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

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.

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