JP Morgan put out an opinion that hedge fund return volatility has been dampened after the crisis and that the risk/return profile of hedge funds is closer to bonds rather than stocks. One way to explain this is that hedge funds have only been catering to large institutions (like pension funds and endowments) and have therefore, adapted their investment strategies to the risk profiles of their clients.
Hedge funds as alternatives to bonds
Now that got me thinking about the disruptions in that asset class. I’ve covered some of the efforts to solve the conundrums in fixed income (Technologies for the fixed-income storm, Algomi) so now lets look at hedge funds.
First, from the point of the view of the investor; then I’ll look at the cap intro process (i.e. fund raising from institutional investors) and lastly, at tools for hedge fund asset managers.
Investing in hedge funds comes in three variations:
- Directly into a fund
- Through a fund of funds
- as a separate managed account
The second proved too be expensive and is less popular nowadays. The others have always been accessible only to “qualified investors”, which for most people basically means a large minimum investment requirement ($1million) and some times long lockup periods (this also less frequent these days). In this post subprime crisis era, institutional clients have increasingly dominated the hedge funds clientele.
The first attempt for disruption in hedge funds comes to address this minimum investment requirement.
Sliced Investing offers quick signup, low fees, and small minimum amounts. The investment process is online and automated.
HedgeCo Vest is an indirect approach to replicating hedge fund investing. Through mirror trading, investors can really reduce fees, reduce amounts invested (at least for liquid assets) in a DIY fashion.
Tashtego, a conventional hedge fund, tackles even less directly the issue, but also using a social trading process. They are creating a Social Equity fund that uses social media info to algorithmically create a hedge fund. They aim to raise $1million. This overlaps with the product that Quantopian aims to design, the crowd sourced hedge fund, using (no social media feedback as the main investing criterion) algorithmic trading “modules” from their broad open source quantitative library. The fund structure aims to be “all weather”
DarcMatter provides transparent, institutional-level access to alternative investment opportunities. They feature a full range of alternatives, including venture capital, private equity, hedge funds, and fixed-income products. Their minimum is as low as 25k. They are also present in the capital raising process.
Silver Pepper with a moto “hedge funds for the rest of us” offers a min as low as $5k, a 2% flat fee, daily liquidity (after 90days), and transparency. For now, they offer a macro fund and an arbitrage fund.
Of course, the test for all these investment products is net performance compared to middle class alternatives.
In the arena of cap intro there are more players looking to unblock the difficult match making process between investors and hedge fund managers.
Darc Matter, is a player as we already mentioned.
Artivest is an online fundraising platform for Private Equity and hedge funds.
Edgefolio is a Norwegian cap intro platform with a hedge fund data API offering also.
ALTX is a cloud-based product of Imatchative; it is a proprietary algorithm that uses a behavioral finance methodology to optimize the search for compatibility among hedge funds and institutional investors.
Hedge Force has already a worldwide presence, as a third party marketing company (since 2007) that serves the entire alternative sector.
BHA, based in Boston also since 2007, uses a networking approach for matching sophisticated investors with alternative solutions.
Back office, analytics and risk mgt tools for the particular needs of hedge funds:
Hedge Analytics, a Swiss based analytics firm focused on risk mgt.
HedgeHogs leverages social media, collaborative networks for trading idea development, sharing of analytics, and data.
Risk_AI is a cloud based solution platform for hedge fund risk analysis and reporting, with an award winning mobile technology.
Liquid offers also a complete cloud based solution for portfolio mgt, risk analytics, back office and compliance.
Hedge funds couldn’t have been left untouched from disruptions. Financial inclusion, democratizing, and crowd funding; are the main trends for now. I also see a tendency to create more overlap between the growing “quantitative trading-investing” space that is growing and re-inventing itself.