Distinction Between Mutual Funds And Hedge Funds Is Eroding

By | February 16, 2016

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The growth of liquid alternatives combined with an evolving regulatory framework is leading to a confluence between ’40 Act mutual funds and private hedge funds, according to Wulf A. Kaal, contributor to the forthcoming Elgar Handbook on Mutual Funds. In an expert from that guide, titled Confluence of Mutual Funds and Private Funds , Mr. Kaal makes the case that mutual funds are becoming more like hedge funds in terms of strategy, while hedge funds are becoming more like mutual funds in terms of regulation. In Mr. Kaal’s view, this calls into question the distinction between mutual funds and private funds. Eroding Distinctions While it’s true that mutual funds and hedge funds still occupy distinct segments of the market, employ some different strategies, serve largely different clients, and are subject to different legal rules, the gulf between the two types of funds is eroding. This is due to a combination of market forces, as retail investors seek out alternative strategies while institutions demand greater liquidity and transparency; and regulatory changes such as the Jumpstart Our Business Startups Act (the “JOBS Act”), which makes it easier for non-accredited investors to fund private, startup enterprises, including via crowdfunding. Alternative AUM Growth In terms of market forces, Mr. Kaal points out that, since 2005, alternative investments have grown twice as fast as traditional investments, in terms of assets under management (“AUM”). Although traditional investments, i.e. long-only stocks and bonds, have seen AUM grow from $37.1 trillion in 2005 to $56.7 trillion in 2013; in terms of percentages, the growth in alternative AUM from $3.2 trillion in 2005 to $7.2 trillion in 2013, is greater. While traditional investments’ AUM grew by a total of 52.8% during the period under review, alternative investments saw their AUM more than double. Rate of Growth Across Alternative Investments Mr. Kaal breaks down AUM growth across three alternative-investment structures: Alternative mutual funds Hedge funds Private equity He also lists the AUM growth for all mutual funds – i.e., mostly traditional assets – as a control group. His findings: While all four categories suffered AUM drawdowns in 2008, alternative mutual funds had by far the strongest growth in 2009, 2010, 2011, and 2012. Alternative mutual funds continued to grow in 2014, but at an abated pace. All three alternative categories showed positive AUM growth for all years, save 2008, while traditional mutual funds lost ground in 2011. Conclusion Market forces and regulatory changes are leading to a confluence between mutual and private hedge funds – but what are the implications of this confluence? Mr. Kaal lists several areas he expects will be impacted, ranging from mutual fund governance to the structure of federal securities law, and he opines that possible effects of this confluence could include “drastic immediate repercussions for market participants.” He concludes his paper by calling for continued monitoring, scholarly evaluation, and regulatory scrutiny of these developments. For more information, download the full report . Past performance does not necessarily predict future results. Jason Seagraves contributed to this article. Scalper1 News

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