BlackRock's ultra cheap hedge fund doubles assets in six months

[BOSTON] BlackRock Inc took a gamble by breaking the one per cent fee barrier for a hedge fund. Now it's paying off.

The Style Advantage fund more than doubled its assets in the first half of the year to US$1.6 billion, according to an investor document seen by Bloomberg News. It's one of the cheapest funds in the industry, charging a 0.95 per cent management fee and nothing for performance. Investors can pull cash with only three business days notice.

BlackRock, which has joined the race to the bottom with fees on exchange-traded funds, is showing that investors crave cheap hedge funds too.

Style Advantage, which was launched in November 2015 as part of a build-out of factor-based strategies by former Columbia University professor Andrew Ang, is the least expensive fund among 18 listed on the document.

Hedge fund managers have been cutting fees as investors pull cash after years of poor performance. Tudor Investment Corp, Brevan Howard Asset Management and Winton have all lowered expenses. Winton in March planned to cut its management fee to 0.8 per cent and 0.9 per cent depending on the size of the investment and performance fees to 16 per cent.

Other hedge funds started by New York-based BlackRock in recent years, including a US$519 million event-driven pool and a US$628 million long-short credit offering, haven't gathered assets as quickly as Style Advantage.

At least thirteen BlackRock funds manage less than US$1 billion, not including assets in separate accounts. Assets in six of its funds shrunk in the first half.

The funds generally charge from one per cent to 2 per cent of assets in management fees and 20 per cent for performance. While hedge funds are a small part of the firm's US$5.7 trillion in assets under management, they bring in a disproportionate amount of fee revenue compared with its ETF business.

BlackRock Outperforms

Style Advantage was one of fourteen BlackRock strategies that outperformed the 2.4 per cent average hedge fund return during the first half, with the Asia-focused pool posting the only loss. The money manager's European long-short equity pool delivered the strongest performance with an 11.2 per cent return, according to the document. The S&P 500 Index returned 8.2 per cent in the period.

While BlackRock's event-driven, multi-strategy and market neutral long-short equity and credit funds posted more than 8 per cent gains, they saw net outflows in the first half.

BlackRock hired Mr Ang in 2015 to develop its factor-based investing business, which has involved distributing strategies through different products, including retail ones. The actively managed factor offerings attracted US$1 billion of net inflows during the second quarter, according to an earnings transcript.

"BlackRock delivers factor-based strategies across a variety of asset classes and investment products, including Style Advantage," said Ed Sweeney, a BlackRock spokesman.

"We offer clients a full range of hedge funds priced along a continuum to deliver the value clients expect."

Style Advantage, which is managed by Ked Hogan, has produced a 4.5 per cent annualised return since inception. It makes long and short bets based on factors like momentum in equities, fixed income, currencies and commodities markets.

BLOOMBERG