Genworth, SEI and Envestnet make alternative investments moves amid 'huge interest'

Brooke’s Note: If I had any doubts about how serious Genworth is about purchasing Altegris, they were curtailed early in the reporting process. When I first tried to reach Gurinder Ahluwalia, CEO of Genworth Financial Wealth Management, he was in a car between LA and La Jolla. I finally reached him Tuesday afternoon at the offices of Altegris in the San Diego suburb. The purchasing CEO typically isn’t the one doing the visiting — unless he’s very serious about what he’s buying.

The announcement by Genworth Financial Wealth Management that it intends to purchase a manager of $2 billion of alternative assets, Altegris Investments, is the latest sign of a brewing battle between TAMPS playing catch-up in a hot market.

Envestnet and SEI have also made recent moves: Envestnet is building out an alternative investments selection system and SEI, long the leader in managing hedge funds, has recently upped its coverage of hedge fund-mimicking mutual fund managers by hiring two more researchers.

All three are reacting to the growing universe of alternative investments, but more importantly, also to the desire of plain vanilla advisors to access what traditionally was more the domain of institutions and family offices. Collectively, the big TAMPs serve as the outsourced investing solution for more than 15,000 advisors.

“Alternative investments, specifically absolute return strategies, are gaining huge interest at all wealth levels, inclusive of institutional accounts, because so many market gurus — not me — predict the stock markets to stagnate over the coming years,” says Charles “Chip” Roame, managing principal of Tiburon Strategic Advisors.

Hedge fund spike

Indeed, hedge fund assets rose $120 billion in the third quarter ended Sept. 30 compared to declines of $131 billion in 2009 and $154 billion in 2008, according to data released yesterday by Hedge Fund Research. This increase included $19 billion of net new assets, which brought total hedge fund assets to $1.77 trillion from 9,175 funds, off only slightly from the 2007 peak of $1.86 trillion of assets in about 10,000 funds, according to the data tracking company.

Some executives, however, doubt the wisdom of either advisors or TAMPS of moving deeper into alternative investments. It may be just an opportunity to charge higher fees without delivering better returns, according to Alex Potts, CEO of Loring Ward, a San Jose, Calif.-based TAMP that manages $5.5 billion of assets for 750 RIAs using 90% Dimensional Fund Advisors’ mutual funds or its own DFA subadvised funds. See: Giant DFA customer puts young CEO in charge to execute ambitious national plan

“This is really a behavioral issue, even for prudent organizations and long-term investment experts who should know better,” he says.

“Over the years, we’ve seen interest in alternative investments spike periodically — think Real Estate Limited Partnerships in the mid 1980s, private equity in the 1990s, and now hedge funds in the 2000s. With the market downturn in 2008, many investors would like to find investments that perform differently (non-correlated assets) when markets decline and attempt to have upside as well. Candidly, high quality, short-term bonds work well as a diversifier, they just aren’t exactly as 'sexy.’”

'Pretty boring’

He adds: “Many alternative investments offer the hope of striking it rich with a hot hedge fund, soaring with the latest VC fund along with its cool new startup, or riding the newest commodity wave all the way to the bank. These are compelling stories that can and have dazzled investors for years, and they can make a prudent, diversified portfolio of mutual funds look pretty boring.”

Genworth’s move was the latest and perhaps most aggressive among the TAMPs in this arena.

The Pleasant Hill, Calif. based turnkey asset management program announced its intent to purchase Altegris, a La Jolla, Calif.,-based manager with 72 employees and $2 billion of alternative assets under management.

“We have limited alternative investments experience today,” says Gurinder S. Ahluwalia, chairman, president and chief executive officer of Genworth Financial Asset Management, Inc. “In the future, you’ll see a more deliberate and conscious strategy to deliver alternatives for the advisor.”

Gurinder Ahluwalia: In the future, you’ll
see a more deliberate and conscious
strategy to deliver alternatives for the
advisor.

TAMPs have not been traditionally associated with the world of hedge funds, private equity and other assets that seek to generate returns that are uncorrelated with market returns of equities.

But Ahluwalia says it was TAMP investors that set him on a search for a way to increase attention to this investing segment. He polled the 13 field reps who serve the 5,000 firms around the country using Genworth TAMPs. “We asked: what do you do off our platform and they said: alternative investments. That began our journey.” See:SEI turns a big corner but Genworth is still the big asset gatherer

Mike Henkel, managing director of Chicago-based Envestnet/PMC, says that his company is on its own quest to offer a better alternatives experience to investors.

All over the board

“We’re deep in the process of rolling out a ranking and sorting system for alternatives,” he says. “They can be all over the board.”

Envestnet hired Ryan Tagal as vice president – product management earlier this year from Morningstar. At his former employer, he was in charge of building Morningstar’s hedge fund data base.

“We’ve been looking at the problem for a while. You have to get managers in the right buckets so you’re not comparing apples to oranges,” Henkel adds.

Still, Envestnet isn’t looking to diagnose traditional illiquid hedge funds and LLPs. “Most advisors, including our own, don’t have boatloads of $15-20 million clients,” he says. “We looked at it and said: It just doesn’t make a lot of sense” to try to serve that market.

Instead, Envestnet is addressing the market by vetting mutual funds and separate accounts with hedge fund-like strategies. He used the example of products from AQR Capital Management of Greenwich, Conn., which uses collective investment vehicles and separate accounts.

This hedge fund-like approach has a compelling logic, according to Roame.

“Ninety-six percent of all Americans cannot purchase limited partnership structured alternatives because they do not meet regulatory requirements so the “hedge fund in a mutual fund structure” becomes popular as even modestly affluent people want in.”

SEI phases one out

SEI has long been the leader in terms of including private equity and hedge funds – even traditional ones – in its selection because it purchased them on behalf on behalf institutional clients. It had a product with them but it phased out that product a year ago.

Since then – with retail advisors in mind — it has upped its coverage of hedge fund-mimicking analysis by hiring two more researchers. See: Unravelling why a big, loyal SEI advisor moved its assets to Schwab

“We scour the market the same way we do with any other manager so it’s not an accident or one-time deal,” says Kevin Crowe, senior managing director of advisor network solutions for SEI Investments.

It now has 10 researchers dedicated to the discipline out of more than 100 total who analyze investment managers for its manager-of-managers approach to investing.

“It’s absolutely been a success and this isn’t the end at all” of improving in this area, he adds.

The biggest problem with the traditional hedge funds was that they can’t be readily sold to raise cash.

“When a client needs distribution, they need distribution,” Crowe says.