New Jersey Alts. Adviser Preps Maiden Fund of Hedge Funds

Nov 20 2007 | 9:37am ET

After years of helping other firms develop hedge fund products, Liberty Gateway Asset Management is helping itself to a slice of the growing hedge fund pie.

The New Jersey-based advisery firm is launching the Liberty Gateway Diversified Alpha Fund, a multi-strategy fund of hedge funds, and its Cayman Islands-based feeder fund, in January, targeting high net-worth individuals.

The funds of hedge funds will invest in more than 24 underlying managers in five to seven hedge fund strategies, according to Robert Push, a Liberty Gateway principal. The portfolio will target two-times leverage and will maintain manager allocations of 2% to 6% a piece. Its underlying funds will have approximately $52 billion allocated to the specific strategies and the average weighted assets under management are $1.8 billion, with the largest single strategy having $8 billion in assets and the smallest managing $40 million. 

Founder Mark Powers and Daniel Karp, director of research, are the portfolio managers for the new vehicle.

Targeting the Retail Crowd

Push, who joined the firm in May with the specific mandate of business development, has a five-year business plan of raising $5 billion and is banking on retail investors to hit his numbers. “If you look at mutual fund data, 91% of all mutual fund assets are from individual investors and roughly 84% of those asset come in through intermediaries,” said Push.

“As soon as we get our feet underneath us, we would like to register this as a mutual/hedge fund so we can broaden the amount of investors into the fund. We really want to focus on the high net-worth individuals and non-ultra-sized family offices because the rest of the industry is catering to the institutional market.”

Push and fellow principal James Powers are relying on their broker/dealer and hedge fund networks to distribute their product to individual investors. “We have a close relationship with a single-strategy hedge fund in Bermuda, which is well plugged-in to the family wealth in that region, and is going to be distributing the fund for us and the 600 high net-worths in their hedge fund. They’re expecting to raise about $30 million for us by the end of Q1 2008,” he said.

Liberty is also making a push to give its investors as much transparency as possible from its underlying managers. Push said investors will get “close” to the same level of transparency that the firm gets from underlying managers but admitted that not all managers are opening their kimonos for inspection.
“We’re getting 100% transparency from a small ABL manager but medium sized funds are more opaque and the larger funds such as Renaissance and DE Shaw don’t give us anything,” he offered.

Fund Dos and Don’ts

Other managers that the portfolio will invest in include Millennium Partners and Paulson & Co. through BNP Paribas, which is also providing the vehicle with leverage. Push said the vehicle is also investing in a niche manager that is trading Israeli bonds and asset-backed lending strategies because “they bring down the beta in the portfolio and provide consistent returns.”

However, the Diversified fund will not invest in asset-backed loan managers in the real estate sector because the firm wants to steer clear of the volatile market and will only include ABL managers in commercial loans and inventory financing. Also, convertible arbitrage and activist managers need not apply.

“We won’t go into convertible arb because it’s so cyclical and if we try to time it, we’ll wind up not getting out in time or we’ll miss the upside,” Push said. “The portfolio has quarterly liquidity with 65 days notice and activist managers really can’t accommodate the portfolio’s liquidity.”

And although Liberty Gate’s founder’s roots are in the managed futures industry--he served as Chief Economist of the Commodity Futures Trading Commission--the new vehicle will not invest in commodity trading advisers because their returns are too “unpredictable.”

The Diversified fund will have an initial 17% allocation to non-U.S. managers and will look to ramp this up to around 25% going forward. It will charges fees of 1.5% for management and 10% for performance, with a $250,000 minimum investment requirement.

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