Invest in Hedge Funds Without the Lofty Fees
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I never thought I’d see the day of hedge fund commercials, but it might not be too far away. Regulators have just lifted a multi-decade ban and cleared the way for hedge funds to begin advertising to U.S. consumers, which could catapult these mysterious investment vehicles into the mainstream. By investing in alternative investment managers, you can benefit from potentially greater asset inflows as more investors become comfortable with the idea of directing their capital into these funds. Just do it before September, which is when the new protocols for alternative asset manager marketing are set to take hold.
Hedge funds are known for their lofty 2/20 fee structure – 2% for the management of the fund and 20% for performance. While fees have come down from these levels somewhat, (amid successful negotiations on the part of investors since the financial crisis), they remain higher than average. Now’s your chance to invest in alternative investment managers and sidestep those charges and the stringent income and net worth requirements attached to hedge fund investing.
Before we get into the companies, it's worth noting that hedge funds are under-performing the market year-to-date, according to hedge fund research firm Hennessee Group. Hedge fund strategies like merger arbitrage have done well thanks to a flurry of activity, but managers have had a tough go of it in places like gold.
Hedge fund manager Och-Ziff Capital (NYSE: OZM)(NYSE: OZM)(NYSE: OZM)(NYSE: OZM)(NYSE: OZM)has $36.1 billion in assets under management (AUM), 20% of which is invested in long-term assets. Assets are down some $200 million since June, according to a company filing, although it's unclear whether the decline is a result of investor withdrawals, performance, or both.
Och Ziff Capital performance
In the first quarter, Och-Ziff collected about $126 million in management fees. The average management fee rate, however, fell from about 1.7% to 1.6% as investors have been directing a greater percentage of assets into lower-fee credit products. In May, the firm announced a $0.28 quarterly dividend.
Och-Ziff swung to a first-quarter profit of $26.1 million from a loss of $122.7 million in the year-ago period. Performance was driven in part by the restructuring of the terms and an expansion of an existing client relationship.
According to a recent investor conference the asset management firm is in growth mode. To be fair, some of that growth opportunity was created as a result of assets lost since the financial crisis, but nonetheless, the firm is focused on attracting greater assets.
It's keyed in on expanding three areas of its business, including its multi-strategy funds, credit (ie: real estate), where Och-Ziff currently has about $5 billion in assets directed, and long/short equity. Long/short is where the firm is seeing the strongest client interest as investors push for exposure to the global equity markets, and this is feasibly where Och-Ziff can benefit the most from marketing to retail investors.
Assets at alternative investment manager Oaktree Capital (NYSE: OAK)(NYSE: OAK)(NYSE: OAK), which recently marked its first year as a publicly traded company, are rising. The company had $78.8 billion in AUM as of March 31, which represents a $1.7 billion increase from the end of 2012. The lion's share of Oaktree Capital's assets are directed in corporate debt, and the firm attributes the recent rise in assets to greater capital commitments and rising market values.
Oaktree is seeking to capitalize on rising demand among retail investors for alternative-investment products. The firm just named a new head of retail in its marketing group, John Sweeney, the timing of which coincides with the more relaxed marketing guidelines for alternative managers. Oaktree already has a retail business, runs mutual funds, and has a wealth management business.
Indeed, the firm's head of investor relations told me only 3% of Oaktree Capital's assets are currently directed into hedge funds. The firm is in the early stages of a retail push, which is where it is focusing its efforts in 2013, and the brand familiarity that it's built from its more traditional products and partnerships with brands like Vanguard could carry over to alternative investments including hedge funds. This is one to watch for sure.
Assets are also rising at Fortress Investment Group (NYSE: FIG)(NYSE: FIG)(NYSE: FIG), where the alternative investment manager's AUM climbed 4% in the first three months of the year to $55.6 billion. This despite the fact that it had to honor some $400 million in hedge fund redemptions, or investor withdrawals, in the period. Fortress achieved $400 million in capital inflows into its liquid hedge funds through May, and these assets will be reflected in its second-quarter results.
Fortress is debt free (with the exception of a single note to be paid off this year) and has $1.5 billion in capital on its balance sheet. Still, it has a low multiple, and trades at a trailing 12-month P/E ratio of about 15.0. It currently pays a $0.06 dividend, but it's also liquidating some assets from which it expects to create some value. With that, and its solid balance sheet, the firm is focused on returning capital to shareholders over the next couple of years and hopes to improve its valuation in the process.
We have yet to see which hedge funds are going to take advantage of the looser marketing rules and which ones will prefer to keep their cards close to the vest. Either way, any ramp up in marketing will raise the awareness of alternative investments, which could bode well for the industry's assets under management. Of the three alternative investment managers, I like Fortress Investment best. It's trading at a low valuation and has a plan of returning more value to shareholders in the near future. Perhaps you should take a closer look.
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