Investment Banks Eye 'Hedge Funds for the Masses'

Date: Wednesday, July 3, 2013
Author: Jenny Cosgrave, CNBC

Several investment banks are said to be eyeing the launch of hedge funds for retail investors with minimum investments as low as $1,000 following the launch of a Goldman Sachs fund in May that raised $58 million in less than two months.

Goldman became the first major investment bank to launch a multi-manager hedge fund for the retail market, and other banks are said to be planning similar offerings, according to Amy Bensted, head of hedge fund research at alternative asset data provider Preqin.

(View More: The 10 Stocks That Hedge Funds Love Most)

Bensted said banks such as Merrill Lynch and UBS are exploring moving into the area, as clients are growing less inclined to rely on wealth managers for alternative investment solutions.

CNBC contacted both UBS and Merrill Lynch; UBS declined to comment, while Merrill Lynch was not immediately available for comment.

"A lot of institutional money is flowing from, say, a Credit Suisse fund to a Bridgewater fund, Bensted said. "There has been a move from relying on wealth managers or investment banks to pure asset management shops – so for investment banks, they need to get these smaller investors in and are trying to get them used to hedge fund investing."

"A $1,000 minimum investment means I could invest in one if I wanted, so it's about getting more people in. I think in general, people are looking to diversify, with such low interest rates in the markets at the moment globally, for a lot of people it could be an interesting way to diversify their holdings," she added.

While Goldman launched the first fund-of-funds for retail investors in May, which will not include any Goldman Sachs funds, hedge funds with single name managers and very low minimum investments are more common, with some funds such as the Wada Capital Japan trust and the Venator Investment trust with minimum investments as low as $500 launched pre-2008 according to Preqin data.

Goldman charges a 2 percent management fee, but does not take the 20 percent performance fee usually associated with hedge funds as the fund is classed as a mutual fund. The fund also offers daily liquidity, so investors' money can be pulled out at any time.

"I think the hedge fund industry is definitely moving towards these really big hedge funds, which have massive minimum investments of $100 million, but at the other end of the scale, investment banks are trying to get the everyday investor. Having a smaller minimum size and maybe better protection of assets is a way to do that," Bensted said.

According to Citigroup, global demand for retail-focused liquid alternative investment products will reach $939 billion by 2017 - more than three times the current level.

Kohlberg Kravis Roberts (KKR) is one alternative investment firm that is planning several strategies to attract high net worth retail investors. Earlier this year it filed to launch two new vehicles, including a retail product from Prisma, its fund-of-funds manager.

Alastair Barrie, global head of hedge funds at Martin Currie said he expects the increasing "democratization" of hedge funds, and that more investors should have simple hedge funds in their portfolios.

"By that I mean long/short credit or long/short equity," he said. "What does that mean for the client? It means they probably sacrifice some upside return, but potentially don't get the same down draft when there is a big market correction."

He added that demand for these types of products had increased, somewhat surprisingly, from investors who were close to retirement.

"When you come up to retirement, you don't want to have too much exposure to the equity markets just in case there is a big correction – that is why you are seeing increasing demand using diversified asset portfolios or multi-manager portfolios so they get less exposure to straight equities," Barrie said.

"As the fear factor of 2008 starts to fade there is an acceptance that not all hedge funds are the same. Some genuinely do hedge, reduce risks – [but] it became an all-encompassing term."