A new report from Finadium evaluates the investment strategies and business models of the US hedged mutual fund industry, including long/short, absolute return and market neutral '40 Act funds.
This segment is growing rapidly; assets doubled to over US$50 billion between June 2009 and October 2010. Fund operators include large mutual fund complexes seeing a new opportunity, hedge funds looking to repackage their offerings, and registered investment advisors marketing internal strategies to a broader audience.
Operationally, hedged mutual funds continue to work out the best routes to access cash for margin and securities for short sales. As retail investors already pay higher than average fees to participate in these funds, managers are incented to look for prime brokers and custodians who can meet their needs in a cost effective, operationally efficient way. Having learned important lessons from 130/30 funds in 2007 and 2008, prime brokers and custodians have responded with new service models for these leveraged funds, and are finding that the services they can offer to hedged mutual funds are relevant to hedge funds and pension plans as well.
Highlights from the report include:
Hedged mutual funds offer investors the opportunity for hedge fund returns coupled with the security of the mutual fund structure.?
Prime brokers are seen as ideal financing providers to hedged mutual funds, but custodians have worked through a key provision of the Investment Company Act of 1940 to provide leverage to their custody clients.
Finadium projects that another $100 billion of assets will migrate to hedged mutual funds over the next two years, tripling the size of the segment.
