Fidelity Investments started offering retail investors the opportunity to invest in hedge funds. It has launched a mutual fund in partnership with Arden Asset Management, in which Fidelity has poured in more than $700 million in this “fund of funds”, according to an SEC filing.
Various pension funds and large institutional investors have placed $7.5 billion in hedge fund investments with Arden Asset Management. By making the new fund available to Fidelity investors, Arden will mine the vast retail market for assets.
In another filing, The Blackstone Group L.P. (NYSE:BX), one of the world’s largest investors in hedge funds, said it is launching a portfolio for retail investors under the name “Blackstone Alternative Investment Funds”. It will invest money in alternative investment strategies like opportunistic trading, global macro, managed future, and quantitative strategies.
Fidelity and The Blackstone Group L.P. (NYSE:BX) both have made the move at a time when investors – especially ultrawealthy ones – are withdrawing their money from hedge funds. Of course, why would any investor pay a hedge fund manager higher fees with longer lockup periods just to get modest returns? Hedge funds usually charge management fees and performance fees, while mutual funds charge only management fees. According to the industry tracker HFR, investors pulled out a hefty $16.5 billion from their hedge fund investments during the third quarter this year, compared to just $7.9 billion in the same period last year.
The two investment firms noticed this trend. So, they have created a way for affluent individual investors to invest in hedge funds without longer lockups and higher fees. The Fidelity and Arden’s fund is targeting high-single to low double-digit returns over three to five year period. A Fidelity spokesperson said the fund would charge a net expense ratio of 2.3%, which is a bit higher than what mutual funds charge, but in line with alternative mutual funds.
Amid poor hedge fund returns, investors are demanding better investment options and diversification of the ways to make money. Large investment firms are quickly trying to satisfy investors. Nadia Papagiannis, the head of alternative fund research at Morningstar, Inc. (NASDAQ:MORN), says that the foray into mutual funds is a “win-win” for hedge funds. “The total asset side is bigger [in mutual funds], the number of clients is bigger, and they’re stickier,” she said, referring to the loyalty of investors.