Catalyst Discloses Insight On Converting Hedge Funds To Mutual Funds, And More
Finding ways to invest in hedge fund strategies is becoming more popular with retail investors. Mutual fund companies such as Catalyst are capitalizing by converting existing hedge funds to mutual funds, thereby making those strategies accessible.
Catalyst co-founder and CEO, Jerry Szilagyi, told Benzinga how the conversion process works and discussed some of the other alternative strategies Catalyst has employed to gain a following among investors.
Benzinga: Can you start by explaining the basics of converting a hedge fund into a mutual fund?
Jerry Szilagyi: Ok. There are a number of aspects to it, and there are a number of requirements that you need to meet to be able to convert a hedge fund to a mutual fund.
The first thing is, the hedge fund has to have an investment strategy that is compatible with mutual fund rules, regulations and restrictions.
In other words, you can't be using excess leverage or have many illiquid securities, things like that.
Beyond that, you have to evaluate whether you could actually implement the strategy in a mutual fund structure.
When we evaluate funds, we look for a strategy that has a good track record, can be done in a mutual fund structure and is something that is repeatable.
In addition, we look for some kind of rationale behind the strategy, and finally, for a fund we think could be marketable to the retail financial marketplace.
BZ: Obviously, retail investors can purchase the fund once it is converted, but who does Catalyst market to?
JS: We market through financial advisers to retail investors, so we don't generally market to retail investors directly.
We're a wholesale firm, which means financial advisers are our primary clients.
BZ: Catalyst has already converted three hedge funds to mutual funds and has other funds as well. Can you talk about some of the strategies available through Catalyst mutual funds?
JS: We have 24 funds all together, of which eight or nine you would probably consider hedge fund-like strategies or liquid alternatives.
The rest are more traditional-type strategies.
BZ: You refer to Catalyst as providing intelligent alternative strategies. Can you provide an example of what that entails?
JS: Sure. We don't mean just what's commonly called liquid alternatives or hedge fund-type alternative strategies. We also offer intelligent alternatives to more traditional asset classes.
For example, one of our funds is the Catalyst Insider Buying Fund (INSAX). This is a long-only, large-cap U.S. equity fund – so a very traditional or core asset class.
Nevertheless, we're providing a unique strategy in selecting investments for that fund. We focus exclusively on corporate insiders' buying activity in their own company stock.
The underlying theory is that these corporate insiders, who run the company on a day-to-day basis, certainly know more about the prospects of their company than anybody else possibly could. So, if they are taking their own cash and doing open-market purchases of their own stock that must be positive for the company.
BZ: In other words, a different approach to a traditional investing strategy?
JS: Exactly. That is one of the underlying themes and philosophies of Catalyst.
We're still a relatively small company, and for us to compete head-to-head with all the big players, doing something similar to what they're doing is probably not going to be the most successful approach.
We're offering unique and differentiated strategies, including unique ways to manage more traditional types of strategies.
BZ: How was Catalyst created?
JS: I was working as an executive and in charge of business development at another boutique mutual fund manager.
My partner, David Miller, came to me with an investment idea, and the rest of the management team at the company I was working at declined to move forward.
I was impressed with David’s idea and strategy and ultimately ended up leaving that company and we formed Catalyst together.
We formed it from scratch in 2006. We set up a company, we registered it as an investment adviser with the SEC, we set up a mutual fund trust and we launched our first fund, seeding it with our own money and some friends’ and family money. Right now, we have $2.3 billion in assets.
BZ: Catalyst recently acquired Auctos Capital Management, LLC. What does the acquisition of Auctos bring to Catalyst?
JS: What we saw in Auctos was a managed futures strategy that I think was different from most of the managed futures mutual funds that were out there.
In addition, there was an investment in research team that we thought could add a lot of value to the whole Catalyst investment process.
It was more than just the fact that they had a small hedge fund that had a good strategy that has performed well that we can convert to a mutual fund.
It was also the fact that they had a very strong and deep investment team that could add value to Catalyst overall.
BZ: What’s the plan for Catalyst moving forward?
JS: We're looking at developing unique types of products, where we believe there's a demand out in the marketplace. Right now, that is focused on these liquid alternative strategies.
We're not necessarily looking to come up with a new large-cap U.S. equity fund. There are a thousand of those out there. However, there's an opportunity, I think, to add a lot more value in the alternative space.
At the time of this writing, Jim Probasco had no position in any mentioned securities.
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