Catalyst Funds CEO Talks Converting A Hedge Fund Into A Mutual Fund: Major League Strategies For Little League Investors

Benzinga recently had the chance to talk about making alternative investment strategies available to retail investors with Catalyst Funds’ Jerry Szilagyi.

At one point, the CEO explained one of the things the firm (which manages about $5.8 billion in assets) was known for was converting hedge funds into mutual funds, so Benzinga asked about the benefits. The mutual fund structure provides “more access by investors, daily liquidity, more transparency and more regulatory oversight,” he explained.

Delving Deeper

Benzinga: When you convert a hedge fund to a mutual fund, do you get to retain the larger and institutional investors that hedge funds have, like pension funds? Do they continue to invest in the funds once they become mutual funds?

Szilagyi: For the most part, in the several conversions of hedge funds to mutual funds that we have done, we have been able to convert over and retain many of the customers/investors in the hedge fund, although not all. In some cases, there are investors in the hedge fund that may have a restriction against investing in an open end mutual fund, for example.

So, I can’t say that we’ve converted all of the clients and retained all of the clients, but it’s a pretty high percentage of the clients that were invested in the hedge funds that remained investors in the mutual funds after conversion.

When we were talking about the benefits of converting from the hedge fund to the mutual fund, I did not mention one important aspect, which I think is one of the reasons why we’ve been able to retain investors: In most cases, the fees and expenses of the mutual fund are lower than the fees and expenses of the predecessor hedge fund.

Pretty much all of the hedge funds that we have converted from mutual funds had a management fee, plus a performance fee. Once we convert them into mutual funds, there is only a management fee; we do not have any performance fees in the mutual funds after we convert them.

BZ: Does retaining these larger investors limit your investments in any way? Do you feel like you cannot invest in certain industries or bet on certain risk/reward profiles? Are there any strings attached to receiving a lot of money from big players?

Szilagyi: No. In all cases, when we convert a hedge fund to a mutual fund, we manage the investment portfolio in the same strategy as the prior hedge fund. We have not made any material adjustments to the strategy, period — let alone as a result of any requests from any individual large investors. That is actually one of the requirements for being able to port over the track record of the hedge fund to the mutual fund.

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