SkyBridge Capital, a top authority on hedge-fund managers, said Friday it has given up for now on trying to export that industry's exotic investment strategies to the mutual funds sold to mom-and-pop investors.
Ray Nolte, chief investment officer of the New York-based $13 billion bundler of hedge fund strategies, said his firm simply hasn't been able to figure out a way to build a strategy that meets the strict liquidity requirements imposed on mutual funds without compromising the underlying investment strategy.
Without naming specific products, Mr. Nolte said the fast-growing efforts of managers to develop so-called “liquid alts” — funds bound by the Investment Company Act of 1940 that can be sold to ordinary investors and liquidated at will — have delivered “fairly mixed” performance.
“We concluded that certainly at this juncture we do not want to launch product in that space,” said Mr. Nolte. “We think some of the issues are holding back hedge fund managers from running more alternative strategies in a daily liquid format.
"Some of the constraints impact the performance, and while we think you can create a better liquidity vehicle, we think the tradeoff that you make to get there isn't the best one,” he said.
SkyBridge's traditional product — known as a fund-of-hedge-funds — is widely sold through top wealth management firms and places restrictions on when investors may withdraw their money.
“It would be difficult to create a world-class product that checks the daily liquid-alts boxes,” said Mr. Nolte. “Then we looked at our core business: Do we want to create a potentially competing product?”
U.S. law puts liquidity and other restraints on managers of open-end funds that are not true of private funds. In particular, Mr. Nolte said merger-arbitrage and certain credit-based strategies would be constrained.
"What you don't want to do is be forced to exit trades at the wrong time because you've created this daily liquid product,” said Mr. Nolte. “If you want daily liquidity, maybe it's not the best place to be investing,” he said of hedge-fund strategies.
Yet the firm is eager to expand into the mutual fund business. SkyBridge recently launched its first mutual fund — and has plans for one or two launches per year going forward. The first strategy is a more traditional approach to markets, buying stocks with an eye toward high dividend payouts.
The Dividend Value Fund (SKYAX) now has a 14-month performance record on its institutional share class, $120 million in assets and ranks in the top 1% of funds ranked in the same category by Morningstar Inc. for its 6.6% year-to-date performance.
The fund was added to Bank of America Merrill Lynch's platform for its more than 16,000 financial advisers this week, Mr. Nolte said.
Mr. Nolte is one of two managing partners of the firm along with Anthony Scaramucci. In addition to its investment products, the firm runs the annual Salt Conference, a hedge-fund industry gathering.
He said the fund already placed on other platforms, including Raymond James & Associates Inc., UBS Wealth Management Americas and Charles Schwab & Co.
Among the SkyBridge's peers in the fund-of-hedge-fund space,
Blackstone Group, Goldman Sachs Group Inc. and
BlackRock Inc. have all built multi-billion-dollar liquid alts franchises. Investors have added some $12.5 billion to the product category over the last year, according to Morningstar Inc.
