Michael Greaney and Olwyn Alexander
With several publicly-offered hedge funds now exceeding US$1 billion in assets, the stage is set for more to be launched. Such is the demand for these products that many managers are overcoming long-held objections to them. Indeed, many now view them as a valuable way to diversify their investor bases.
Through the public market, hedge funds are tapping into both retail investors and institutional investors such as smaller pension funds. Retail investors are buying as they seek alternatives to traditional long-only funds. Institutional investors, for their part, increasingly want the protection offered by regulated products after the financial crisis and related scandals.
By launching publicly-offered vehicles, hedge fund managers are not only diversifying their revenue bases but also enhancing the persistency of their assets. For example, closed-end fund offerings provide what is essentially 'permanent capital' and are exchange traded. Even the open-end mutual fund format can deliver a less volatile investor base. These vehicles also open up distribution channels that are only accessible to regulated vehicles (eg, defined contribution pension assets).
For hedge fund managers, entering the regulated space also provides an opportunity to leverage the brand, allowing them to build broader businesses. In this way, they can grow assets in investment strategies beyond those they are known for.
At the same time, deterrents to joining the regulated world are falling. After all, alternatives managers will have to register with the Securities & Exchange Commission (SEC) anyway from the summer of 2011, and many are already augmenting their compliance infrastructure accordingly.