Hedge-Type Fund Eyes an Approach To Small Investors

On Fifth Avenue, where you can pay $5,000 for a fancy tiepin or evening gown, you'll be able to invest with a hot Vienna-based hedge-fund manager.

Quadriga Asset Management, with $1.8 billion under management, is opening a 7,000-square-foot "investor center" at 489 Fifth Ave. in mid-March, across from the New York Public Library.

To invest in the two futures funds Quadriga is offering, the investor will need to demonstrate either a net worth of at least $150,000 or annual gross income of at least $45,000. Hedge funds, in contrast, have long required a minimum net worth of $1 million or annual income of $200,000.

The ease of investment, however, comes at a cost: The expense structure of the Quadriga Superfund is among the highest in the industry, according to analysts.

The Austria-based fund manager, by peddling two of its funds to the American public, is taking advantage of its technical designation as a Securities and Exchange Commission-registered investment adviser. Hedge funds, unlike mutual funds, have long been prohibited from advertising, since they need not disclose their holdings or be audited, given their legal classification as pools of private investment capital. Because the futures funds Quadriga will be offering at its Manhattan boutique are subject to those requirements, they are not technically hedge funds - though they bear a close resemblance to them.

Quadriga, through its walk-in approach to investing, will be shattering the exclusivity that has long surrounded investment in hedge funds. Entree to the consistently best-performing hedge funds, such as Moore Capital or Tudor Investments, has generally been unavailable to even the rich, with access often limited to either the highly connected or the largest financial institutions.

For those reasons, the new venture could turn the secretive hedge-fund industry on its ear.

"We think we can grow assets and expand our investor base by going directly to the individual investor, rather than appealing solely to institutions," a Quadriga spokeswoman, MaryAnn Kiely, said. "The store is just an offshoot of what we've done in Europe, where the strategy has worked nicely." The new center will sell only Quadriga's two funds.

Quadriga is offering a type of fund called a managed futures fund, specializing in using complex computer programs to identify emerging trends in the price movement of more than 100 different currencies and commodities. A hedge-fund manager who also is a columnist for theStreet.com, James Altucher, described the trend-following trading strategy as, ideally, tending to "small losses and large wins," though "with perhaps more losses than wins."

If investing in Quadriga will be easy, that doesn't mean it's a sure thing for investors. Admittedly, the performance of the Series A and B funds - the two funds cleared for sale in America - was solid last year, with Series A up 11.35% and B returning 16.82%, in a year when the Hedgefund.net index of 340 funds was up 2.85%. But eating into those returns are astronomical expenses.

Before the investor sees the first dollar in profit, the fund's prospectus lists the following costs: a selling commission of 4%, brokerage fees of 3.75%, a management fee of 1.85%, an offering expense of 1%, and an operating expense of 0.15%. On the B series, the brokerage fees are 5.63%, given the more aggressive nature of trading in that fund. After applying back interest income of 2%, the one-year breakeven rates for both funds are 8.75% for A and 10.63% for B. Assuming both funds are profitable, a 25% performance fee for Quadriga kicks in.

For example, a $5,000 initial investment in Quadriga's Series B fund that returns 25% in the first year, for a $1,250 gross profit, would be whittled down to a pre-tax return of $837.84 after costs and fees.

Unlike many hedge funds, Series A and B will allow monthly redemptions, upon 10-day written notice.

It is hard to make hedge funds seem like a bargain, but their fees are generally much lower than the Quadriga products, with a hedge fund typically charging a management fee of 1% to 2% of principal and performance fees of between 20% and 30% of profits.

As to the question of whether Quadriga signals a change in how investments are marketed in America, skeptics abound. One futures industry veteran, the president of the International Advisory Services Group, Perry Jonkheer, said there was little chance that many individual investors would rotate out of traditional assets, such as stocks and bonds, to invest in a fund like this.

"It has tremendous monthly volatility and is very expensive from a cost standpoint," he said. "This is for people who have a lot of money and are comfortable with taking risks with some of it."