BlackRock's Low-Fee Hedge Fund Lures Cash Though Returns Shrink
At BlackRock using low fund prices to lure assets is a success. Less successful is the return for its cheapest fund.
(Bloomberg) -- At BlackRock Inc., using rock-bottom hedge fund prices to lure mountains of assets is proving successful. Less successful is the return for one of its cheapest funds.
The Style Advantage fund had net inflows of $2.4 billion in 2017, the most of any of the 18 listed in a company presentation seen by Bloomberg News. Its return last year: 0.01 percent, following a gain of 4.1 percent in 2016.
The world’s largest asset manager is betting that attracting new money will make up for revenue lost to low fees as investors clamor for the cheapest investment products. It’s a strategy that started with the firm’s exchange-trade funds business.
Style Advantage makes long and short bets on factors including momentum in equities markets, fixed income and commodities. It has a performance fee of zero and a 0.95 percent management fee.
“BlackRock provides a full range of index, alpha-seeking and alternative solutions,” spokesman Ed Sweeney said in a statement. “Different strategies have varying levels of capacity and return expectations. Across our entire investment platform, including our range of hedge funds, our funds are priced along a continuum to deliver the value clients expect.”
Fund Outflows
Clients moved into Style Advantage as its performance waned during the year. While the fund ended the first quarter of 2017 with a gain of 3 percent, it lost 0.38 percent and 3.4 percent in the second and the third quarters, respectively. It rose 0.88 percent in the fourth quarter.
Overall, several BlackRock hedge funds were hit with net outflows last year even as performance recovered from negative returns in 2016. Investors pulled money from 11 of the 18 hedge funds in the documents seen by Bloomberg.
Among the group with outflows were all five of the company’s computer-driven hedge funds. Four of these funds posted positive returns in 2017 after experiencing some of the worst returns in their history the year prior.
Strong Performance
In terms of performance, all but one of the 18 BlackRock funds posted gains in 2017 and 10 of them beat the industry average. That tracks with the broader industry, which last year posted the best returns since 2013. The asset class gained 6.5 percent on average on an asset-weighted basis, according to data from Hedge Fund Research Inc.
While BlackRock’s hedge fund division only accounts for a fraction of the firm’s more than $6 trillion in assets, it’s among the most lucrative since it generally charges higher fees.
BlackRock’s $27.7 billion hedge fund business sits within the money manager’s alternatives platform, which managed $129 billion in assets at the end of the year. The alternatives unit, which also offers other strategies like private equity, infrastructure and credit, expanded assets by about 11 percent from the year prior.
Among BlackRock’s biggest winners in terms of performance last year was a hedge fund that bets on and against stocks in European companies, the documents show. It gained almost 22 percent last year. The pool, run by Alister Hibbert and Michael Constantis, saw assets increase by 43 percent to $3 billion.
By contrast, BlackRock’s quant-focused fund that bets on and against stocks of Asia-Pacific companies declined 13 percent last year. The fund, run by Jeff Shen, who also co-manages the firm’s quant group, saw assets decline 85 percent to $85 million as of the end of December.
To contact the reporter on this story: Sabrina Willmer in Boston at swillmer2@bloomberg.net.
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella, Vincent Bielski
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