Industry Watches Arden Experiment

Chidem Kurdas

Fund of funds firm Arden, a well-established player in the institutional market, is preparing to offer a multi-manager mutual fund that will be invested largely by hedge fund managers. Arden has applied to the US Securities and Exchange Commission to get exemption from certain mutual fund rules.

The firm wants permission to hire hedgies as sub-advisers and change sub-advisory agreements with board approval only, without having to get the approval of mutual fund shareholders. Whether the SEC will allow the novel setup is unclear, though  lawyers suggest the regulator may have already indicated some willingness to grant exemption.

Despite the mutual fund format this is not really a retail product, given that minimum required investment is $1 million. It appears to target the high-end affluent who might have an investment portfolio of more than $10 million.

Its net operating expense of 5.59% is high compared to other mutual funds with alternative strategies. However, single-manager mutual funds such as the new KKR high-yield product are a different type of investment.

Arden’s new product is unusual because as an open-ended US mutual fund it is obliged to provide daily redemption at NAV but it will invest in hedge fund strategies that are relatively illiquid. The hedge funds that will manage portions of the portfolio may themselves have monthly, quarterly, annual or even less frequent redemption. Arden itself may manage 20% of the portfolio and also invest in other mutual funds.

While Arden expects to trade primarily in publicly traded securities, the portfolio can include non-traded or illiquid instruments.  Losses are a risk if the mutual fund is forced to sell illiquid securities because of redemptions.

Arden executives, headed by founder and chief executive Averell Mortimer, will pick the external managers. The firm had $8 billion in assets as of this July.

Others in the industry are interested to see if Arden is successful in getting SEC permission and raising money with the product. Depending on how things go, the format could be an attractive conduit for multi-manager offerings.

The European mutual fund market has a wider array of alternative products than the US, owing to differences in regulation. But the confluence of alternatives with traditional investments is a trend that goes back over a decade in both regions.

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