Investors will sometimes complain that too many names in a given portfolio will lead to over diversification and dilute returns. Permal Group has taken that argument to heart. The firm, which has $22 billion in institutional fund of hedge fund assets, is bringing its concentrated, thematic approach to the retail world.

Unlike its competitors, most of whom are running broadly diversified portfolios with 12-20 hedge funds in them, Permal has chosen to run several thematic alternative mutual funds with four or five managers in each, explained Max Osborne, head of U.S. distribution for Permal. The firm has already selected four underlying hedge funds for its portfolios and will be looking to add more. The themes would target different securities, such as equity or credit, or strategies, such as event-driven or macro, for example.

So far it has the Permal Alternative Core and the Permal Alternative Select funds listed on Morningstar. The Alternative Core fund is a multi-strategy vehicle with a 50 percent weight to liquid alternatives and the rest in long-only equity or fixed income. "We view the fund as a new balanced portfolio given the struggling market for traditional fixed income," Osborne said. The vehicle can draw ideas from open and closed-end funds, ETF's, ETN's and other strategies. The Alternative Select fund doles out money only to alternatives managers that have historically been unavailable in a mutual fund form.

The thematic approach is in line with how Permal has run its business historically, as some of the funds it manages for institutions are also theme-based and concentrated. In general, Permal has been used to tailoring the portfolios and their liquidity requirements to a client's needs. The firm has also been a big player in the managed account space for some time: where Permal will set up separate accounts with hedge fund managers to strip out an aspect of the strategy that's more attractive or a better match for a client's needs. "We were already asking managers to give us a managed account, now we're asking for a sub-advised structure with daily liquidity," Osborne explained.

Permal has been going out to its existing stable of hedge fund managers and asking them to run simpler, more liquid strategies of their products, Osborne said. "We're looking at managers who have been good partners for a long time for us."

Canyon Capital Advisors, for example, the Los Angeles-based event-driven credit expert, will be running a '40 Act compliant fund as part of the Permal strategy, where it will invest in more liquid, distressed securities than the one's in Canyon's hedge funds. "It would be things like the Lehman liquidation, which is very liquid paper," Osborne said. "But they already have a good information advantage and are experts in the event-driven space."

Apex Capital, the long/short equity firm out of San Francisco was also already selected as a sub-advisor. Long/short equity is back in favor among investors, given the recent bull market and Apex plays in sectors that look more attractive right now, like healthcare and technology.

The underlying hedge funds don't have to register their own '40 Act mutual funds to be part of Permal's offerings, but Osborne said it'd give the firm and end investors more confidence. "Doing so would show a commitment to trading liquid,' 40 Act compliant vehicles. We welcome that. It'd mean having both feet in the water and make us and other investors more comfortable."

Osborne, who came over from SkyBridge Capital, another New York-based fund of funds manager, in Nov., 2012, said that while other institutional firms might find getting into the retail channel a steep learning curve, Permal's access to parent firm Legg Mason's distribution channels should put it in a better position to do so. Legg Mason also hired Thomas Hoops earlier this year from Wells Fargo Asset Management as its executive vice president and head of business development.  

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