Hedge funds have endured the slings and arrows of multiple critics, including presidential contenders on both sides of the aisle, yet they remain the investment platform of choice for institutional investors and high net worth individuals.

This fact is not lost on the small investor who, unable to meet the definition of a qualified investor, still hungers for access to the hedge fund strategies so popular with the very wealthy. This is borne out by the tremendous interest engendered by liquid alternatives, also referred to as alternative mutual funds.

Liquid Alts Posed No Threat

Alternative mutual funds, although initially popular with small investors, failed to pique the interest of institutional investors and high net worth investors. Small investors poured billions into these new investment vehicles. However, these billions did not flow from hedge funds into liquid alts—conventional mutual funds were the losers … not hedge funds, largely because the majority of those investing in mutual funds and liquid alts would not meet the definition of a qualified investor and were never in a hedge fund.

Interval Alts May Prove a Greater Threat

Interval alternatives have much in common with their liquid alternative cousins. Like alternative mutual funds, interval alternative funds are SEC registered, have boards with forty percent of their directors defined as independent and, although they provide greater liquidity than hedge funds, are less liquid than liquid alternative funds.

By sacrificing liquidity, interval funds are empowered to employ investment strategies that more closely parallel hedge fund strategies. Interval alternative funds permit contributions or withdrawals in monthly, quarterly or other pre-defined intervals, unlike liquid alts which basically trade like stock.

Like hedge funds, interval alternative funds can assess a management fee and a performance fee. However, by choosing to charge a performance fee, the fund must sacrifice its ability to sell to anyone not meeting the definition of a qualified investor.

Interval alternatives offer an uncomplicated broker sales process, unencumbered by the complex hedge fund subscription process. Interval alts can provide 1099s for clients rather than the comparatively complex K-1 reporting of hedge funds. Interval alts, unlike hedge funds, can absorb an infinite number of ERISA and/or IRA investors without any need to alter their investment strategy, interpose a master/feeder or exotic offshore fund structure.

While it is unlikely that interval alternatives will entice institutional and high net worth investors from the hedge fund niche, interval alternatives may be the ideal investment vehicle for hedge fund managers to offer retail investors, opening the door to trillions in retail inflows.

Closing Thoughts

Hedge fund managers with an interest in capturing some segment of the lucrative retail market would be well-served by considering the interval alternative fund. Interval funds have the potential to be less disruptive than liquid alternative funds. Of course, care must be taken to avoid conflicts with the existing assemblage of funds and the possible cannibalization of other products within the hedge fund.

While interval alternatives are unlikely candidates to unseat hedge funds, they may prove to be the best investment vehicle for hedge funds to employ in their quest for the retail investor.



The human tsunami of refugees created by ISIS’ unprecedented and unchecked rise in the Middle East may prove to be a greater barrier to hedge fund gains than the on-again-off-again FOMC rate hike. Any FOMC rate hike would likely impact hedge funds with equity strategies first and, one could argue, with greater negativity than funds pursuing other strategies.

However, recent media coverage highlighting the Syrian and other refugee influx into Europe, particularly Germany, should give us pause.

What’s the Problem?

In the same way investors fled the plunging Chinese market for relative safety in India and beyond, the peoples of the Middle East are fleeing the horrors and economic disruption heaped upon them by ISIS and related terror groups. The nearest refuge is Europe and the nation within Europe demonstrating the greatest largesse is Germany.

Coincidentally, Germany is the epicenter of the European Union’s economic might and, its pledge to welcome some one-million of these unfortunate persons into the country is certain to have a negative impact on the German economy.

Germany’s population is about a quarter of the U. S. population, standing at 82.6 million, of which 0.31% are currently defined as irregular immigrants, a broader term than the illegal immigrant expression used in the United States. This translates to around 2.6 million people.

Recently, the German government agreed to accept an influx of 800,000 to 1 million Syrian refugees, which increases Germany’s immigrant population by one-third. This would be the equivalent of the U.S. accepting 3.8 million refugees, given the fact that the U.S. illegal immigrant population stands at an estimated 11.7 million.

No reasonable person could make a credible case that this influx will not have an adverse impact on the German economy.  More to the point, as goes the German economy, so goes the European economy.  Europe has already experienced a significant economic slowdown, so this wave of immigration is ill-timed at best.

The International Monetary Fund ranks Germany as the 5th largest economy in the world and the largest economy, in terms of GDP, in the European Union. The United Kingdom is a distant 10th and Italy is at number 12. The remaining members of the European Union appear much further down the list—Sweden, for example, is in 41st place and Hungary, much criticized for its unwillingness to accept these refugees, is 57th.  Moreover, the Hungarian per capita income is about 46% less than its German counterpart’s.

At the nexus of these geopolitical and economic concerns lay the hedge fund industry.

No Strategy Is Immune to this Perfect Storm

We have already seen the market correction in equities deal a blow to hedge funds with long, long/short and other equity driven strategies. Events in Asia, China in particular, have not been kind to emerging market funds and the strengthening U.S. dollar has wreaked havoc on many funds pursuing currency strategies.

In short, hedge fund managers are facing enormous challenges. They have not faced any combination of events so potentially catastrophic since the 2008 financial crisis. The coming weeks and months will determine whether or not they are up to the task.


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