Dian's Column
Dian's Archive

Lavine/Liberman Archive




Lipper
Muriel Siebert & Co.


Hedge funds now come in registered form



When markets are volatile, wealthy investors often turn to hedge funds to manage risk. Now more popular than ever, these alternative investments come in a new flavor---one that's registered.

Hedge funds have been around since the 1920s but these private placement investments have only been offered to qualified investors, i.e. individuals with incomes over $200,000 for the past few years and assets totally over $1.5 million. Minimum investment requirements have also been hefty---typically $500,000 or more.

Today those investment rules still apply, but, there's a new hedge fund product around. This one is a hedge fund of funds product that's not a private placement but is a registered security, has minimum initial investment requirements a fraction of those on traditional hedge funds--usually $50,000---and doesn't carry as strict qualified investor requirements. Fund families like OppenheimerFunds and Phoenix both have created hedge fund of funds products now available to investors. Even Schwab has one.( A hedge fund of funds is similar to a mutual fund fund of funds in that each is made up of a number of different funds all managed by various investment pros.)

Robert Rosenbaum, senior vice president and director of Tremont Advisors, a global alternative investment research and advisory firm and the managers of the Oppenheimer Tremont Hedge Fund Series, says that what's different between the original hedge fund of funds product and the new ones is in how they are made available to the investing public. "These are not private placements but are registered under the '40 Act ( the Investment Company Act of 1940) and the '33 Act ( the Securities Act of 1933). So you have all the same disclosures you would in any closed-end mutual fund."

While the registered hedge fund of funds comes with lower minimum investment requirements and more disclosures, they can be tricky to understand. So, before you get a call from your broker or investment advisor suggesting you invest in one, what follows are some of the differences that Lipper sites between a mutual fund, an unregistered hedge fund and a registered hedge fund:

  • Mutual funds. These investment companies are usually set up as a business trust or corporation. They are registered under the 1940 Act, taxed as a corporation and require a SEC registered adviser to manage them.

    A mutual fund's net asset value (NAV) is priced daily, shares are offered to the public and shares can be bought and liquidated each day. Investors receive statements on their account values monthly and reporting from the fund company on an on-going basis. While funds may come in load, low-load or no-load format, they are not subject to fees based upon their performance.

  • Unregistered hedge funds. These are limited partnerships or LLCs (limited liability corporation), that are not registered and are taxed as partnerships. They may be managed by either registered or unregistered advisers and are privately offered to "qualified investors" . Reporting is periodic, there are no daily NAVs available and investors pay a performance fee on top of the other fees the fund imposes.

  • Registered hedge funds. These are also limited partnerships or LLCs but are registered under the 1940 Act and taxed as partnerships. They may be privately or publicly offered by an SEC registered adviser and also don't post daily NAVs. Reporting to investors is periodic, although ING Pilgrim is seeking monthly reporting. And these funds do have performance fees.

    Like every investment product---new or old--- the registered hedge fund of funds is not for everyone and comes with no performance guarantees. So, while they offer a wide variety of different investment strategies that can add a cushion to your overall portfolio, make sure to do your homework before investing.

    #

    Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.


    To read more articles, please visit the column archive.




  • [ top ]