Hedge-Fund Firm Dips Into Mutuals

\By SHEFALI ANAND As the hedge-fund industry shrinks in size, some of its players are turning to mutual-fund investors for new money. Permal Group, one of the largest and oldest hedge funds of funds, will launch its first mutual fund on Tuesday. Permal is a unit of Legg Mason Inc., which has a longstanding mutual-fund lineup. This is the second high-profile mutual-fund launch from the hedge-fund world this year. In January, Clifford Asness's AQR Capital Management LLC introduced its first of a series of planned mutual funds. Legg Mason Permal CEO Isaac Souede saw $6 billion in outflows last year. These launches come amid one of the worst years for the hedge-fund industry, now facing sharp asset declines combined with massive outflows. Investors pulled out a record $152 billion in capital from hedge funds in the fourth quarter of 2008, according to data from Hedge Fund Research Inc. New York-based Permal, which has been managing hedge funds of funds since 1973, had $6 billion in outflows last year. It currently manages $20 billion in assets, down from $38 billion at the beginning of 2008. Its various hedge funds of funds fell, in aggregate, 14% in 2008, according to Isaac Souede, Permal's chief executive. That compares with a 21% decline in the average hedge fund of funds, according to Hedge Fund Research. If Permal's mutual fund, Legg Mason Permal Tactical Allocation, works out, it would be a boon to its ailing parent Legg Mason. Legg has been struggling with poor performance in many of its mutual funds, notably Bill Miller's Legg Mason Value Trust and those at bond subsidiary Western Asset Management Co. A Higher-Risk Vehicle The Legg Mason Permal Tactical Allocation fund is a go-anywhere fund, meaning it can invest across countries and asset classes, including in stocks, bonds and commodities. It targets investors who are "willing to assume a higher level of volatility and risk ... than fixed income," says Matt Schiffman, head of Americas retail at Legg Mason. The fund aims to outperform an index of 60% global stocks, 30% bonds and 10% cash, over a period of three years or so. Fees are on the high side. It charges an expense ratio of 1.75%, and a maximum front load of 5.75%. The fund also will invest in a number of other funds, primarily those from Legg Mason's various affiliates, but also non-Legg Mason funds, closed-end funds and exchange-traded funds. For instance, the fund's managers currently favor corporate bonds, especially high-quality ones. "The credit markets need to improve before the broader equity markets begin to work," says co-manager Christopher Zuehlsdorff. Hedge-Fund Experience The Permal fund joins a small but increasing number of funds that are advised by managers from the hedge-fund world. The AQR Diversified Arbitrage fund, which engages in various arbitrage strategies including merger arbitrage, was up 1.95% since inception in mid-January through April 9, versus a 1.52% gain for the Standard & Poor's 500-stock index during the same period. The AQR fund has $14 million in assets, up from its seed capital of $7.5 million. Highbridge Capital Management LLC, a unit of J.P. Morgan Chase & Co., has managed the $2.9 billion J.P. Morgan Highbridge Statistical Market Neutral mutual fund since 2005. J.P. Morgan Funds' chief executive, George Gatch, says the company is exploring the possibility of launching more funds to be advised by Highbridge. However, like the new Permal offering, these funds are typically quite expensive. The AQR fund has an expense ratio of 1.5%, while the Highbridge fund charges about 2% plus a maximum front load of as much as 5.25%. Write to Shefali Anand at shefali.anand@wsj.com