ValueLine Funds is looking to be among the latest asset management shops to jump into liquid alternatives arena with a proposed acquisition of the Alpha Defensive Alternatives Fund (ACDEX) from Alpha Capital Management.
If the acquisition is approved by both the Securities and Exchange Commission and the fund's shareholders, it will join a ValueLine family of 12 traditionally-managed funds that combine for $2.3 billion under management.
Representatives from both ValueLine and Alpha Capital declined to comment before the deal becomes official, but according to the
SEC filing, Alpha Capital chief investment officer Bradley Alford will continue to manage the fund under the ValueLine banner.
The $20 million fund, was launched January 2011, and has a three-star rating from Morningstar in the multi-alternative fund category.
This year through April 6, the fund has gained 87 basis points, which compares to a category average decline of 72 basis points.
Mr. Alford, who has been managing investments for 24 years, founded Alpha Capital in 2006.
The fund is not a huge brand name. In fact, Alpha Capital manages just one other fund, the $21 million Alpha Opportunistic Alternatives Fund (ACOPX).
But the acquisition represents another acknowledgement by a corner of the traditional asset management industry that it needs to evolve in order to stay relevant.
The trend of traditional
active management losing ground to lower-cost indexed investing is well established. A move into the liquid alternatives space is seen as way to diversify a fund company's product line up.
Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, described the pending deal as logical for fund complexes responding to the steady flow of assets out of traditional actively managed mutual funds.
“The asset managers seek to offer products that provide diversification benefits and are less correlated with the broader equity market,” he said. “Investors are increasingly shifting to passive U.S. equity funds.”
The timing for expanding into liquid alternative strategies couldn't be better, according to Dick Pfister, founder and chief executive of AlphaCore Capital.
He pointed out that alternative strategies in general have proven resilient during the market volatility earlier this year, and retail-oriented
liquid-alt funds have been outperforming traditional hedge funds.
Specifically, Mr. Pfister referenced the Boston Partners Long/Short Equity Fund (BPLSX), which is up 6.22% this year, and is up 8.02% over the trailing 12 months.
That compares to a long-short equity fund category average decline this year of 2.05%, and a 12-month decline of 5.26%.
Source: Morningstar, Inc.
As Mr. Pfister explained, the market volatility during the first two months of the year favored so-called divergent strategies that tend to do well when fundamental factors are thrown out the window, such as the December-through-February period when everything was going down together.
Convergent strategies, by contrast, tend to do better when fundamental factors come back into play.
But the Boston Partners fund is an example of how some convergent strategies stepped aside during the market turmoil by getting more hedged with fewer long positions and more short positions.
“Typically, in a market selloff, divergent strategies tend to do well, and convergent strategies do poorly, and we saw a lot of big hedge fund managers do poorly by continuing to ride the big macro themes,” Mr. Pfister said.
Across the board, during the market volatility of January and February, liquid alt mutual funds generally outperformed their hedge fund counterparts.
Managed futures mutual funds did the best, with a category average two-month gain of 4.2%, while hedge fund counterparts gained 2.5%.
Multialternative mutual funds averaged a decline of 2%, while the HFRI fund of funds composite fell 3.8%.
Event Driven mutual funds fell by 30 basis points, while the HFRI Event Driven hedge funds lost 3.7%.
Long-short equity mutual funds averaged a 3.8% drop during the period, while the HFRI Equity Hedged category dropped 4.9%.
And the non-traditional bond funds tracked by Morningstar fell 1.7%, compared to a 2.2% drop for the HFRI Relative Value category.
“During the credit crisis a lot of the convergent strategies were caught off guard, but that didn't happen this time around,” Mr. Pfister said. “That's something I haven't seen since the tech wreck in early 2000, when hedge funds really made their name.”
In terms of an old and established shop like ValueLine, which launched its first mutual fund in 1950, adding the Alpha Capital fund, Mr. Pfister called it a good fit, and the kind of thing he expects to see more of.
“So many liquid alt funds have been launched in the past five years, they all can't capture the attention and the assets, that's why the top 10% of funds control about 90% of the assets,” he said. “But there are some decent funds on the next tiers down. That will lead to more consolidation of probably another 20 or 30 funds over the next two or three years.
