Morris ran ultra-sophisticated funds for the ultra-rich based on
Now Morris is chief executive of
The first instance: the
But the fact that Hagin is launching a mutual fund shows that elitism in investing isn't what it used to be.
After years of negative headlines for hedge funds, regulators are getting spunkier and financial advisors more vocal in their demands for hedge-like products that can fit within their transparency regimes.
"The trend toward convergence between the traditional and alternative sectors will accelerate in the future. We would rather be on the leading edge than chasing the wave," says Morris.
Morris is just the latest example of hedge fund managers embracing the masses. Other firms that have recently entered the game include
However, downgrading from the Aston Martin crowd to the station wagon set isn't easy. There are plenty of operational, legal and strategic headaches involved.
"Converting a hedge fund into a mutual fund raises a number of potential legal issues," says
Headaches, according to Hunt, include tough questions related to product design: Can the strategy work within the liquidity and leverage limits of the Investment Company Act of 1940, as well as the tax constraints of the Internal Revenue Code, such as subchapter M, which limits the amount of underlying actively managed assets? Also, will the adviser or fund have to register with the
Then there are headaches with organization, registration and implementation. For example, will the mutual fund board be comfortable evaluating the skill of the manager and approving the level of fees? Can the strategy and risks be described in a plain English prospectus?
For instance, managers have to ensure that the conversion from the hedge fund format to the mutual fund format is accomplished via a tax-free transaction, so that the former limited partners of the hedge fund are not taxed on their share of the unrealized appreciation tied to the hedge fund's investment portfolio.
This means meeting certain technical requirements in the tax regulations for a tax-free transfer. This could involve either getting a letter ruling from the
Managers also have to deal with the costs of audits and regulatory reporting when they transfer to mutual funds.
Hagin built a new infrastructure to meet the needs of the mutual fund world, fine-tuning it by "walking" dollars through-or simulating the operational steps of-the new system to make sure they understood all the ramifications.
That led, for instance, the firm to set up a tri-party agreement for trading. That is to cover the needs for a prime broker for the shorting involved or a custodian to hold stocks for long only investing, plus a fund administrator and a transfer agent.
In comparison, a hedge fund manager can choose to use only a prime broker. The costs and the complexity of trades, of course, increase with the addition of service providers, says Morris.
"If a new manager is considering a mutual fund they should do a lot of comparison shopping," he says. "Administration, custody, audit and legal all cost significant sums of money and each provider is mission critical."
Operational and regulatory headaches are just part of the problem. The other issue is whether the hedge strategy can actually work in a mutual fund format.
Not Lost In Translation
According to fund servicer Gemini Funds Services, the hedge fund strategies that generally work in mutual fund formats include long/short equity, market neutral, arbitrage and absolute return. Others that have succeeded include real estate, strategic
"There are some limitations that don't exist in hedge funds, like those related to leverage or assets," says Rogers. "We look for what can be translated, and what can be lost."
"We are very transparent. You know what you own. Many times hedge funds are not," he says.
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