David Kupperman attached two additional high-power blinking LED lights to his bicycle and backpack in April after a driver almost ran into him during the last leg of his 22-mile journey to Neuberger Berman’s New York headquarters from his home in Demarest, New Jersey. Kupperman, who worked on a satellite that supported the anti-ballistic missile “Star Wars” project when he was at John Hopkins University Applied Physics Laboratory in the 1990s, wasn’t about to give up his almost-daily ride, which he starts at 5:45 to avoid the most dangerous traffic and includes a trip over the George Washington Bridge and down the West Side of Manhattan on bike paths. But he will do everything he can to reduce the possibility of bad things happening. Adding to his arsenal of five LEDs was a logical next step in his safety program.

Kupperman uses similar, albeit more quantitative, risk avoidance tools in his job as co-portfolio manager of the Neuberger Berman Absolute Return Multi-Manager Fund, one of his firm’s first mutual funds, providing investors access to lower volatility investment strategies typically available only through hedge funds. Kupperman designed the now $2.1 billion vehicle so that hedge funds hold their investments in accounts that Neuberger oversees directly.

Having the ability to watch hedge funds trade around positions and add securities to their portfolios in real time is a clear advantage for investors. In the second half of last year, for example, Kupperman saw that managers were crowding into tax inversion deals. Once the arrangements came under regulatory scrutiny, he trimmed certain positions to bring down the fund’s total exposure. The move helped protect Neuberger when the largest tax inversion deal — drugmaker AbbVie’s proposed $54 billion merger with rival Shire — unraveled after the U.S. Treasury Department said it would impose rules to curb the tactic.

Risk management is just part of the appeal of the Absolute Return fund, which combines the benefits of a transparent mutual fund offering daily liquidity with the independent operations and infrastructure of Neuberger Berman, a $251-billion-in-assets privately held firm well known to mainstream investors and advisers. The fund employs investments from 11 firms, including New York–based event-driven specialist Levin Capital Strategies, multistrategy shop Visium Asset Management and Sound Point Capital Management, which runs long-short credit strategies.

Kupperman, who started his finance career in 1998 when Goldman Sachs & Co. recruited him from the Applied Physics Lab, joined Neuberger as co-head of its alternative investment management business in 2011. Part of his mandate was to build out a liquid alternatives lineup. Kupperman thought the time was right after witnessing pension funds and other institutional investors increasingly going direct to hedge funds — usually the biggest brand names — and skipping funds of hedge funds, which had been tarnished by the Bernard Madoff Ponzi scandal. Smaller hedge funds, which Neuberger’s fund-of-funds group has long focused on as the most promising part of the industry, were losing out.

At the same time, participants in 401(k) plans had few opportunities to get into lower volatility investments like hedge funds that could have cushioned portfolios during the massive shocks of 2008 and early 2009. Hedge funds are structured as partnerships, which makes them hard to include in defined contribution plans. “Human nature being what it is, people sold when that happened and missed out on the upside,” says Kupperman, who became friends with George Walker IV, Neuberger’s CEO, when the two worked at Goldman Sachs. “The beauty of liquid alternative funds is that they are a way for DC plans to really offer shock absorbers to keep people invested by avoiding those drawdowns.”

Liquid alternatives were originally designed for mainstream investors. While intended to democratize investing for participants in retirement plans and other middle-class savers, they have also become attractive to pension funds, endowments and other institutions that like the lower fees, transparency and ability to withdraw their money daily.

Investors poured $22 billion into liquid alternatives in 2014 and $2 billion more this year through April 15, according to New York–based Strategic Insight, a mutual fund research firm. Today there is $234 billion in the category, up from $120 billion in 2011. Bank of New York Mellon, Goldman Sachs Asset Management and Pacific Investment Management Co. are among a growing number of firms that have launched products to try to leverage investors’ increasing appetites for easy-to-use, understandable, noncorrelated investments.

Avi Nachmany, director of research at Strategic Insight, says demand for liquid alternatives still outstrips supply. “Most advisers want some exposure for their clients to these strategies so they can offer a bit of diversification from expensive stock markets and extraordinarily expensive bond markets,” he explains. “Demand is significant and lasting if you can deliver.”

Money managers have been surprised at the level of interest in liquid alternatives from institutions, which account for about 20 percent of the assets in Neuberger’s Absolute Return fund. Co-portfolio manager Jeffrey Majit says one of the fund’s biggest differentiators is its structure, which requires hedge fund managers to run their part of the portfolio in a separate account overseen by Neuberger. “While institutions can afford to lock up their assets as they don’t have near-term liabilities, they like the operational setup that we have,” says Majit. “They are taking Neuberger’s operational risk rather than the operational risk of a small hedge fund. In the post-Madoff era, that is attractive.” Style drift, which is a primary reason investors leave hedge funds, is now easily detected as well.

Not all hedge fund strategies are liquid enough for liquid alternatives. Neuberger, for its part, avoids distressed debt and investments that use a lot of leverage. Still, Majit says that about two thirds of strategies are suitable for daily valuation and meet other mutual fund regulatory requirements, which allow shorting and a modest amount of leverage.

The Neuberger Absolute Return fund celebrated its three-year anniversary earlier this month; performance has been solid. Majit and Kupperman have delivered an average annualized return of 5 percent, with the same volatility as the Barclays Aggregate Bond index, the most widely used fixed-income benchmark. “As rates move up, these strategies will work even better,” says Kupperman.

The fund actively dials up and down the allocations to each manager. Kupperman, who has been negative on strategies such as global macro and managed futures, is now more upbeat about these investments. Last year the Neuberger fund added two long-short managers, Los Angeles–based Blue Jay Capital Management, which focuses on health care, and Cloud Gate Capital in Chicago. Majit says long-short managers can do well in current market conditions that include some frothiness in valuations, a stronger dollar and tighter U.S. monetary policy.

Neuberger has plans for more liquid alternative funds. The retirement market is virtually untapped by hedge funds, and participants could potentially benefit from lower volatility strategies. But Kupperman admits it may take a while to truly crack 401(k) plans, even though his firm has had some big wins, including Hartford Health Care.

Kupperman says he relies on his training as a physicist when it comes to risk management and developing a process to oversee a portfolio of hedge funds that can have more than 1,000 positions. “In physics, you learn how to take a lot of different things and simplify them to the basics,” he says. •

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