In the latest sign of the blurring of lines between alternative and traditional investment products and strategies, some of the leading hedge-fund-industry-tracking firms are wading into the liquid alternative mutual fund space.
Hedge Fund Research Inc. and BarclayHedge Ltd. both confirmed that they are actively gathering data on registered-alternative-strategy mutual funds to be included in future databases and indexes.
“We've reached out to the managers in our database and we hope to build an index of liquid alternative funds,” said Sal Waksman, founder and president of BarclayHedge, which currently has a database of 6,000 hedge funds.
According to Morningstar Inc., there are 429 alternative-strategy mutual funds with a total of $144 billion in assets, up from 116 funds and less than $22 billion 10 years ago.
Both Mr. Waksman and representatives from HFR said the expanded data collection is in response to client demand, which suggests the financial services industry in general is quickly looking beyond product wrappers and more toward appropriate access points.
“The main appeal of a '40 Act product is that you can offer access to a strategy for a smaller initial investment,” Mr. Waksman said. “So, if you have a '40 Act fund to offer, and you can get on some of these platforms, you will have access to a tremendous market.”
While the case for hedge funds and traditional mutual fund firms expanding into the liquid alts space might be obvious, the expanded data-gathering efforts could ultimately put some heat on fund-tracking stalwarts like Morningstar and Lipper Inc.
Tom Roseen, head of research services at Lipper, acknowledged that fund-tracking firms could do a better job of benchmarking the increasingly popular and fast-evolving liquid alts space.
“You really can't compare the liquid alt strategies to an S&P 500 benchmark, and hedge fund database firms will probably provide a little more comparability to the liquid alt strategies,” he said, suggesting that it is an obvious expansion for the hedge fund data-gathering firms.
“For them, to expand into the mutual fund space is probably what they see as an extension of a complete asset class,” he said. “In some ways, they probably saw us entering their space when we started tracking liquid alternative funds.”
Bradley Alford, chief investment officer at Alpha Capital Management, described the move by hedge fund database firms into the liquid alts space as the “latest paradigm shift, by adding credibility to the idea that liquid alternatives are here to stay.”
Mr. Alford concurs with Mr. Roseen that the added competition ultimately will be good for investors.
“Now people will be able to see whether a fund is doing a good job or not, because it will be compared more accurately to other alternative strategies,” he said. “They will start to break them into subcategories and not mix alternatives with traditional funds.”
So far, the hedge fund databases mostly have been getting the word out to hedge funds and subscribers that they are looking to build a database of liquid alts.
An actual index could be months away.
In practice, however, they are likely to find the data-gathering is a lot more complex than collecting performance numbers from hedge funds.
“There are basically two mutual fund data providers, and there's a reason for that,” said Nadia Papagiannis, former director of alternative fund research at Morningstar, who is now director of alternative investment strategy for third-party distribution at Goldman Sachs Asset Management.
“Gathering hedge fund data is mostly manual, but mutual fund data-gathering is a completely different process,” she said. “It is time-consuming and onerous because you get the data from the fund company providers and you need the infrastructure in order to get the data feeds.”
Even as Ms. Papagiannis sees challenges ahead for hedge fund data firms migrating into the liquid alts space, she is a big fan of the general trend.
“I think there is a big upside in having data on all alts in general, because the vehicle is really not the first decision point for investors,” she said. “People are first deciding whether they want to be in alternatives, then what kind of alternatives, and then they start thinking about the vehicle.”
“I think this is confirmation that the alts world is converging, and at some point there won't be very many pure hedge fund providers and pure mutual fund providers,” Ms. Papagiannis added.