Blackstone: Nice Stock, Stupid Product?
Now that the SEC lifted an 80-year ban that kept hedge funds from advertising, the industry faces a bit of a conundrum: what to advertise? As Bloomberg BusinessWeek recently noted in a damning cover story titled “Hedge Funds are For Suckers,” the average hedge fund has underperformed a long-only stock index fund in eight of the last 10 calendar years.
Besides, hedge funds may be free to advertise, but there are still restrictions on whose money they can take: individual investors must have an annual income of at least $200,000 and net worth (excluding home equity) above $1 million.
Blackstone (BX), that bastion of exclusivity for the 1% and institutional investors, has come up with another idea: go full-bore retail by offering your wares to the masses. The firm just launched the Blackstone Alternative Multi-Manager mutual fund that advisors and broker dealers can use for their individual investor clients. Yes, a straight-up, old school, for-the-hoi-polloi mutual fund.
The fund is part of Blackstone’s growing hedge fund (and fund of hedge funds) business that currently has $49 billion under management. The retail fund is starting out with 11 sub-advisors of hedge funds and institutional money managers that bring a broad mix of alternative strategies to the table. Blackstone is also reserving the right to manage up to 35% of fund assets in-house.
As an individual investor you should question any advisor who tries to sell you this obnoxiously expensive fund. The prospectus lays out a normal annual operating expense charge of 3.4%, though for the first three years Blackstone is gallantly waiving some fees to make sure investors can get in at the rock bottom annual expense of 2.4%. That’s still well above the average 1.9% expense ratio for other retail “alternative” mutual funds in Morningstar’s database that take a multi-strategy approach.
And to be clear, 1.9% is not a deal. If you were to invest 60% of your portfolio in Vanguard Total World Stock Market ETF (VT) and the other 40% in the Vanguard Total Bond Market ETF (BND) your combined annual expense ratio would be a whopping 15.4 basis points, or less than one-tenth the 240 basis points for this fund. Heck, swap out Vanguard’s bond index for the Pimco Total Return ETF (BOND) if you want to hire Bill Gross, and you’re still only at a net expense charge of 33.4 basis points for that simple portfolio.
To be fair, 60/40 stocks & bonds doesn’t give you any alternative assets exposure. Then again, it’s not as if these strategies have paid off for retail investors. According to Morningstar, existing multi-strategy alternative funds posted an average 4.5% return over the trailing 12 months. For the past five years the annualized gain is 1.4%. Here’s the one-year performance for the simple Vanguard ETF portfolio.
And five years (YCharts uses total returns, not annualized) years:
On an annualized basis those returns are 5% and 3.1% over the past five years. Well ahead of the 1.4% for the multi-alternative class.
While you have to be a fee sucker to bite at this fund for your own portfolio, as a stock investor it could be yet another triumph for Blackstone the stock investment. Of the $4 billion in total revenue Blackstone earned last year, $2.03 billion came from straight up management and advisory fees, a 28.5% gain over 2011’s management and advisory fee haul. (Performance fees contributed another $1.6 billion in 2012.)
While revenues have rebounded from the financial crisis, they haven’t really exceeded the pre-crisis level.
The hedge fund division generated $345 million in management fees last year, up from $276 million in 2010. It’s not hard to imagine Blackstone’s cachet will bring plenty of investors to the retail fund, adding a nice new revenue stream to the hedge fund division.
Yet the one thing Blackstone impressively comes in low at is valuation, as in PE ratio:
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.