Yield of Dreams

Hedge Fund Managers Salivating Over Retail Investors

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Hedge funds and private equity have long been reserved for the elite investor—institutions and ultra-high-net-worth individuals. They’re characterized by restrictions, lock-ups and high minimums meant to keep retail investors out. But lately the tables have turned. Many hedge fund and private equity managers are salivating over the assets of retail investors, with many launching mutual fund strategies for the first time.

The latest manager to jump into bed with retail investors is KKR, which launched two distressed debt mutual funds this month. AQR Capital Management, which introduced its first liquid alternative fund in 2009, rolled out four new mutual funds this month.

Interest in these types of funds is only expected to grow, so I can understand the appeal. According to data released by Cerulli Associates and Strategic Insight/SIMFUND, alternative mutual funds account for 2.8 percent of overall mutual fund assets today, but are projected to reach 15.8 percent of assets a decade from now.

This is not a new phenomenon; alternatives in liquid form have been around for several years now. But with KKR’s recent push into the space, the issue does seem to be garnering more attention, as well as scrutiny.

MarketWatch’s Chuck Jaffe, for example, says retail investors should be wary of the KKR funds:

But it’s clear why the fund business would be attractive to any private-equity or buyout firm that isn’t necessarily making money at its core business in this troubled economy. If a firm can open new funds and attract significant assets, management gets a fat, steady paycheck…

Still, when the barbarians open their gates to you, it might be time to wonder if you are being led to slaughter.

I agree. Whenever assets start flowing into a certain product and several firms jump on a new strategy, a red flag goes up, especially when the red rope was up before.

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What's Yield of Dreams?

Casting a gimlet-eye on asset management issues.

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