Yield of Dreams

Hedgies to Go After RIAs

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The JOBS Act, signed into law in April of this year, includes a provision that allows hedge funds to be able to advertise and perform general solicitations, including posting private offering documentation. And while hedge funds are still restricted to qualified individuals and require high minimums, hedge fund managers are taking their message to a new audience: registered investment advisors, according to Institutional Investor.

The article points out that it was difficult for hedge fund managers to penetrate the RIA market because most RIAs have a client base consisting of both accredited and non-accredited investors. But the new rules allow hedge funds to be more transparent about their investment performance and strategy, putting them on the same playing field as registered products.

But is it too little too late? As the article notes, some hedge fund managers, such as AQR, have diversified into liquid alternative products. Even many mutual fund managers now have liquid alternative offerings. Not a new phenomenon, and thus, such strategies have already taken hold in the advisory industry. And with the history of blow-ups in the private offerings space—take Madoff for one—advisors and clients have been wary of illiquid alternatives and the risk those investments bring for some time. (Not to mention the increased regulatory scrutiny around private investments.)

In October, single-strategy hedge funds had net outflows of $1.7 billion, while multi-strategy hedge funds gained $976 million in net inflows, according to Morningstar. For the year, funds with no Morningstar rating have raised $6.5 billion, while rated funds have shed $12.2 billion.

On average, RIAs allocate 5.84 percent to alternative assets such as hedge funds, managed futures, and commodities, according to WealthManagement.com’s 2013 AdvisorBenchmarking RIA Trend Report. And 41 percent of RIAs expect to increase their usage of alternative investments in the next three years, while 55 percent of them plan to keep it the same.

The question remains, will hedge funds market to RIAs more aggressively in the future, or will they continue to capitalize on their mystique? But perhaps an even bigger question is whether RIAs will listen. 

 

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Casting a gimlet-eye on asset management issues.

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