The Boglification of alternatives; “Institutions are finally realizing the cost of hedge funds, including fees, lack of liquidity, lack of transparency, and lack of regulation, are starting to outweigh the benefits”

The Boglification of alternatives

Advisers, institutions view fees as the main reason to avoid alts, Morningstar/Barron’s survey finds

By Jason Kephart   |  June 24, 2013 – 1:55 pm EST

When it comes to alternatives, investors are finding out what John Bogle knew many years ago: You get what you don’t pay for.

A majority of financial advisers and institutions now view fees as the main reason to avoid alternatives, up from 38% and 39% respectively in 2009, according to Morningstar Inc. and Barron’s 2012 alternative investment survey.Liquidity and transparency were the top concerns in the previous four surveys.

Managed-futures mutual funds felt the brunt of advisers’ fee wariness.

For the first time in three years, the trend-following strategy wasn’t ranked as the top alternatives allocation strategy. In fact, it didn’t even make the top five.

Managed-futures funds are among the most expensive alternatives funds.

The average fund charges 2.6%, according to Morningstar, and many have complicated performance fees attached to them as, well.

To be fair, it probably wasn’t just the fees that scared advisers away — the performance has been terrible. The average fund lost 7.4% last year and 6.9% in 2011.

Managed futures did lead in terms of how many funds were launched last year. The 22 new entrants were the most of any fund category, while the multialternatives category was second with 17 launches.

Institutions, meanwhile, were busy ditching long/short hedge funds for long/short mutual funds, with costs a key driver, said Morningstar analyst Nadia Papagiannis.

“Institutions are finally realizing the cost of hedge funds, including fees, lack of liquidity, lack of transparency, and lack of regulation, are starting to outweigh the benefits,” she said.

More than 45% of institutions use long/short equity mutual funds, up from 38% in 2010, while just 26% report using long/short hedge funds, down from 61% in 2010, according to the survey.

The good news is that the more institutions latch onto alternative mutual funds, the better it will be for advisers, Ms. Pappagiannis said.

“It lends more credibility to alternative mutual funds,” she said.

“It’ll bring attract better offerings. More assets should theoretically mean lower fees, too,” Ms. Papagiannis said.

The average long/short mutual fund charged 1.9% last year, according to Morningstar. That’s just under the 2% that most hedge funds charge and doesn’t have attached to it a performance fee, which can typically be about 20%.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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