Bank of America's investment management unit has started its first registered hedge fund to meet customer demand for alternative investments.
Banc of America Capital Management's alternative investment unit, BACAP Advisory Partners LLC, said last week that it had issued BACAP Opportunity Strategy, a long-short technology hedge fund subadvised by Alkeon Capital Management LLC.
The fund, which takes both long and short positions in technology companies, went on the market last Tuesday. The initial minimum investment is $100,000, and it is only available to investors with at least $1.5 million of net worth.
Larry Morgenthal, the managing director of alternative investments at Banc of America Capital Management, said it has offered private placement hedge funds in the past but that these products were limited to 100 investors. A registered product can be offered to an unlimited number of investors, he said.
"We can take this product to a broader group of investors, and this opens up the hedge fund universe to a much larger audience," he said.
Mr. Morgenthal said the product responds to an outcry in the market for alternative investment products. Hedge funds and other alternative investment vehicles have been very topical lately, he said, because hedge funds have held their own as the equity markets have slumped.
"High-net-worth investors want these products," Mr. Morgenthal said. "They go to advisers and have read about the products, and they want it. They want all the alternative investments they can get because they can endure through this market."
Bank of America will aggressively offer alternative investments to a wider audience, Mr. Morgenthal said, including hedge funds, private equity funds, and real estate products.
But analysts are wary about new alternative investments' performance. Since hedge funds surged to $792 billion of assets at Jan. 1, returns have been flat. After average monthly returns of 16% last year, the average hedge fund rose 0.85% in August but is up only 0.82% for the year, according to the Credit Suisse First Boston Tremont Index.
"Hedge funds are a strong product, but the bubble may be over," said Kevin Daniels, the president of Daniels & Associates in Boston. "This isn't to say they cannot be consistent performers, but the days of 25% returns are long gone."
Mr. Daniels said Bank of America's reputation and customer base will let it build a hedge fund clientele quickly but that the real test would be performance. "Customers will stay with what they know at first," he said. "But the test is always going to be performance. If the funds perform well, then their hedge funds will collect assets."
Mr. Morgenthal said that Bank of America is confident it can succeed as a hedge fund manager. This market makes a lot of sense, he said, and his unit will continue to observe it closely.
Hedge funds "give customers something that they cannot buy in a typical format," he said. "We are going to continue to launch strategies that are not correlated to stock and bond funds. These strategies include merger arbitrage and convertible arbitrage hedge funds."
