By: Kurt Brown, CFA

Far too often, the wealth management industry creates a maze of complexity for clients in an effort to justify high professional fees and push products. Unfortunately, market volatility can provide fuel for advisors to steer clients into complex and unnecessary products. Many of these result in much higher fees and lack clarity on how you are invested. Do not be lured into the sales trap of complex tactics, often rewarding the advisor or product company rather than you, the investor.

Following the Global Financial Crisis (GFC) in 2008 and 2009, many advisors pushed clients into complex alternative funds which were theoretically used to add more diversification.  A few ended up adding value, but many failed to meet expectations. A current example unfolding in real-time is the Hatteras Core Alternatives fund. To be clear, we never recommended or purchased this strategy, but have had a few clients transfer this in from their previous advisor.

Per Hatteras’s website and annual report, “the fund provides diversified exposure to private investments for potential return enhancement and hedged investments for potential volatility and risk mitigation.” This sounds pretty good, right? Who wouldn’t want better returns with less risk? Many advisors bought into the strategy and Hatteras was able to raise over $1B is assets following the GFC.

However, as time passed results failed to meet expectations, “the fund experienced a large number of investors who wanted to tender (sell) their investments.” But shareholders were only able to sell a small percentage of the fund each quarter due to the illiquid and complex structure of these alternative products. “Hatteras took into consideration multiple options to provide liquidity for investors who wanted out while recognizing the needs of investors who wanted to remain in the funds. While exploring options, Hatteras was approached by a buyer (Beneficient) with interest in acquiring all of the funds’ underlying assets in 2021. Ultimately, Hatteras determined a plan of liquidation was the best course of action for the funds’ investors.” Beneficient also agreed to pay a 5% fixed return until the liquidation was completed. Again, this sounds like a solid plan to provide liquidity and earn a return while you wait, right?

Over 18 months have passed and shareholders are still unable to sell any of their shares. Instead, on June 8, 2023, Beneficient went public via a SPAC merger and all Hatteras investors received Beneficient common stock (BENF) priced at $8.00 per share. The Hatteras fund still controls the shares and has partnered with an investment bank to liquidate and distribute the cash to investors.  However, the BENF stock price quickly plummeted to as low as $1.69 per share.  Today, it trades at $2.94, a 63% loss in just three months!

Time will tell if the price can climb back up near the break-even $8.00 level, but this WSJ article doesn’t paint a strong picture. Link: $2 Billion Default Followed Warnings to Everyone but Investors

What was originally sold for potential return enhancement, along with volatility and risk mitigation, has likely resulted in a permanent loss of capital for many investors.

At PDS, a few key themes emerge when we construct portfolios for clients. First, capital markets reward long-term investors, therefore we want to ensure clients have appropriate stable reserves, complimented by globally diversified, equity-centric investment strategies. Additionally, we believe great investments have a few common traits: liquidity, tax-efficiency, low-cost, and ease of understanding. None of which Hatteras Core Alternatives exhibited. Complexity is often sold as necessary for those with great wealth, but acts in direct contrast to those traits. Layered into that complexity is often miscalculated risk, a potentially costly one in this case.

If you find yourself in this unfortunate circumstance, please feel free to ask for our help in restoring your portfolio to one centered on achieving your personal goals.

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