NEW YORK (TheStreet) - Hedge funds and private equity shops have been expanding their horizons beyond the confines of America's wealthiest investors. In fact, giants of the PE and hedge fund industry have quietly been investing in a push to gain access to ordinary 401k plans and mutual fund investments.
Firms as prominent as Blackstone Group (BX), Goldman Sachs Asset Management (GS), KKR (KKR), AQR Capital Management, Avenue Capital Management and The Carlyle Group (CG) have begun to launch investment vehicles that give ordinary, non-accredited investors access to some of the most exclusive investment styles, whether they be direct investments in hedge funds, tracking vehicles for PE-returns, or direct ownership of a company's publicly traded units.
The painful lessons of the financial crisis have tempered the interest of ordinary investors in complex investments such as alternatives. If investors are moving back into stock markets, they are more than likely to put their money into a low-cost index fund.
A five-year bull market since alternative investment funds entered the mutual fund space has also made it hard for hedge funds to keep pace with the S&P 500 Index. Being hedged isn't so fun when the S&P rises nearly 30%. Still, alternative mutual funds are growing at a fast clip from a small base.
"The growth rate of these categories is pretty high," Josh Charney, an alternatives analyst at Morningstar, said in a telephone interview. Active long/short equity mutual funds grew their assets 70% in 2013, while multi-alternative fund assets rose 55%, according to Charney.
This year could be a big test for alternative mutual funds, especially if the S&P 500 and global stock markets stall.
"People, although the market is going straight up, are worried," Charney said. "I would consider it an extremely positive development that people are looking to get to these investments over the long term," he added.
Most asset inflows to alternative mutual funds have come from institutional investors and investment accounts managed by financial advisors. "For good reasons, I don't think that the retail audience is diving into these [funds]," Charney said.
Fees, Fees, Fees
Still, one sticking point is the fees that ordinary investors have to pay to access alternative funds.
Charney said fees have to come down across the board, and he expects they will. Expense ratios of 2.5% are way too high, he added, noting that fees of such magnitude take a big bite out of returns when an alternative fund is only targeting gross returns in the mid-to-high-single digits.
As such, Morningstar only is positive of three of the 15 multi-alternative mutual funds it covers.
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