The Cool Kids Aren't Starting Hedge Funds Anymore

For the past few decades, hedge funds have been the sexiest way to make money on Wall Street — you can go long or short, fill them with "exotic" products, and lever up as you wish.

But it looks like they're losing their edginess to (are you ready?) mutual funds.

Just stay with us here.

These aren't your father's average long-only mutual funds. These are "alternative mutual funds."

These are mutual funds that act like hedge funds but they're not. They diversify and hedge with shorts, derivatives, ETFs, you name it. The reason they're not hedge funds is because investors don't have to be accredited and can invest less money, there are limits on leverage, and most importantly, alternative mutual funds do not charge that infamous hedge fund 2% and 20%.

According to data compiled by Morningstar, there were 112 alternative mutual funds in 2007. In 2012 there were 357.

Part of this is happening because the hedge fund world is a dismal place these days.

First off, it's hard to raise the money necessary to start a fund. Each investor has to be an accredited investor, which for individuals means they have to make at least $200,000 a year (or $300,000 with a spouse).

And if you don't want to get laughed off the Street, you better have a nice chunk of money to start — something like $50-100 million, and a significant portion of that should be from you (the hedge fund manager).

There are a lot of people starting (and, more often than not, failing at starting) these funds, but industry-wide hedge fund returns since 2008 have been lackluster, most underperforming the S&P. Investors are getting skittish.

That's why even hedge funds are starting mutual funds right now.

Last November legendary hedge fund manager Cliff Asness started two of them.

"You tell them, 'Hey we're a rock star hedge fund at a mutual fund price ...' It's what's working right now," one fund manager told Business Insider, adding "People just won't pay the fees, and they shouldn't have to."

Those fees, says the manager, are the reason why hedge funds, which are truly compensation schemes and not a specific asset class, has persisted.

But they keep many investors away, and if fund managers can get more assets under management by making it cheaper for people to participate, they may want to say goodbye to 2% and 20%.

It's what Jack Bogle did when he started Vanguard. He set the bar lower, he welcomed retail investors, and his fund got massive.

"We are a harbinger of things to come," said the manager.

Sorry hedge funds.