Competition With Mutual Funds From Hedge Funds And ETFs
The world of Wall St. is changing with more money looking to be in speculative instruments. While 90 million Americans have investments, usually through their IRA or 401K in the Mutual funds, there seems to be a shift in this $10 trillion industry. The smaller investors have their funds pooled in various ways to enter the once forbidden hedge fund market. Hedge funds have the advantage of being mostly "market neutral", and as it is well known, the stock market, at least in terms of the leading indexes, has not been going anywhere in a long time. The other two market innovations now making the rounds are ETFs, Exchange Traded Funds, and SMAs, Separately Managed Accounts. In particular, the ETFs have seen an over 50% increase in money managed. These instruments are more liquid, and more tradable.
Of course, Hedge Funds have become sort of the magic genie of the financial world. The market is up, the market is down and they still make money. However, as we were reminded in the recent crash and burn of Motherrock Hedge Fund, the Hedge Funds do not always defy the law of gravity. This has caused grave difficulties for its creditor ABM Bank, and even delayed the sale of its futures unit to UBS Bank.
What happened to the LTCM Hedge Fund in August 1998 is also relevant. So if there is a big shift toward Hedge Funds, the Federal Reserve better get the bail out funds ready. Not just $4 billion like LTCM needed, but a lot more will be needed at this rate. The theory is that Hedge Funds, totally deregulated operations, run from offshore, thrive on exploiting little cracks and inefficiencies in the system, but the world is not infinite. This may be the time for the U.S. Government among others to go for re- regulation before the next crash.
SMAs are also a tool usually of the super rich, but they seem to be going for those a little less wealthy. They are a basket of equities, but seem to have a more tailored, more boutique approach to what companies to invest in. Also, you can know what they are doing day to day; you don't have to wait for the quarterly report.
So these are some of the new alternatives to mutual funds. Is it just glitzy marketing or is this a shift toward much more speculative? The danger will lie in the details.