Missed the Morningstar UK Investment Conference in London? Catch up on all the articles and video interviews here.
Alternatives are a hot topic at the Morningstar Investment Conference, and panellists on the "Two Worlds Collide" panel displayed their alternative stripes. Moderator Mallory Horejs from Morningstar kicked off the discussion by asking the panellists why the hedge fund and mutual fund worlds are finally colliding.
Dennis Heinke, of Franklin Templeton, believes the stars are finally aligned for certain hedge fund strategies to transition into the mutual fund space. The cost structure in the hedge fund world is significantly higher because of the added regulatory and legal framework. Henry Davis, of Arden Asset Management, believes hedge funds are leading the charge in the search for asset growth. Hedge funds are looking at the changing landscape of pension plans and greater potential for new revenue sources in the defined-contribution arena.
But ultimately, Kamal Bhatia of OppenheimerFunds thinks the real motivation lies in the challenges multi-alternative mutual funds can solve. Currently if investors desire a secure source of real income, Bhatia contests, they too often turn to Treasury Indexed-Protected Securities, which isn't an ideal solution. Alternatives can help investors protect against inflation and provide a steady income stream. But alternatives can serve other purposes. Many investors are concerned with stock market volatility, which Bhatia believes was a problem during the last market cycle. Tomorrow's challenges, Bhatia points out, will be bond market volatility. In a well-diversified portfolio, bonds are a great hedge against stocks; however, stocks are a lousy hedge against declining bonds.
As the hedge fund realm inches closer toward the mutual fund world, Horejs asked the trio if the convergence is a fad. After all, many predicted 130/30 funds (which long 130% and short 30% of their assets) would gain significant traction. The group ultimately failed to launch. Heinke started off saying that 130/30 funds never provided a benefit for investors. The funds exhibited a beta of 1, and their diversification benefit was suspect. Davis explained that a fund's objective is key to its success but also its potential failure. Its objective, for instance, can't be to guarantee returns, but only time will tell if its objective pans out (especially for the new funds in the multi-alternative category).
Finally, Horejs asked the panellists if the worlds can coexist. Heinke disputed that the worlds have already collided and that an industry sea change is erupting. The year 2008 taught everyone that correlations among traditional asset classes are too high during times of crisis, and that hedge fund managers are starting to have a real conversation with clients about fees. Hedge funds, in his view, can't charge 2/20 (fees on 2% of assets and 20% on performance) for beta, or market exposure. Davis believes his business isn't hurting a hedge fund's ability to charge 2/20 because he offers a slightly different product, but he sees other firms, like AQR, offering hedge-fund-like products in the retail space--at retail prices. Bhatia believes the transformation is somewhat astounding because retail investors can now have access to products once relegated to the institutional world, at a lower cost.
Clearly, when worlds collide, investors win.
