An emerging class of investors is increasingly demanding hedge funds, and Merrill Lynch & Co. is aiming to be a major provider.
The New York brokerage is merging four alternative-investment-product departments into one to improve its products and market them better to institutions and high-net-worth people.
"Alternative investments are now going to be a key focus for us," said Ron Rosenberg, head of the new alternative investments division. It plans to offer products such as hedge funds, separately managed accounts, and private equity funds, he said.
The company wants to leverage its global distribution ability and the "tremendous relationships" its brokers have with clients to become a significant player in alternative investments, Mr. Rosenberg said.
For Merrill Lynch, consolidating the four departments will help focus its marketing efforts as well as blend poorly performing products with more successful ones, he said. For example, some of Merrill's retail hedge funds have not performed to its satisfaction and are likely to be merged with institutional products, he said.
Wealthy investors are attracted to hedge funds partly because of their mystique and partly because they tend to be more liquid than other products designed for the wealthy, according to Russ Alan Prince, a financial consultant in Shelton, Conn. Hedge funds are attractive to overseas investors as well, he added.
As institutional investors have realized they can often substantially improve results by investing 10% to 15% of their portfolios in a hedge fund, Mr. Rosenberg said, their interest in alternative investments has grown.
Institutional accounts are the fastest-growing group in Merrill's alternative-investment business, he said, but some analysts expect retail high-net-worth investors to become bigger spurs.
"The No. 1 product that high-net-worth investors are asking for is hedge funds," Mr. Prince said.
Since so many companies are going after these investors, however, success will depend upon finding brokers and advisers who understand the products and can identify clients for whom they are appropriate, Mr. Prince said. He added that Merrill is well positioned since it has a sales force as good as any in the business.
Merrill also plans to seek clients by customizing products to their specific needs and investment strategies. Only someone with $50 million to $100 million to invest can qualify for a tailored fund of funds product today, Mr. Rosenberg said, but he expects the buy-in price to drop somewhat as his division grows.
Banks, brokerages, and other institutions are increasingly looking to market hedge funds as wealthy investors' interest grows, Mr. Prince said.
The appeal of these products may fade if their performance turns sour or if new products become fashionable, Mr. Prince said, but most industry analysts expect investors' interest to remain strong for several years.
The new unit has about 120 employees and manages about $6 billion of assets, split roughly evenly between institutional and retail clients, Mr. Rosenberg said. It is developing products but will not market any until the first quarter, he said.