop and I was anxious to tap into the resources, particularly on the distribution side, of a large organization,” he said. “For me, it was important to separate myself from some of the back-office management, as well as sales and distribution, and focus on investment strategy and research.”

“Many more hedge fund-like strategies, alternative investment strategies, and commodity-based strategies are appearing in the ‘40 Act’ mutual-fund world,” Walczak continued. “Catalyst’s business model is to offer alternative strategies, on the theory that the world doesn’t need another large-cap growth fund.”

A small hedge fund that hasn’t attracted substantial institutional assets would be more likely to consider converting to a mutual fund, but even the big players have taken notice of demand trends.

“Hedge funds, no matter how large and successful, recognize that there is untapped distribution potential in the retail, smaller institution, and small family office marketplaces,” Walczak said, “There is a lot of money out there available for some of these hedge fund strategies.”

“You’re seeing some larger, more established hedge-fund organizations begin to offer mutual fund products, to tap into a new clientele and source of assets,” he continued. “We see a trend towards not necessarily converting a hedge fund, but at least offering a comparable strategy in a mutual-fund format.”


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