From Alpha To Beta, Mutual Fund Launches 2nd Alternative

Feb 3 2006 | 1:00am ET

Alternative Investment Partners is gearing up to launch its second fund-of-funds-type vehicle, which will employ hedge fund strategies but is actually an open-end mutual fund. The Beta Hedged Strategies Fund, which is set to debut March 31, will be marketed to registered investment advisors who serve affluent clients.

“This is one of the few choices that mutual fund investors have where they don’t have to have an outlook on what they think stocks are going to do this year of what they think interest rates are going to do,” said Lee Schultheis, chief investment strategist and co-founder of Alternative Investment Partners. This is the second of the firm’s hedge-like mutual fund offerings. The firm launched the Alpha Hedged Strategies Fund three years ago, and as of Jan. 31 the fund had $168 million in assets under management with an annualized return of 8.33% since inception.

Schultheis said that he decided to launch the new Beta Fund because he was seeing demand from his clients for a similar product to the Alpha Hedged Strategies Fund, but with a higher risk/reward profile. He said clients like the transparency, lower fees and liquidity the mutual funds offered when compared to hedge funds.

“The real difference between the alpha and the beta [funds] is the mix of the underlying managers, the beta will be a more aggressive mix,” said Schultheis. “In the Alpha Fund, we typically leverage between 20-40%,” he said, explaining that openended mutual funds are only allowed to leverage a maximum of 50%. “In the Beta Fund, we might get closer to that 50%. We might be in the 35-45% range, just because it is a more aggressive product looking for a higher return.”

According to Schultheis, managers have been using the Alpha Fund as a fixed-income substitute because they can get high single-digit returns with a very low risk profile. The new Beta Fund is geared toward investors who are willing to take on more risk, but are still interested in protecting themselves from a down year in the markets.

Jonathan Ferrell, portfolio manager and founder of the three-year-old Top Flight Fund, a mutual fund that employs a long/short equity strategy, said that both the supply and the demand for these types of funds is on the rise.

“I think that there is a real interest on the part of investors. You are seeing more sophisticated, better educated investors,” he said. “The idea of having an investment that has the opportunity to outperform in every market environment is appealing to most investors and is something they consider more than they would have 20 years ago.” In addition to managing a hedged mutual fund, Ferrell also managed a hedge fund, so he is well-positioned to compare the two vehicles and their appropriateness for investors.

"There are some investors that just really aren't right for a hedge fund, such as the smaller investors. But for those who can chose, we say, 'do you want the big hitter or do you want the safer play?"

More proof of the staying power of hedge-like mutual funds is Morningstars’ recent move to create a separate category for long/short mutual funds. “I think it was a great move by Morningstar,” said Ferrell. “A mutual fund that is planning a new offering can compete with 40 funds and can be ranked in the top of the category,” he said, explaining that this is far preferable to being ranked in a category alongside 2,500 large-cap growth or value funds, which is where they were before.

Ferrell said that even the big players are focusing on this space now. Last month Janus Capital Management filed for permission with regulars to launch a hedge-like mutual fund, and big names like Charles Schwab & Co. have had similar funds for years.

“We have three, and they seem to be popular among investors,” said Sondra Harris, a spokeswoman for Schwab.

Calling All Talented Emerging Managers

Schultheis is currently looking for hedge fund managers willing to do separate accounts for mutual funds.

“We typically have between $10-20 million that we can start a manager out with,” he said. “There are a lot of small managers who have $25-, $50-, $100 million that they are managing, and we think that some of the best managers are in that space.” The Alpha Fund currently has money invested with 10 underlying accounts. Schultheis plans to eventually invest with 20-40 managers for each of his two funds, which he said will make the funds “singularly unique in the hedge fund world.”  

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...