Equity long/short mutual funds “could easily grow twenty-fold over the next five years:” Report
Nov 9th, 2009 | Filed under: Retail Investing, Today's Post
Readers of the FT over the weekend learned that “a new breed of hedged mutuals grows apace.” The paper reports that investor demands for liquidity and transparency in hedge funds have forced managers to “try something different.”
But as regular AAA readers are aware, the convergence of hedge funds and mutual funds have been occurring for several years (see end of this post). In fact, we covered a seminal paper on this subject 3 years ago. In “Hedge funds for retail investors? An examination of hedged mutual funds” Vikas Agarwal, Nicole Boyson, and Narayan Naik wrote:
“Recently a number of mutual fund companies have begun offering mutual funds that emulate hedge fund strategies, with assets tripling since 2002…over half of the Registered Investment Advisers who do not currently use hedge funds for their clients would add hedged mutual funds to their portfolios.”
The trio concluded that hedge fund managers seemed to be more adept at, well, managing hedge funds:
“…using hedge fund strategies, even within the constraints of the mutual fund environment, can significantly improve performance.”
While “hedged mutual funds” may not be that new, the Madoff Affair may have certainly made them more interesting to retail investors.
A new report by BNY Mellon’s Pershing Prime Services unit and consultancy Finadium (“Competition and Convergence: The Evolving Landscape for Hedge Funds” – available here with free registration) finds that traditional asset managers are adding long/short funds to their line-ups at an astonishing rate.
The companies forecast that the amount of long/short assets managed by traditional money managers will increase by a whopping 75% to $345 billion by 2012. Meanwhile the amount managed by actual long/short equity hedge fund managers will increase by only 25% to $580 billion. (Those of you who contend that long-only managers have no business shorting may find this to be further evidence that 2012 will indeed herald the end of the world.)
Back in 2004, Agarwal, Boyson and Nail found that their 39 “hedged mutual funds” (Table 7 of their report) represented about 2% of all hedge funds. BNY and Finadium find that today, there are 157 such funds managing $27 billion or about 4% of all hedge fund assets (see chart from report below): More…
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[...] “As hedge funds and mutual funds begin to eat each other’s lunch, their leverage levels are also converging.” (All About Alpha) [...]