Hedge Fund Executives Explore Trends in New ‘Wall Street South’

Hedge fund professionals gathered in Miami last week for the Miami Finance Forum’s exclusive power breakfast panel discussion  on the industry’s performance in 2013 and expected trends in 2014. The discussion also included a unique focus on the growing hedge fund industry in the new Wall Street South – Miami.

I was honored to moderate the discussion with panelists Steve Mason of Collins Capital, Michael Aronovitz of Gables Capital Management, Jesse Wachs of Powell Investment Advisors, Paul Schwarz of Lighthouse Partners and Marc D. Sarnoff, City of Miami Commission and Chairman of the Miami Downtown Development Agency (DDA).

The panel discussed three trends that are expected to continue during 2014:

1. Continued operational cost efficiency
2. Heightened regulatory environment
3. Demand for liquid alternatives (i.e., 40 Act Funds)

Operating costs

Continued operating cost efficiency was of particular interest to the panel.  Margins continue to diminish due to an array of factors, so investment managers are looking for ways to slash costs. Many investment managers favor a reduction or elimination of state and local taxes, which can exceed 13% in some jurisdictions. Florida’s favorable tax environment is an advantage that the DDA has used to lure investment managers.

Case in point: Universa Investments is the first big catch for the DDA, who convinced the firm to move from California to Florida. “Florida’s business-friendly policies, which are different from California’s, offer the perfect environment for us as we expand,” said Mark Spitznagel of Universa Investments. Commissioner Sarnoff said there are four other large fund families that are currently contemplating a similar move to Miami.

Regulatory environment

The panel also discussed the heightened regulatory environment that the hedge fund industry is currently experiencing.  While there was a consensus that increased regulation is raising the costs of managing a fund, the higher level of investor confidence that results from increased regulation is a benefit that cannot be ignored.

Liquid alternatives

Lastly, one of the biggest concerns for investment managers is raising capital.  In the Kevin Costner movie Field of Dreams, he was told to build a field and they would come!  Unfortunately, as most managers have experienced, this is not the case with investors in the hedge fund world. Accordingly, hedge fund managers have started turning to 40 Act liquid alternative funds to attract more investors.

What’s a 40 Act fund?  It’s a pooled investment vehicle offered by a registered investment company – as defined in the 1940 Investment Company Act – that is not purely pursuing long-only investing in equities of debt instruments.  The 40 Act liquid alternative funds afford the regulatory protection of a registered mutual fund with the flexibility offered by an unregistered hedge fund.  The 40 Act funds have a relatively high entry point but open the investment manager to the 401(k) investor base in the U.S. – the Holy Grail!

The panel discussion concluded with an overall sense of enthusiasm for the recent trends in the industry, particularly, the maturation of the hedge fund industry in Miami – aka Wall Street South.