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Innovative fund group actively seeks hedge funds for conversion


Catalyst Funds is a USD 6.4 billion fund group, founded in 2006, and is actively seeking hedge funds to convert into mutual funds. Catalyst CIO and senior portfolio manager David Miller explains that his firm has so far converted nearly a dozen hedge funds to mutual funds.

“We started converting hedge funds into mutual funds in 2012,” he says. “The initial driver was that we met a manager with a strong long-term track record in M&A but not much background on the marketing side. After that conversion our firm developed an expertise in working with hedge fund managers on this process.”

The longest duration fund with Catalyst has been in existence since 1997. This is the Catalyst/Millburn Hedge Strategy Fund which converted in 2015 into a mutual fund. The fund has achieved performance of 11 per cent per annum since 1997 and shows strong non correlation with equities.

The Catalyst/Millburn fund is a combination of managed futures and global long only equity exposure. At conversion it had USD40 million under management and is now at USD4.8 billion. The combination of managed futures and global equities is designed to enable the fund to potentially do alright when everything else is doing terribly, Miller says.
The fund has experienced only two calendar-down years in its 22 years in operation, and was positive in the critical stress years for equities of 2000, 2001, 2002, and 2008. That last year, 2008, saw the fund return 5.33 per cent against the S&P 500’s loss of 37 per cent.

Millburn converted the fund because they saw the potential for growth by working in partnership with Catalyst. Fees on the newly mutualised hedge fund are a 2 per cent net expense ratio and there is no performance fee. Buyers are financial advisers working through the wirehouse platforms in the US or as registered investment advisers or as independents. The annualised return of 11 per cent compares well with the S&P’s annualised return over the same period of 8.24 per cent.

Miller says: “Investors are looking for the best risk adjusted returns they can get and the combination here sees the potential for managed futures doing their best when equities aren’t doing well such that the combination minimises the risk of the portfolio. The total return and risk-adjusted return is like nothing else you will see in 40 Act mutual funds.”

The firm is actively seeking out hedge fund managers who are ready to convert. “We are looking for managers who have great strategies and strong risk adjusted return histories to bring in, in niches where we don’t have one at the moment such as long/short equity. We are trying to find a great l/s equity manager to bring onto our platform,” Miller says.

“Mediocre hedge funds have had their day. No-one wants to pay an incentive fee on funds that aren’t doing very well. There is always a place for a firm that is producing consistent risk adjusted alpha.”

The firm also runs ETFs under their Strategy Shares brand and Jerry Szilagyi, CEO of Strategy Shares, describes their mission as rooted in bringing alternative-focused ETFs to the market.

Miller confirms that there is another ETF launch planned in the future for Strategy Shares, focusing on tactical asset allocation.

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