WASHINGTON, D.C. (HedgeWorld.com)–A startup investment manager, Pennsylvania Avenue Advisers LLC, is looking to create a hybrid of a hedge fund and a mutual fund with the Pennsylvania Avenue Event-Driven Fund.
As its name states, the fund will employ event-driven strategies: merger arbitrage, capital structure arbitrage, distressed investing and proxy fight investing. The fund adviser and the fund itself were founded by Thomas Kirchner, president and portfolio manager. Mr. Kirchner currently also is a financial engineer with FNMA.
The fund is the company’s first offering and currently has a small amount of seed capital, he said.
Mr. Kirchner said he launched the fund after deciding that event-driven strategies have become compatible with the mutual fund format. “I found these strategies are very reliable, very efficient,” yet there weren’t mutual funds focused on them.
“These strategies are pretty plain vanilla,” he said. There’s no need to pay the performance fee typically found in a hedge fund, he said. He added that performance fees in the hedge fund arena are muddying the whole investment process, giving managers too much incentive to pile on leverage or risk. A mutual fund doesn’t carry that problem.
Although there are existing merger arbitrage mutual funds, Mr. Kirchner said he wasn’t aware of anyone offering a full palate of event-driven strategies. “I figured there was a niche for someone to fill,” he said. Some of the merger arb funds in existence have proved popular. Water Island Capital LLC, New York, manager of the merger-and-risk-arb-focused Arbitrage Fund, plans to close it to new investors as of the end of this month Previous HedgeWorld Story.
Mr. Kirchner said another reason to offer event-driven strategies in a mutual fund is for the additional Securities and Exchange Commission oversight that comes with it.
Another fund manager, Alternative Investment Partners, White Plains, N.Y., said last year that concerns about oversight of hedge funds could be a good thing for mutual funds using hedge fund strategies. Alternative Investment Partners offers a mutual fund with a hedge fund multi-strategy approach, Alpha Strategies I Fund .
As far as the actual investing goes, he said his experience using those strategies comes through his management of his own finances. His job at Fannie Mae as a senior financial engineer is not directly related. He also had investment experience at a predecessor to BNP Paribas, he said.
Mr. Kirchner said the fund can employ leverage under mutual fund rules and can borrow up to 50% of its assets as long as the borrowing is fully collateralized. He also said that contrary to popular perceptions, mutual funds can sell securities short, and the Pennsylvania Avenue fund will do so.
Total estimated operating fees for the investor class shares during the first year will be 1.5% of assets after the fund waives an estimated 1.25% in other payments, such as dividends on securities sold short. The adviser shares carry estimated total fees of 1.75% after the same waiver.
Pennsylvania Advisers will distribute the fund and act as transfer agent and administrator. Although the fund went effective in November, the official launch opening it to investors was delayed into 2004 for tax-related reasons.
Mr. Kirchner said the firm currently is not planning to offer the fund through mutual fund platforms such as those offered by Charles Schwab & Co. Inc., San Francisco, or Fidelity Investments, Boston.