When Retail Gets An Opportunity, Watch Out
The money management industry is rolling out products that offer the retail investor an opportunity to invest in products that heretofore have been limited to institutional or wealthy investors. Blackstone and Fidelity have launched a mutual fund that consists of a series of portfolios overseen by hedge fund managers. Meanwhile, numerous managers have launched IPOs, known as special purpose acquisition companies (SPACs). A SPAC is a shell company that enables the money manager to acquire a private company some time in the future. It is the poor man’s version of private equity. The Blackstone/Fidelity hedge fund initiative has an account minimum of $50,000 for the moment, but I’d expect that figure to drop. In April, I wrote about another such fund that quickly dropped its minimum investment (“And So It Begins: Hedge Funds for the Masses [April 12, 2013]”). The hedge fund mutual fund and SPACS are both attempts to offer alternative investments to the public.
|Departmental Meeting (2003)|
By the time endowments, institutions, and public funds have discovered and invested in an asset class, the best opportunities are long gone. As I’ve argued on numerous occasions, when public funds enter alternative investment en masse, it is already late in the game. So when money managers finally feel the urge to attract retail investors, the only motive is to gather assets and earn fees.
SPACs have been around for years and have a poor track record. SPACs tend to reemerge when the stock market is strong and the IPO environment is favorable. A SPAC offers a big commission to brokers and a fat fee to the manager. The manager hunts for a company to buy, and eventually uses the cash in the SPAC, plus debt to make an acquisition. The investor winds up with a single investment, often in a highly questionable company. Although there are exceptions, most SPACs turn into disappointments for investors. After a while, SPACs tend to disappear from the market until the painful memories fade, and a subsequent bull market re-ignites greed.
Hedge fund mutual funds are a new phenomenon. In order for the biggest alternative managers, like Blackstone, to continue growing, they need to find a vast new pool of capital. The unsophisticated retail client is the perfect target. As you can imagine, when the fees and expenses of a mutual fund are loaded onto a hedge fund strategy, retail investors are going to have a small chance of achieving decent results.
The marketing effort for these products is always compelling, so you will be tempted. Resist.