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Alternative Market Briefing

Other Voices: Performance drag of alternative multi-manager mutual funds

Friday, May 09, 2014

amb
Andrew Beer
This research paper was authored by Andrew D. Beer, Chief Executive Officer, Beachhead Capital and Michael O. Weinberg, Adjunct Professor, Columbia University. The full version can be downloaded from Opalesque here.

Well-documented advantages of alternative mutual funds include daily liquidity, lower all-in fees, greater regulatory oversight, lower minimum investment requirements and the absence of partnership K1s. These features make alternative mutual funds a viable investment for defined contribution plans and retail investors, an untapped multi-trillion dollar market for hedge fund managers.

The opportunity for fund of funds managers is clear. Post-crisis, funds of hedge funds faced a sharp decline in profitability due to a combination of disintermediation, declining fees and rising costs (e.g. customization). Gone are the days of managing a highly profitable co-mingled fund of hedge funds where each incremental dollar of revenue drops to the bottom line. Defined benefit pension plans – long-time investors in funds of funds – are in steady decline; by contrast, defined contribution plans are growing rapidly and current exposure to alternatives is de minimus. Alternative multi-manager mutual funds (AMMFs) could represent a new dawn for funds of funds: co-mingled, highly scalable vehicles with strong potential investor demand.

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