After suffering through a brutal bear market, investors have been reintroduced to the concept that stocks can go down as well as up. As a result, investment managers have been eager to capitalize on that and to fill a market need: the need to hedge. Not surprisingly, more and more funds are being introduced as record amounts of money are flying in the alternative asset direction.
According to a report by TASS Research, which is the research unit of New York-based Tremont Capital Management, hedge funds brought in an all-time best $38.2 billion in new assets during the first three months of 2004. That’s $12 billion more than the last three months of 2003.
Indeed, research by this magazine found that though currently only 45.2 percent of family offices invest in fund of funds, a stunning 83.8 percent expect to over the next three years. (The study, commissioned by Registered Rep., was performed by Russ Alan Prince of Prince & Associates, and Hannah Shaw Grove of Merrill Lynch Investment Managers.)
It comes as little surprise, then, that funds across the country—and overseas—are doing what they can do get in the game.
One of the companies launching into the fund of hedge fund game in the United States is London’s Man Group. The company, one of the world’s largest alternative investment managers, has long been valued by the English as a provider of tax-efficient alternative investment products, but, thanks to cumbersome U.S. tax laws, it has struggled to gain a foothold in the States. Man, now with a Chicago office, is trying again.
On Tuesday in midtown Manhattan, Man Investments CEO John Kelly introduced a new hedge fund product, the Man-Glenwood Lexington TEI. The purpose of the hedge fund: To allow independent broker/dealers and registered independent advisors to use the hedge fund’s unique structure to bypass existing IRS tax structures by deferring funds through a bank in the Canary Islands. The hedge fund is set up to be accessible for high-net-worth investors who want to “dip their toes in the water” rather than hedge heavily. The minimum investment is an unusually low $25,000, with $10,000 additional after the account is set up.
“We want this to be more suitable for more investors,” says Kirk Strawn, director of Intermediary Sales for Man Investments. The firm still requires all clients in the fund to have a net worth of $1 million or a $200,000 income over the last two years.
The Man-Glenwood Lexington TEI has a unique tax-exempt aspect to it that diverts investments through a bank in the Canary Islands, allowing clients to avoid certain tax codes. (Steven Zoric, head of Man’s U.S. compliance division, says that though the loophole has not been “explicitly” cleared with the IRS, the firm’s legal experts say it meets all requirements.) The fund’s price is steep: 175 basis points, with a 300-basis-point cap.
James Lumberg, managing director and co-founder of EnvestnetPMC, which will help distribute the fund to its clients—terms of the deal were not disclosed—says he has seen the uptick in hedge fund investing coming for some time now.
“We went through a period of curiosity, and the smoke we were seeing then is now fire,” Lumberg says.