HedgeCoVest, an online alternative investments platform, is aiming to take advantage of the appealing aspects of hedge funds while overcoming concerns about
hedge fund fees.
The registered investment adviser has 45 hedge fund firms, including Fred Alger, The Boston Company, Cornerstone, Kovitz and Sandell, signed on to its hedge-fund-replicator platform, which recently came out of beta. HedgeCoVest's technology, which the company calls Replicazor, recognizes when a manager makes a trade and duplicates it almost instantaneously in investors' separately managed accounts. The idea is to provide investment strategies that mirror the hedge funds that advisers or SMA clients select.
HedgeCoVest is targeting both retail investors and advisers, who will be able to allocate and liquidate their clients' SMAs at any time, without the typical hedge fund gate provisions.
HedgeCoVest charges a flat management fee of 2.5% with no performance fee, although users will also be charged a fee from their brokerage firm. So far the company has teamed up with Interactive Brokers. Other brokerages in the process of coming onboard include Pershing, TD Ameritrade and Fidelity.
COMPARING RETURNS
A calculator on the website shows advisers and investors the differences between their net return with
hedge funds' net returns. By using the HedgeCoVest platform, advisers can introduce their clients to a pool of alternative options — something they may have had difficulty doing in the past due to high investment minimums, two-and-20 fee structures and gates (2% management fee plus 20% of profits).
"There is a strong pent-up demand from advisers," said Evan Rapoport, chief executive of HedgeCoVest.
Some issues advisers have faced with hedge fund investing include receiving the fund statements after the first of the month, when advisers usually provide their own statements to clients, and having clients who fall below the minimum for one hedge fund. Mr. Rapoport said advisers can use HedgeCoVest to diversify their clients' portfolios with the use of customizable alternative investments, providing an opportunity for mass-affluent and other retail investors.
"They can actively manage portfolios and meet the individual's risk and return objectives, which is a fiduciary responsibility," Mr. Rapoport said.
Mr. Rapoport said the platform also has agreements with hedge fund firms to target their portfolios and pull out individual positions to create new products. Currently, HedgeCoVest has 14 investment products, including an investable hedge fund index that includes all available strategies. Other products will be specific to certain strategies and customizable based on advisor recommendations and investor preferences.
Many investors have been resistant to hedge funds, especially after the economic crisis of 2008, Mr. Rapoport said, due in part to concerns about fraudulent activity. This platform aims to address those concerns by maintaining that clients' money will remain in their own separately managed account.
HedgeCoVest has been in beta for nearly four years and has $80 million invested and committed from advisers and investors. Mr. Rapoport said about 90% of that capital comes from advisers.
Ed Butowsky, managing partner of Chapwood Capital Investment Management in Addison, Texas, has been using HedgeCoVest while in beta.
SOLVING RIA ISSUES
"HedgeCoVest addresses and solves all of the issues that RIAs have with their clients about hedge funds," Mr. Butowsky said, citing daily visibility, a simple fee structure and no Schedule K-1 tax documents. "The need for alternatives has never been bigger in portfolios and being able to access it at this point is a major game-changer."
Mike Kane, chief executive of Hedgeable, a robo-adviser with alternative investment options, said with the
commoditization of online automated investment platforms, advisers' and clients' needs aren't always met. Investing in alternatives is a way of meeting those needs.
Platforms such as HedgeCoVest and Hedgeable are tackling the issues that may arise for investors from investing with hedge funds.
"Most advisers have always had an alternatives bucket in portfolios — this is something advisers and wirehouses have been doing — but clients aren't always very high-net-worth, " Mr. Kane said.
This isn't the first online platform that provides financial advisers with advice for alternative investments. Insight Advisors,
which came out in November, is a hedge fund manager that provides strategies to financial advisers through an online automated platform. The company gathers data, profiles an investor and then creates a customizable plan.
"All individual investors should have access to these types of investment strategies in managed accounts," said Michael Tito, founder and head portfolio manager of Insight Advisors. "New financial technology makes this type of investment option possible.
“Success, however, will ultimately still be determined by investment performance," he said.
