, the company behind the Allied Owners Action Fund, shut its doors in late June, citing inadequate inflows into the mutual fund. The idea behind the fund, however, may live on. Co-Founders Martin Stoller
and Aaron Brown
still believe in the idea behind their fund and hope to open with a new company.
The idea behind the Allied Owners Action Fund was this: combine the energy of internet discussion boards and interested shareholders to get the shareholder more involved in his investments. To do so, the fund managers would buy approximately five percent stakes in companies, and then use that stake to mobilize shareholders of the company in question to help effect change.
"eRaider seeks to engage Fund investors in an on-line dialog, and to enlist their help in improving the companies the Fund buys,", stated on their website
Pursuing that goal, the company ran into a few problems. Besides lack of fund flows, the founders also discovered that it was difficult to sustain shareholder interest after the initial excitement of a "raid." And interestingly, the people who were active on eRaider's discussion boards
were not necessarily investors in the Allied fund, and vice-versa, said Deborah Pastor
, portfolio manager of the Allied fund.
Ultimately, it was the lack of asset base that did the fund in. With less than $3 million in assets and low management fees, the fund could not cover its expenses. Pastor estimates that it would take $50 million in assets to sustain the mutual fund.
What differentiated the Allied fund from the countless other "activist" funds out there?
"[S]ome of these other funds serve special interests. They want companies to stop animal testing, or pay workers more, or subscribe to Christian principles. They do not pretend to represent the interests of all company shareholders. eRaider fights for the interests of all shareholders regardless of political or religious beliefs" said Stoller and Brown.
"We fight for openness, fairness and profit," the founders stated.
That fight, however, came to an end.
Although eRaider retooled the mutual fund as a hedge fund approximately three years ago to try to cut costs, that move was not enough.
Pastor estimated that it cost the firm an additional $300,000 to $400,000 in start-up costs and annual fees of $50,000 to $75,000 to operate as a mutual fund instead of a hedge fund. Part of the high start-up cost of the firm was an eight to nine month regulatory approval process at the SEC, said Pastor. The agency was wary of eRaider's proposal: "we really had to push," said Pastor.
But despite this, Pastor supports the recent fund regulations and hypothesizes that the larger funds may find some of the disclosure rules more onerous. As an example, she said larger fund families may find it difficult to find enough truly independent directors to staff their many fund boards.
The founders plan on keeping the hope of shareholder activism alive, but intend to focus on activist institutional investors, like TIAA-CREF and CALPERS, said Pastor.
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