Highland Capital ramps up liquid alternative strategy push

Catching the wave of the fast-growing category, asset manager plans to launch new platform for alts

Mar 20, 2015 @ 10:14 am

By Jeff Benjamin

Highland Capital Management is ramping up its focus on liquid alternative investments by carving out a unit specifically dedicated to the fast-growing part of the $21 billion asset management company.

The company is expected to announce early next week the launch of Highland Alternative Investors, an investment platform designed to build on the $5 billion in alternative investments it already has under management.

Like a lot of firms, Highland is tapping into one of the fastest-growing areas in asset management. Alternative strategy mutual funds now total nearly 500, with total assets nearing $200 billion, according to Morningstar Inc.

Highland Capital is promoting the platform as an organizational change that will include naming portfolio manager Michael Gregory as global head and chief investment officer of the unit.

Mr. Gregory said the alternatives platform is not being created specifically for the purposes of building out the product line of alternative products. But he isn't ruling out the idea of more liquid alt products down the road.

“I've been the architect of this new platform, and we realized the alternatives space was going to be big, and we wanted to be involved, and we wanted to transfer some of our expertise to the liquid alts side,” he said. “Right now we want to better position our current funds.”

Brad Ross, president of Highland Capital Management Fund Advisors, said expanding distribution will be part of equation.

Most of Highland's distribution is currently through the wirehouse and independent broker-dealer channels, but he said the company is building out a hybrid group that will focus on independent financial advisers.

“The formation of Highland Alternative Investors will enable us to continue to build upon and expand this success across the entire platform and achieve our primary objective, which is meeting the needs and demands of our clients,” Mr. Ross said.

Morningstar alternative strategies analyst Anthony D'Asaro III described the move as an “internal restructuring that will not have an immediate impact on investors in Highland funds.”

But he added that, “Ceremonially, it is important as it is the capstone on what has been a slow moving shift in focus for Highland.”

From $1.5 billion five years ago, alternative investments are making up an increasingly large part of Highland's business. Three of the firm's six liquid alt funds, including the Highland Long/Short Healthcare Fund (HHCZX) managed by Mr. Gregory, are recent top-category performers.

The $550 million healthcare fund, which Mr. Gregory will continue to manage, has been the best-performing long-short equity fund in each of the past two years.

The fund gained 17.1% last year, compared with a category average of 2.9%, and in 2013 it gained 34.9%, compared with a 14.6% category average. The fund is also leading the category this year with a 9.9% gain versus the category average gain of 1.6%.

The $1.7 billion Highland Global Allocation Fund (HCOYX), managed by the company's co-founder and president, James Dondero, led the world allocation category for the last two years and ranks sixth so far this year.

The fund gained 15.4% last year, while the category gained 1.5%. In 2013, the fund gained 29.9%, while the category gained 10.1%. Year to date, the fund is up 4.3%, while the category average is 2.9%.

The $815 million Highland Floating Rate Opportunity Fund (HFRZX) is managed by co-founder and chief investment officer Mark Okada.

The fund was the top performer in the bank loan category in 2012 with a gain of 17.7%, compared with a category average of 9.4%, and in 2013 it gained 17.4%, compared with 5.7% for the category.

Last year, however, the fund ranked 33rd with a gain of 0.9%, compared with 0.6% for the category. So far this year, the fund has gained 0.4%, and lags the category average of 1.6%.

“Liquid alternatives are making up an increasing share of Highland's assets under management, and this move is a recognition of their importance,” said Mr. D'Asaro. “It sets the stage for Highland to launch more liquid alternative products, and for liquid alternative AUM to eventually outgrow Highland's traditional business.”

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