Hedge fund goes retail and becomes a mutual fund

Date: Monday, June 22, 2009
Author: Jeff Benjamin, Investment News.com

Bull Path Long Short Fund gets SEC OK to tout performance.

For as long as mutual funds have been able to sell stocks short, there have been attempts to bring more-sophisticated hedge fund strategies to the mutual fund world. But it is rare for a hedge fund to undergo a complete transformation into a mutual fund.

This is exactly the case with the Bull Path Long Short Fund (BPFCX).

After managing the strategy as a hedge fund for more than six years, Bull Path Capital Management LLC in New York converted the domestic version of its hedge fund into a mutual fund June 1.

The mutual fund officially opens to retail investors this week, offering everything that the hedge fund offered minus the higher fees, lack of transparency and lack of liquidity.

The conversion, which is unique on several levels, underscores some of the challenges that face high-end alternative products such as hedge funds.

“With the collapse of the hedge fund industry, we're looking for a better product,” said Robert Kaimowitz, a portfolio manager and Bull Path's chief executive.

“We think there will be a lot of changes in the hedge fund industry in the next six to 12 months, and nobody knows where fees will wind up,” he said. “The whole hedge fund model is being shredded, and I think hedge funds have no choice but to do something like this.”

It is true that hedge funds suffered some hard knocks during the past few years through a string of scandals, lagging performance and general bad publicity. But it might be premature to assume that the $1.2 trillion hedge fund industry is teetering on the brink of extinction.

The bottom line for Bull Path could boil down to basic economics.

The firm, which still manages hedge fund accounts, including an offshore version applying the same strategy as the mutual fund, has just $100 million in assets under management, down from a peak of nearly three times that a few years ago.

Mr. Kaimowitz said that the mutual fund is being converted with seed money from friends and family, but declined to say exactly how much money. He hopes to tap the vast, if somewhat fragmented, universe of financial intermediaries to try to bring his long-short equity strategy to the retail masses.

One factor working in his favor is the fact that the Securities and Exchange Commission has given him the green light to apply his hedge fund's track record, dating back to October 2002, to the mutual fund.

During the 12-month period through the end of March, the strategy lost 15.8%, which compares with a 38% decline by the Standard & Poor's 500 stock index.

According to Mr. Kaimowitz, the strategy has outperformed the S&P 500 on the basis of three- and five-year annualized returns, as well as on a total-return basis since inception.

Bringing a solid strategy over from the alternatives space into the mutual fund category is “a real positive for investors,” according to Don Phillips, managing director at Morningstar Inc. in Chicago.

“There is nothing inherently wrong with wanting to be hedged,” he said. “The problem most people have with hedge funds is the lack of transparency, lack of liquidity and a lack of regulations.”

One reason the transformation was even possible is because Mr. Kaimowitz's strategy is relatively straightforward.

Although the fund does invest both long and short, it doesn't use leverage, and it doesn't dabble in any exotic products such as derivatives.

The portfolio holds 16 long and 16 short positions and is 15% net long, Mr. Kaimowitz said.

The investment strategy is fundamentally driven by bottom-up stock picking, which tends to concentrate on domestic companies with market capitalizations in the mid-cap, $4 billion range.

The general focus is on businesses with a recurring revenue stream, a strong franchise and high barriers to entry, and a strong and dedicated management team.

On the short side of the portfolio, Mr. Kaimowitz said that he is looking for near- to long-term deterioration of fundamentals and near-term negative sentiment.

It will be interesting to see how much credence advisers and investors give a track record that was created under a hedge fund banner.

Time also will tell if Mr. Kaimowitz can make the transition from the world of hedge fund management to a more restrictive world of mutual fund management.

“Shorting in the mutual fund space can be more expensive and ultimately more challenging for the manager,” said Ben Alpert, a hedge fund analyst at Morningstar.

A new Investment Insights -column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at jbenjamin@investmentnews.com.