Italian hedge funds lower the bar

As part of the strategic plan put forward by a team of industry professionals led by Banca d’Italia aimed at boosting the fortunes of the suffering Italian fund market - its total assets have decreased by 28 per cent to E436.6bn over the past two years, according to the latest data from fund association Assogestioni - the proposal to make hedge funds available to the retail market is ground-breaking news. The minimum initial investment required to access these instruments could be reduced from today’s E500,000 - which is the barrier to entry for both pure hedge funds and funds of hedge funds - to as low as E25,000 for funds of hedge funds, provided they respect given investment conditions and use precautions in terms of leverage and liquidity risk. Becoming alternative The barrier would be lowered to E250,000 for single manager hedge funds. Moreover, hedge funds would be able to shake off their unappealing nomenclature of fondi speculativi and would be renamed fondi alternativi. “The reduction of the barrier to entry in funds of hedge funds could lead to a significant widening of the client base and therefore to the expansion of the industry,” said Massimo Mazzini, chief executive officer at Eurizon AI, which is Intesa Sanpaolo’s asset management arm for funds of hedge funds. Lower initial investment limits would open up these instruments to the affluent segment and the allocation to funds of hedge funds in high net worth individuals’ portfolios could be more tactical or opportunistic, said Mr Mazzini. Moreover, a lower barrier to entry would allow the employment of a broader product range. “Given the E500,000 threshold, investors’ portfolios can often be invested in only one fund of funds,” he said. “By reducing it, it would be possible to employ different types of funds of funds, by strategy and investment style, which would further increase portfolio diversification,” said Mr Mazzini. Today, hedge funds account for E29bn, less than 7 per cent of Italian fund assets. A total exposure of E50-E60bn to hedge funds would be a plausible target, claims Mr Mazzini, but only “in normal market conditions.” High net worth individuals account for 90 per cent of total hedge funds assets, with the remainder held by institutions. Affluent investors Stefano Calderano, head of retail and private division at BNL, the branch network acquired by BNP Paribas two years ago, said that the bank has started to sell hedge funds managed by BNP Paribas Investment Partners’ range to its high net worth investors. “The opportunity to offer these products to the affluent segment is also of great interest to us,” he added. The complexity of these instruments, the increasing liquidity risk, general lack of transparency combined with very low financial knowledge, on average, of the mass affluent investors, would make these instruments a threat more than anything else, says Paolo Renza, head of wealth management in the retail segment at Banco Popolare. “I see more risks than opportunities in lowering the threshold of funds of hedge funds so much,” said Mr Renza, who hopes for a gradual reduction of the threshold of these instruments to more something like E125,000. Mr Renza believes that stringent regulation on the transparency of the operations of hedge fund managers is what is necessary first. Alternative investments will be the winners emerging from the credit crisis, said Nathanaël Benzaken, head of hedge fund research and selection at Lyxor Asset Management. Investors are today more risk averse, equities will be much more volatile and risky, rates will be lowered and the value of money market funds will be eroded. “As a result, hedge funds of funds will also attract the attention of investors who have lower assets,” he said. And the industry is actively working towards making these instruments suitable to retail investors. “This is a long term trend, it won’t happen overnight,” added Mr Benzaken.