Putnam takes a turn down investment road less traveled

For a mutual fund firm that bills itself as conservative, Putnam Investments is dabbling in a decidedly alternative lifestyle.

Since announcing its joint venture with buyout firm Thomas H. Lee Co. last summer, the nation’s fourth-largest fund company with $390 billion under management is courting wealthy individuals and institutional investors with alternative investments — offerings that don’t jibe with its risk-averse image.

Through their joint TH Lee Putnam Capital, the two Boston firms are in the process of raising between $500 million and $1 billion for a private-equity Internet fund. The portfolio, which is called TH Lee Putnam Internet Partners, will make investments in later stage e-commerce and Internet companies and be available only to institutional investors. It will be managed by Jeffrey Coates, the former head of technology investing at General Electric Capital Services Inc.

There’s also talk that TH Lee Putnam Capital — Putnam owns 25%, Lee the rest — is planning to get into the hedge fund business. The company is believed to be planning to launch hedge funds this year to be headed by Putnam money managers, according to industry sources.

Scott Maxwell, a Putnam managing director who oversees his company’s relationship with Lee, dismisses such talk as speculation.

“There’s no plan right now to launch any hedge funds,” he says, “although, if you talk to me a month from now, there might be. We’re very early in the stages of many discussions and have not decided when hedge funds might come out.”

More expensive for investors than mutual funds, hedge funds are loosely regulated portfolios that often take large risks on speculative strategies, including short-selling or investing in companies that have declared bankruptcy and are undergoing reorganization. Since most hedge funds are not limited to buying publicly traded stocks, they have the potential to do well in almost any kind of market.

With affluent investors showing an increased appetite for alternative investments, fund companies like Alliance Capital Management LP and Wellington Management Co. LLP have added hedge funds to their menu of offerings in recent years.

Richer than croesus?

Then there’s also the all-important profit motive. Hedge funds that perform well can be extremely lucrative for their managers, since they generally charge upwards of 1% of the assets they manage plus 20% of any gains above their benchmark annually. The average stock mutual fund charges 1.44% of assets, reports Morningstar Inc., the Chicago fund tracker.

“The mutual fund companies have got to be attracted to the higher potential fees that a hedge fund can bring to the table,” says E. Lee Hennessee, founder of Hennessee Group LLC, a hedge fund consulting firm in New York.

Putnam is mum about what other alternative investments it is considering, although one idea under discussion is a fund of funds overseen by Thomas H. Lee Co. The thinking, says Mr. Maxwell, is that it would be accessible to investors who are rich, but not filthy rich.

“We’ll do our best to meet the needs of all our investors,” he says. “A fund of funds would certainly allow you to lower the bar a little bit.”