Risk-control alternatives fund restructures to attract more investors

Strategy seeks to take advantage of rising rates; performance solid

Jan 21, 2014 @ 12:17 pm

By Jeff Benjamin

+ Zoom

The timing might be just about perfect for the kind of noncorrelated strategy being rolled out by Pine Grove Asset Management, but financial advisers should still proceed with their eyes wide open when considering this latest example of repackaging illiquid investments.

The Pine Grove Alternative Institutional Fund has a 16-year track record as a private investment strategy but was repackaged Jan. 1 as a 1940 Investment Company Act registered closed-end fund.

Technically, it was launched as an interval fund, which is a specific type of closed-end fund often used as a wrapper around less-liquid alternative strategies.

The fund also is restricted to investors with a net worth of at least $1 million. But this new format dramatically broadens investor access, which had previously been limited to 99 investors, and there were also limits on how much of the assets could come from qualified retirement accounts.

A key element of the fund's evolution is that it will be bringing its track record with it because the underlying investment strategy is unchanged from when it was a pure private investment.

In other words, the fund will still invest directly in between 25 and 35 underlying private investment portfolios, the majority of which involve credit strategies such as distressed, structured, convertible arbitrage and long-short debt investments.

“It's a very conservative approach; our average net exposure to the [equity] market is about 25%,” said Matthew Stadtmauer, president of Pine Grove, which manages a $1 billion in assets.

“This strategy is generally used as an alternative credit investment in the fixed-income bucket,” he added. “Our goal is to have as little exposure as possible to equities, interest rates, foreign exchange, junior unsecured credit and commodities.”

As a risk-management strategy, it is not designed to stack up against a roaring equity market cycle but it might be a good allocation in the midst of a roaring equity market cycle.

For the 12-month period ended Nov. 30, the fund's most recent reported performance period, the fund returned 8.9%. That compares with 7.8% for the HFRI Fund of Funds Index, a 30.3% gain for the S&P 500 Index, and a 1.6% decline for the Barclays U.S. Aggregate Bond Index.

The strategy's 10-year annualized performance through November was 5.2%, which compares with 2.7% for the hedge fund index, 4.7% for the Barclays Aggregate and 7.7% for the S&P.

The strategy has a beta (or correlation) to the S&P of 0.13, which compares with 0.15 for the hedge fund index, and negative 0.01 for the Barclays Aggregate.

“By focusing on credit strategies, we are offering investors exposure to managers who exploit market inefficiencies that most traditional long-only funds are not capturing,” said Tom Williams, Pine Grove chief investment officer. “Our portfolio construction is positioned to handle a potential rise in interest rates as the managers we allocate to usually display negative correlation to high-quality bonds.” Even though it is structured as a registered closed-end fund, the strategy is still in many respects a fund of funds, which means the fees are in line with what one should expect in the private investment universe.

Pine Grove charges a flat fee of 90 basis points, and the average charged by the underlying managers is a 1.5% management fee and an 18.9% performance fee.

A previous version of this story misstated the regulatory act under which the Pine Grove Alternative Institutional Fund is registered. As of Jan. 1, it is a 1940 Investment Company Act-registered closed-end fund.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Building a practice for tomorrow's tomorrow

Advisers: it is time to take a long view of your practice. Check out some tips and strategies on how to do it (and why) with Tom Stefaniak of Pinnacle Wealth Management.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

Trump rejects idea of new caps on 401(k) savings in tax plan

GOP reportedly had been considering reducing the cap on the annual amount workers can set aside for 401(k)s.

Finra's stats reveal an industry in decline

The broker-dealer regulator reports fewer entities under its watchful eye.

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.