Event-Driven Mutual Fund vs. Hedge Funds

Chidem Kurdas

Mutual funds are increasingly offering less widely-available hedge fund strategies. Thus Rydex/SGI, a pioneer in the field, introduced an event-driven and distressed investing fund this month, in addition to funds in other alternative strategies.

Big investors developed an interest in such mass-market vehicles in the aftermath of the 2008 crisis, when getting one’s money back from hedge funds became so difficult.

Since then, hedge fund investors became more focused on liquidity, a strong suit for mutual funds, which are obliged to offer daily redemption. Large investors have not moved en masse to alternative mutual funds, but they’ve become more likely to allocate part of their portfolio that way.

They are not the typical customers for Rydex/SGI, which tends to get investors through financial advisers and has about $5.3 billion in alternative mutual funds, including a long/short commodities strategy.

“As money comes off the sidelines, we believe these products will be increasingly deployed by advisers and their clients,” says Rydex/SGI chief executive Richard Goldman. “This is the future.”

Event-driven hedge funds often hold their positions for extended periods. Hence they like to have lock-ups  and other restrictions on withdrawals, to avoid having to sell assets at a bad time. The Rydex/SGI event-driven fund does not have this issue because it does not hold long-term assets—instead, it replicates the Credit Suisse event-driven index by trading relatively liquid instruments such as stocks, futures, options and exchange-traded funds.

The liquidity is attractive but the returns could be lackluster, says a hedge fund investor. What’s replicated are average event-driven returns. Many hedge fund managers will of course do better than that, even after taking out the fees.  The mutual fund is not for investors able to get in with the top hedge funds in the strategy.

Then again, many managers will make less than the average. You can avoid manager risk with the replicator. That is another advantage, besides the liquidity.

Event-driven and distressed strategies are expected to do well in volatile markets. The Credit Suisse event-driven index returned over 20% in 2009. In the past 10 years, event-driven funds have on the whole done better than markets and hedge funds in general.


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