First up Reuters:
John McCormick has been on a mission for the past five years: to bring hedge funds to the masses.That may seem like a tough sell. Traditional hedge funds, those lightly regulated investment pools open exclusively to large institutions and rich individuals, have been duds lately, trailing the U.S. stock market’s performance every year since 2009 by an average of 10 percentage points, according to Hedge Fund Research Inc data.
But already, McCormick, a senior managing director at Blackstone Group LP, has been wildly successful. He has done so as a tireless evangelist for what are called liquid alternative investments, or “liquid alts.” Like hedge funds, they invest in everything from simple stocks and bonds to all sorts of complex derivatives and other “alternative” assets. The main difference is that liquid alts are packaged as mutual funds and marketed to retail investors who can’t invest in traditional hedge funds.
“Any investor who wants access to alternative strategies should have access to them,” as long as they are suitable for the investor and properly explained, McCormick said in an interview.
Apparently investors agree. Though critics complain about high fees, opaque strategies and other factors that they say make liquid alts inappropriate for small investors, these products have become one of the fastest-growing types of mutual fund.
Liquid alt assets under management in the U.S. and Europe have surged to about $440 billion, according to Preqin, a research firm specializing in alternative investments. In 2008, analysts estimate, the figure was less than $100 billion. Blackstone and its chief rival in this market, Goldman Sachs Group Inc, manage half of all liquid alternative assets sold by big brokerage firms, according to Dover Financial Research.
The appeal is not outsize returns: Liquid alts have delivered even less than hedge funds in recent years.
The reason for their popularity, McCormick said, lies in the 2008 financial crisis and the damage it inflicted on many small investors’ portfolios. “You have baby boomers nearing retirement who experienced a scary event in 2008,” he said. “People who thought they had diversification and didn’t really have it.” The long lists of assets liquid alt funds hold are designed to provide that diversification, he said.
Now, McCormick is among the scores of fund marketers pushing to get liquid alts on the menu of options for U.S. workers’ employer-sponsored, tax-deferred 401(k) retirement savings plans - a pool of money that totals $4.4 trillion. To date, these accounts have offered little-to-no exposure to alternative assets like hedge funds, private equity and real estate....MORE
And from the Wall Street Journal:
Hedge Funds Gear Up for Another Big Short
Some money managers are looking to profit from potential trouble at some ‘alternative’ mutual funds and bond ETFs
Wall Street is preparing for panic on Main Street.
Hedge funds are lining up to profit from potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.
Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as Federal Reserve benchmark interest rates remain near zero. But many on Wall Street worry that junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.
Concerns about such scenarios have been escalating for some time. Now, investment firms such as Leon Black’s Apollo Global Management LLC and Oaktree Capital Management LP are laying the groundwork to cash in if they come to pass.
Apollo has been raising money from wealthy investors for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”
Guided by a similar outlook, Reef Road Capital LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.
“They are going to be toast,” David Tawil, president of hedge fund Maglan Capital LP, said of the funds holding hard-to-sell assets like emerging-market debt and small-capitalization stocks. “It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors.”
In a way, the moves resemble efforts by some hedge funds to find a way to wager against the U.S. housing market ahead of the financial crisis. At the time, the country brimmed with highly indebted homeowners who had been encouraged to borrow more in a low-interest-rate environment. John Paulson’s eponymous hedge-fund firm made billions of dollars betting against the subprime-mortgage market. The risk now is that this latest era of low interest rates has made risky junk bonds, which pay relatively high returns, disproportionately attractive for investors.
The hedge funds are taking aim at what is regarded by many on Wall Street as a weak spot in the markets. “Liquid alternative” funds have emerged as one of the hottest products in finance, fueled by a promise to deliver hedge-fund-style investing to the masses. They use many of the same strategies as hedge funds, with wagers both on and against markets, but are open to less-wealthy investors with fees closer to mutual-fund standards....MORE