Exclusive hedge funds crack open door to Main Street

Tue May 27, 2014 3:13am EDT
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By Svea Herbst-Bayliss

LAS VEGAS (Reuters) - As a $14.8 billion hedge fund with a reputation for savvy mortgage trades and a record of double-digit returns, Pine River Capital Management has long signed up multi-billion-dollar pension and sovereign wealth funds as investors.

Now the exclusive hedge fund is making some of its strategies available to Main Street investors who've been warned that bets on stocks and bonds may not see them through retirement. For as little as $1,000, they can include hedge funds in their nest eggs.

As one of seven firms managing money in Wells Fargo's new Alternative Strategies fund, Pine River is among the latest big-name funds to crack its doors to private clients with look-alike products known as liquid alternative funds after years of courting only the super-wealthy.

"Sub-advising portfolios in the (mutual fund) space is a new and diversified source of capital for a firm like ours," said Brian Taylor, who founded Pine River with $350,000 of his retirement money in 2002. "Like anything new, we are taking a measured approach, but we believe it could be a growing part of our business over time."

In the last two years, several big name hedge funds have signed on as sub advisers to liquid alternative funds, offering them through mutual funds to average investors: D.E. Shaw, York Capital Management, Jana Partners, Two Sigma Advisers, and HealthCor Management are managing pieces of the funds sold by mutual fund giant Fidelity. Brigade Capital Management and Graham Capital Management manage money for a Goldman Sachs fund while Passport Capital Management manages money for the Wells Fargo fund.

The trend provides private investors with fresh options beyond stocks and bonds and allows hedge funds to tap a vast new pool of capital. But it has also sparked fears that the original products - which demand high fees - could be cannibalized, drawing traditional investors to the cheaper ones.

Lackluster performance among traditional hedge fund portfolios in recent years are fanning those fears, giving pension funds - the giant pools of retirement money that have formed the backbone of hedge fund clientele - fresh ammunition to complain about funds' 20 percent performance fee coupled with a 2 percent management fee.

"What was worth paying a 2 percent management fee and a 20 percent performance fee for a few years ago, isn't worth it anymore," said one investor, whose company puts billions into hedge funds and didn't want to be named for fear of angering clients. The fee structure among hedge funds is referred to in the industry as "the 2-and-20".   Continued...

Brian Taylor, Founder and CEO of Pine River Capital Management, speaks at the Reuters Private Equity and Hedge Funds Summit in New York, March 2, 2010. REUTERS/Brendan McDermid