Buoyed by solid performance last year, hedge funds such as Welton and Graham Capital are building up distribution to high-net-worth advisors.
By Chris Larson
March 15, 2023
William Marr, Senior Managing Director [email protected]
The relatively strong performance of hedge funds overall during last year’s public markets rout – and continued interest in the asset class in the face of ongoing economic uncertainty – is sparking renewed interest in the asset class among financial advisors and their high-net-worth clients, and driving alts product platforms such as iCapital and CAIS to expand their menus.
And hedge fund managers, too, are increasingly making their strategies available on those platforms as they look to expand their investor base beyond institutions, with Welton Investment Partners and Graham Capital Management among the latest to expand distribution with moves in the past month.
The space appears to be picking up steam, with platform providers saying they see growing interest from advisors and are looking to carefully add more hedge funds to help meet that increasing demand.
“We have seen a significant uptick from advisors for hedge funds.” Joseph Burns, iCapital.
Among the most recent moves was iCapital adding Welton to its platform, allowing financial advisors at brokerages and independent firms to put client money into the manager’s flagship systematic macro fund. Until now, Welton has had virtually 100% of its assets coming from institutional investors.
“It’s an important channel” for growth, said Welton senior managing director William Marr. He joined the New York-based manager last summer to lead its new wealth management group, tasked with building out the firm’s presence among independent advisors, brokerages, private banks and family offices.
Flows to alternative funds from those advisor channels have been strong and growing, say market participants, with hedge funds making a prominent move.
“Across our platform in 2021 and 2022, we saw a significant increase in allocations to hedge funds, with the largest flows going to multi-strategy and hedged equity strategies,” said Brad Walker, chief client and product development officer at CAIS.
CAIS last month paired with Graham Capital, making the manager’s discretionary macro strategy fund available to the independent registered investment advisor, or RIA, market through the platform. CAIS may offer more Graham funds in the future.
CAIS has been seeing more demand from financial advisors for hedge fund strategies recently, Walker said. “We have also seen demand for making the process of allocating to these solutions easier,” he added. That’s a key selling point of platform providers, which use technology and automation to help streamline the often clunky and manual process of investing with institutional alts managers.
For many advisors, a move into hedge funds reflects a shift in their allocation strategies for clients.
“We have seen a significant uptick from advisors for hedge funds, particularly those that are complementary to existing client portfolios,” said Joseph Burns, head of hedge fund solutions at iCapital.
Other alternative product platform providers say they’re actively looking to add more hedge fund managers for similar reasons. It’s often an advisor-driven process, said Frank Burke, CIO of platform provider PPB Capital Partners. Many times, “it’s the advisors coming to for help getting access to a manager,” he said.
The providers say they will tread carefully when adding strategies. “We don’t want to be a supermarket,” Burke says. “So, we are pretty selective in terms of adding funds.”
But platforms may have more managers to work with, as hedge funds are starting to better understand how to distribute more effectively to the advisor market.
“Until the technology these platforms bring was available, the highest-quality alternative investment strategies were only available to institutional and extremely high-net-worth investors,” Welton’s Marr says. “Most private investors had to settle for watered-down versions of these strategies.”
Now, though, the platforms “make it possible for private investors to invest alongside institutional investors which have been accessing these strategies for decades.”
That should become a long-term trend. Graham, in the announcement of its deal with CAIS, cites a recent survey from CAIS and Mercer that found almost 88% of advisors “intend to increase their allocations to alternatives over the next two years.”
Marr similarly cited forecasts that wealthy investors will more than double their collective allocation to alternatives in the next few years.
And current market conditions and the uncertain economy may only accelerate that “strong demand” for hedge funds, Burns said.
“Advisors have grown frustrated with the downside correlation of a traditional asset-only allocation and are seeking solutions across equity, credit, event, macro and multi-strategy funds to drive better client outcomes,” he said.
Among the strategies that iCapital may consider adding in coming months, Burns said, are “quantitative equity and specialized credit to modify long-only public markets exposure, multi-strategy funds to help stabilize performance and reduce portfolio volatility, and global macro as a diversifier to drive returns in different asset classes.”
At CAIS, advisor demand is especially growing for “non-directional and low beta strategies,” Walker said. There is particular demand for “more opportunistic strategies that in a recession or volatile market can take advantage of distress and economic headwinds without making a separate allocation,” he added.
And that’s where providers think they are well-positioned with their technology-based platforms, Walker added. “Advisors want to allocate more to these strategies,” he said, “and this has led to increased demand for simplifying the investment process.”
(Article reprinted with permission from FUNDfire).
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