Home / ASIC looks at trend to retail alternatives

(Pictured: Ged Fitzpatrick)

The strong US trend to liquid alternatives for the retail market, which is showing signs of blossoming in Australia, has attracted the attention of ASIC, the AIMA Australia Hedge Fund Forum was told last week.

The annual forum, which had a record attendee roll-up of almost 300 – making it the largest investment alternatives conference – revealed some mixed feelings among managers and investors about the retail trend.

Three hedge fund clients questioned the liquid alternatives trend. Sam Mann, managing director of K2 Advisors, said some of the retail funds were “not legitimate hedge funds”. He said: “We’ve been surprised at the number of managers prepared to go down this route.”

Richard Johnston, managing director of Albourne Partners Asia, said it was akin to the trend for smart beta and that the liquid alternatives had a similar background – low cost and automated factor-driven processes.

Simon Fludgate, head of due diligence at Aksia, said he was sure how successful the funds in the US – known as 40 Act funds – would be. “I guess we will tell over the next five years… but they are not quite hedge funds. It seems like a wild west now.”

Sam Mann used a similar analogy, saying there was a “land grab” going on in the US to establish liquid hedge funds. “The managers believe that the volume of money is so large that they are prepared to do it for a one per cent flat fee, daily liquidity and full transparency.”

But, Keith Haydon, the CIO of FRM, said in his “fireside chat” with AIMA chair Paul Chadwick, that large investors in the US had moved away from funds towards managed accounts. FRM had looked at processes which were cheap, liquid and could be run as an overlay and then ultimately looked at building the strategy itself. He said he was worried that a driver for the trend might be that people did not want to pay high fees in a low-return environment but that was “exactly the wrong point in the cycle to do that”.

Ged Fitzpatrick, ASIC’s head of investment managers and superannuation division, said that its recent “engagement process” with managers, investors and service providers, had emphasized the trend to retail alternatives.

“There is an increase in interest by fund managers getting into retail investments as a preferable route for their businesses,” he said. “We are concerned that some investors may not be able to see all the elements in the strategies, for example, the use of leverage.”

Fitzpatrick said the issue of complex products, in general, might lead to investors misunderstanding the risks. “We will continue to take a flexible approach to identify complex products,” he said. I answer to a question on the trend to market hedge funds to the retail sector, Fitzpatrick said: “I wouldn’t say the trend was alarming. The question is: ‘do they understand it?’