Hedge funds of funds are looking beyond fees to win the hearts – and dollars – of pension funds and institutional investors burdened by multi-layer fee structures. New York-based Belstar Group will open its multi-strategy, multi-advisor Belstar Multi-Advisor Hedge Fund (onshore) and Belstar Multi-Advisor 2x Hedge Fund (offshore) to investors Feb. 1. The fund has been trading with partner money since October.
The fund, describes Kenneth Orr, director and chief investment officer and managing partner of Glocap Partners, is a hybrid of a fund of funds structure and a straight hedge fund in its multiple manager approach.
"It's designed to be a very diversified fund that would perform in virtually all market conditions," he says, "and will take advantage of sideways markets."
The fund will charge investors only a single layer of fees – a 2% management fee and a 20% performance fee. Typically multi-manager funds charge an incentive fee when one manager reports positive returns while another is negative, which can result in a negative return overall. Orr says his fee system is based on netting risk, instead.
The fund will have four core asset classes – foreign exchange, fixed income, stocks and a commodity index – plus options trading, commodity option trading, emerging markets/china and distressed debt, which will be related to the "core but will perform in an uncorrelated way," says Ryan Goldberg, director of development. The fund currently has 10 managers. Goldberg added that he is in the process of adding a real estate component.
Aside from its fee structure, other distinguishing factors include equally weighting managers, and hedging managers out using different strategies. "Each manager is hedged by another manager or strategy," Orr says. "That's something that you don't hear a lot of funds of funds talking about and it is how we are able to provide very stable returns." The fund's target return is 15%, with an annualized downside deviation of less than 2% and a Sharpe Ratio greater than 2.5%.
Investors, especially institutions, have been critical of fund of funds lately saying lackluster returns haven't justified the multi-tier fee system. Orr says complaints by pension funds and institutional investors have also targeted the hedge fund structure. For instance, bond hedge funds with 95% of their positions in long stock are essentially fixed income funds wrapped in fees, he says.
Orr, declining to name the bank, says he came back on the hedge fund scene two years ago when said European bank commissioned him to develop a hedge fund based on the "original hedge fund concept" that didn't overburden investors with fees. European pension funds and banks have expressed the most interest in the fund, Orr says, though he would not identify the names of investors.
"Right now Europeans seem to be more in tune with the idea, and they have a shorter decision cycle," he says.
The fund is undergoing the registration process with the Securities and Exchange Commission. It has 90-day liquidity and no lock-up period. The minimum investment for institutional investors is $1 million; there is a $5 million minimum for managed accounts.
