Assets in Market Neutral Mutual Funds up 342% in 3 years
Feb 16th, 2007 | Filed under: Hedge Fund Industry TrendsMarket-neutral funds mirror hedge-like strategies
By: Murray Coleman, MarketWatch
Published: February 12, 2007
Hedged mutual funds don’t seem to be going away. In fact, this article suggests anemic equity returns will fuel the rush into these lower-correlation cross-over funds. According to MarketWatch, assets in these funds is up 342% in the past 3 years (to $5 billion). Lipper’s Andrew Clark tells MarketWatch:
“If you’re holding bond funds for diversification, you might want to swap out some of that money for market-neutral or long-short funds. You won’t pick up any more risk. And they’re non-correlated to both bonds and stocks.”
Clark just completed a study of drawdowns in various types of funds from government bond funds to hedge funds. He concludes:
“Market-neutral equity funds aren’t any more risky than a substantial number of bond funds. And they’re substantially less risky than equity mutual funds.”
The story goes on to cite two top performing cross-over funds with very different business models: the TFS Market Neutral Fund, a long/short equity fund with nealry 500 positions (so we are assuming they have a pretty quantitative focus) and the Absolute Strategies Fund – essentially a funds of hedge funds with 13 managers.
Jay Compson, manager of the Absolute Strategies Funds and co-founder of Boston-based Absolute Advisers, tells Lipper that his fees are “roughly half what a hedge funds of funds would charge”.
Based on sticker-price alone (i.e. not accounting for the amount of alpha), this really is a remarkable turn of events in the asset management industry. When institutions began to invest in hedge funds, managers would marvel that volume discounts didn’t seem to be required. Institutions paid “retail fees”.
Now we seem to have a situation where institutions are not only willing to pay “retail fees”, but are paying even higher than retail fees – and for larger volumes of business. Maybe the lack of economies of scale in smaller asset managers (like Absolute Advisers) is more than fully off-set by their ability to manage costs better. In other words, could this be a rare example of where the little guy is better served by another little guy?
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