Central Park Group Solving Hedge Fund Gap For Smaller U.S. Institutional Investors
New York-based Central Park Group launched a new equity long/short hedge fund recently; CPG Cooper Square International Equity - sub-advised by equity hedge fund manager Select Equity Group - invests in stable, high growth potential businesses domiciled outside of the U.S. which trade at significant discounts to intrinsic value.
CPG thinks it has solved a gap in the market with the new product. The firm targets specifically smaller institutional and high net worth investors in the U.S., and Mitchell Tanzman, CPG Co-CEO and Co-CIO, says that the new fund is designed to address an exposure misalignment and a shortcoming for their clients.
“U.S. investors tend to be overweight the U.S. market. That’s worked well in the last 10-12 years but by most objective standards U.S. markets are expensive. Non-U.S. markets have similar companies that are cheaper,” he said. “And while there are a lot of global and U.S. funds that dabble internationally, there aren’t that many pure-play non-U.S. equity hedge funds. So, we felt there was an opportunity there.”
CPG Cooper Square International Equity is available to qualified clients in the United States; that is, those with a net worth of more than $2.1mn. It has a $50k minimum, low compared to many private funds, and can be held in an Individual Retirement Account or an ERISA account (a U.S. federal law which offers certain protections for private pension owners). It’s structured as a non-diversified, closed-end management investment company and offers 1099 reporting, making the investors annual tax return easier to manage.
“Taxes and tax reporting are of course big considerations to a U.S. investor,” says Tanzman. “When we see something we really like, the first thing we think about is ‘what is the best structure to deliver this to our clients and how can we make the tax reporting easier’ and go from there.”
It’s not only the high net worth individual investors which CPG is targeting with the new fund; smaller institutions can also invest in CPG Cooper Square International Equity.
“With the qualified purchaser rules in the United States, if you’re an entity like a small pension plan or a charity foundation, you need an investment portfolio of $25mn or you can’t invest in a 3C7 fund of hedge funds. We’re seeing a growing interest in alternative strategies generally from smaller institutions and products like ours enable them to get access to different strategies depending on what they’re looking for,” said Tanzman.
CPG chose Select Equity Group as the sub-adviser for the new fund for two reasons. Firstly, CPG says that it partners with managers which have a history of outperforming, and just as importantly, CPG works with managers with which it has an existing relationship or that it knows well; the firm has previously created products to invest in funds from brand-name investment managers such as The Carlyle Group, KKR, and Lighthouse Partners. Working with Select Equity Group to create the new fund ticks both of these boxes for Tanzman.
“In the real world, the options for our clients are limited. There are a handful of 3C1 funds but they’re from sponsors we’ve never heard of,” he said. “Or, you have 3C7 funds where you need a $5mn investable portfolio. If you are a U.S. investor with a $3mn portfolio then you haven’t really had any good choices for exposure to actively managed international developed market equities hedge funds until now.”
CPG has been investing in hedge funds for 30 years and has allocated more than $10bn to these products; the firm manages fund of hedge fund vehicles for its clients as well as single manager funds. It also invests in private equity and real estate products, and private markets products have seen net inflows in the past few years compared to net outflows for hedge funds. Tanzman says that the headlines aren’t as applicable to CPG’s client base and that his firm has observed a different trend; furthermore, he feels that equity hedge fund managers could be poised to shine again in the coming years.
“We’ve actually seen inflows into hedge fund products in the past year or so,” he said. “We launched the fund because it offers our clients the international equity exposure, but the fundamental driver is that we think we’re entering into a period where stock picking and active investing can be attractive again. This is a good point to revisit hedge fund investing. And we can be constructive on both hedge funds and private equity, and we are. It’s not a zero-sum game for us.”
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