In joining the parade of mainstream wealth managers starting alternative investments units, MFS Investments of Boston is making a long-term commitment to giving its institutional investors access to emerging hedge fund managers.
The fund unit of Sun Life Financial Inc. of Toronto said the subsidiary, Four Pillars Capital Inc., will allow investors to put money into hedge funds running long-short equity, distressed debt, arbitrage, and event-driven strategies.
MFS wanted to build an alternative investment business "that can be durable in the long run for institutional clients," Robert Manning, MFS' president and chairman, said in an interview.
"This is a start-up venture that may take years before it has a meaningful impact on the firm," he said. "We don't care if it makes money right away. If the products generate good returns and we can generate a good client experience, then the economics will take care of themselves."
Four Pillars, which was announced Monday, will focus on finding hedge fund managers who need seed capital to establish their own firms and on providing expansion capital to small hedge funds seeking to expand.
"Customers want hedge funds, but they want hedge funds that offer better transparency and better returns," Mr. Manning said. "They want a company and brand that can provide the overlay management, which is expensive for smaller companies."
This is the first time MFS has launched a unit as a separate subsidiary. Four Pillars will use MFS technology and distribution, but have its own research and trading, Mr. Manning said.
He said institutional investors are demanding alternative investments but are concerned about investing with hedge fund managers who have faced regulatory scrutiny in the past two years.
"Institutional investors are more comfortable with mutual funds because they are regulated and have the technology and support of large companies around them," Mr. Manning said. "We are transferring our technology and putting it into the alternative space, which hasn't had that overlay and control. This is going to make pension funds more comfortable."
MFS, which in 1924 introduced the first mutual fund, had more than $202 billion of assets under management at midyear. It is entering the hedge fund market as a number of competitors, including BlackRock Inc. and Bank of America Corp., are ramping up their alternative investment capabilities.
In June, BlackRock announced it was buying fund-of-hedge funds provider Quellos Group LLC for $1.7 billion. In August, Bank of America announced new leadership for its global wealth and investment management arm's new alternative investments group.
To lead Four Pillars, MFS hired Thomas Knott as president and Eric Lass as chief investment officer. Mr. Knott co-founded K Capital Partners, a Boston hedge fund company, and Mr. Lass managed its Credit Opportunities Fund.
Mr. Manning said he worked with Mr. Knott at a previous job and after Mr. Knott, 44, retired from the hedge fund business in 2003, Mr. Manning saw an opportunity to work together again.
Four Pillars' offerings will be relatively vanilla "stay-rich strategies, not get-rich strategies," in line with the goals of the institutions that would be investing in them, Mr. Manning said.
"Hedge funds are completely misunderstood," he said. "Everyone thinks they are crazy people doing opaque things. We really are talking about more conservative products, such as long-short equity strategies, with less volatility."
