Internet opens alternative doors for advisers

Don’t expect the Internet to transform alternative investing the way it has turned traditional equity investing upside down in the last few years.

But at least a flood of new online information is making the world of hedge funds and private placements far less insular.

It will be a long while before there’s an alternative-investing equivalent to E*Trade or Ameritrade, or even Merrill Lynch OnLine, according to industry experts.

uncomfortable

Due diligence, typical dollar amounts and regulatory requirements are all too high to allow for an extensive online flattening of the process when it comes to investments in hedge funds, venture capital funds and private placements.

“It’s certainly a useful way to get an introduction to a hedge fund, but it in no way eliminates the need to visit and talk in person,” says Karl Morawski, vice president of research for LJH Global Investments in Naples, Fla., which manages more than $3 billion, mostly for wealthy individuals.

“I couldn’t feel comfortable giving someone that large a chunk of money without more in-depth due diligence, without spending some time talking to the investment manager and to who’s doing the trading, even the legal and administrative people,” he says.

Michael Ocrant, editor in chief of Managed Account Reports LLC, an alternative-investment information service in New York, agrees: “Most of the better [investors] are going to want to meet people face to face and ask managers probing questions. Online just doesn’t fit the bill for that.”

Securities and Exchange Commission regulations governing alternative investments are another obstacle. Among other things, they require investors to have $1 million in net worth and $250,000 in salary in each of the last two years ($200,000 if the investor is single) to be considered a qualified investor.

“General partners [of alternative-investment funds] need to be very careful about how and to whom they allow access to their marketing information and materials,” says Gary Robertson, head of the private-markets group for Callan Associates Inc., an asset management consulting firm in San Francisco.

“They don’t want to be seen by the SEC as holding themselves out in the mode of general solicitation. And that really doesn’t lend itself to Internet marketing or transactions.”

But more and more alternative-investing entities are willing to share quarterly reports and other information with advisers and investors online if the requester indicates that they are accredited.

“Whereas before, people had to go to consultants or have contacts in the industry, now they can go to one of more than 20 sites and – if they’re accredited – find information for free or at very nominal cost about hedge funds,” says Meredith Jones, director of research for Van Hedge Fund Advisors International in Nashville, Tenn.

She points to sites such as hedgefund.net, hedgeworld.com, altvest .com and hedgefund247.com.

“What the Net does is open up opportunities for some information that hedge fund managers deem important to be available in a relatively efficient way to investors and prospective investors,” says John Pileggi, president and CEO of PlusFunds Ltd. in New York.

The company is building a middleman operation for hedge funds, including plusfunds.com.

New investors

“The Net is a great way to get information into the hands of traditional investors who haven’t been in that market,” Mr. Pileggi says.

But Ms. Jones says that advisers and investors should expect pretty much that the “same groups of funds” will be making information available on all of those sites.

Van doesn’t make its proprietary database of information on 3,600 funds available online, she says, because most of the hedge funds it researches won’t agree to that.

Similarly, venture capital information is more and more broadly available on the Internet.

On vencast.com, accredited investors, advisers and agents can view streaming audio and video of presentations by managers of hedge funds, VC funds and private-investment opportunities.

The National Venture Capital Association’s website (nvca.org), covering 200 VC organizations, is among a number of sites providing general information about venture capital.

Also proliferating are private-placement websites such as IPOnet – run by Pasadena, Calif., brokerage firm W.J. Gallagher & Co. Inc. – which has received SEC approval to sell private-placement investments.

All of those sites can be useful tools for financial advisers who want to increase their understanding of alternative investments.

But, Mr. Pileggi cautions: “We’re dealing with a very different world in alternative investments, not a place for the retail or self-directed investor, or for someone to do any impulse buying.”