Fidelity Investments: Hedge Fund Or Not?

Fidelity Investments, formerly known as Fidelity Management & Research (FMR), is an American multinational financial services corporation based in Boston, Massachusetts. It is one of the largest asset managers in the world, with trillions of dollars in assets under management and administration. The company operates a brokerage firm, manages mutual funds, and provides a range of financial services, including investment advice, retirement services, wealth management, and insurance. In recent years, Fidelity has expanded its offerings to include alternative investment strategies similar to those used by hedge funds. This has led to some speculation about the nature of the company's operations and potential conflicts of interest.

Fidelity Investments' history

Fidelity Investments, formerly known as Fidelity Management & Research (FMR), is an American multinational financial services corporation based in Boston, Massachusetts. It was established in 1946 and is one of the largest asset managers in the world.

The company's history can be traced back to 1930 when the "Fidelity Fund" was incorporated in Massachusetts. During the Great Depression, it was the only fund approved by John C. Hull, the Securities Director for Massachusetts, due to widespread bank failures. In 1946, the corporate structure changed, and the company became known as Fidelity Management & Research (FMR).

Over the years, Fidelity expanded its operations and established itself as a leading financial services provider. In 1969, the company formed Fidelity International Limited (FIL) to serve non-U.S. markets, and in 1980, it was spun off into an independent entity owned by its employees. In 1982, FMR started offering 401(k) products, and in 1984, it introduced computerized stock trading.

Fidelity continued to grow and innovate, launching its first ETF in 2003 and establishing a presence in India in 2004. In 2014, Abigail Johnson became president and CEO of Fidelity Investments, and the company has since ventured into the world of cryptocurrency and blockchain technology.

Today, Fidelity Investments operates a major brokerage firm and has investor centers across the United States. The company has a strong focus on innovation and providing value to its customers and clients by developing new products and services to meet their evolving financial needs.

The Johnson family's involvement

The Johnson family has been involved with Fidelity Investments since its founding in 1946 by Edward C. Johnson II. The Johnson family, led by patriarch Edward "Ned" Crosby Johnson III, has built a substantial fortune with Fidelity Investments, and the family continues to play a significant role in the company's operations.

Abigail "Abby" Pierrepont Johnson, granddaughter of the founder, is the current president and CEO of Fidelity Investments. She has held these positions since 2014 and also served as chairman of the company from 2016 until her grandfather's death in 2022. As of 2024, Johnson's wealth is estimated at $35.6 billion, making her one of the world's wealthiest women. Johnson's father, Edward "Ned" Johnson III, was the previous chairman of the company and remained chair emeritus until his death in March 2022.

Despite the controversy, the Johnson family has maintained significant control over Fidelity Investments and its sister company, Fidelity International (FIL). As of 2013, the family owned a 49% stake in the privately held company, with Johnson herself holding an estimated 24.5%. The family's influence is further highlighted by their involvement in key strategic decisions and the appointment of executives.

The Johnson family's wealth and influence extend beyond Fidelity, with a net worth estimated at $26 billion by Forbes magazine, ranking them as the 9th-richest family in the United States. Their diverse investments and business interests have contributed to their vast fortune.

F-Prime Capital Partners

F-Prime Capital has been described as directly competing with Fidelity's public funds. A 2016 Reuters investigation identified several cases where F-Prime Capital was able to invest in companies at a much lower price than Fidelity's funds due to SEC regulations. This competition has resulted in lower returns for Fidelity fund shareholders, as the company's funds are forced to delay investing until later and at much higher prices.

F-Prime Capital has a global portfolio of over 370 companies, including more than 30 that it started from scratch. The firm has over $4.5 billion under management and invests in healthcare and technology companies, including therapeutics, medtech, and health IT & services. It has offices in Cambridge, Massachusetts; London, UK; and San Francisco, California.

F-Prime Capital's roots can be traced back to Fidelity Investments, which was founded in 1946 and grew from a single mutual fund into one of the largest asset management firms in the world. For over 40 years, F-Prime Capital (formerly known as Fidelity Biosciences in healthcare and part of Devonshire Investors in technology) has backed entrepreneurs in building groundbreaking companies in technology and life sciences.

In other geographies outside the US and Europe, F-Prime Capital's sister fund is called Eight Roads (formerly Fidelity Growth Partners), with investment teams in London, Shanghai, Beijing, Hong Kong, Tokyo, and Mumbai.

Fidelity's expansion into liquid alternatives

Fidelity Investments, an American multinational financial services corporation, has expanded its alternative investment offerings by launching a new business unit called Fidelity Diversifying Solutions. This unit offers regular investors access to hedge fund-like strategies, known as liquid alternatives, which have seen significant inflows amid rising interest rates and increased market volatility.

Liquid alternatives provide investors with an easily accessible investment structure, typically in the form of mutual funds and exchange-traded funds (ETFs), while also offering daily pricing and liquidity. These features make liquid alternatives attractive to a broader range of investors.

Fidelity's new unit has started hiring staff and rolling out offerings, with plans to introduce two new funds: Fidelity Global Macro Opportunities and Fidelity Risk Parity. These funds will employ complex investment and trading strategies, investing in both traditional and non-traditional asset classes.

The expansion into liquid alternatives is part of Fidelity's commitment to creating world-class alternative investment capabilities and developing innovative products to meet the evolving needs of its clients. The company aims to provide diversification beyond traditional asset allocation, offering potential opportunities for return enhancement, diversification, and downside protection.

Fidelity's alternative investment platform, launched in October 2013, offers a wide range of alternative investment products, including liquid alternatives, real estate investment trusts (REITs), private credit funds, private equity funds, and '40 Act mutual funds. The platform also provides research, education, and third-party due diligence for intermediary clients.

In May 2023, Fidelity continued its expansion in alternative investments with the launch of the Fidelity Multi-Strategy Credit Fund, an 18th alternatives product introduced in the past 12 months. This closed-end interval fund seeks to provide a high level of current income and capital appreciation by investing across a variety of high-income-oriented asset classes, including both liquid and illiquid securities.

Fidelity's alternative investment capabilities include private equity, private credit, real assets, liquid alternatives, and digital assets. The company is a leading provider of custodial services, offering over 5,000 alternative products to institutional, intermediary, and retail clients.

The company's cryptocurrency plans

Fidelity Investments has been an innovator in the cryptocurrency space since 2014, when it began researching Bitcoin and blockchain technology. In 2018, the company launched Fidelity Digital Assets, an institutional custody and trading platform for digital assets.

Fidelity Digital Assets provides services for Fidelity Crypto, which enables individual investors to buy and sell digital assets through the Fidelity Investments app. With as little as $1, investors can trade and secure crypto like Bitcoin and Ethereum directly through a Fidelity Crypto account.

Fidelity also offers two crypto funds—one for Bitcoin and one for Ether—allowing investors to add exposure to crypto in brokerage, trust, and IRA accounts. These funds, known as FBTC and FETH, are spot crypto ETPs, which are highly volatile and intended for investors with a high-risk tolerance.

In addition to its spot crypto ETPs, Fidelity offers two exchange-traded funds (ETFs) that provide indirect exposure to cryptocurrencies: the Fidelity® Crypto Industry and Digital Payments ETF (FDIG) and the Fidelity® Metaverse ETF (FMET). These ETFs invest in companies engaged in activities related to digital assets, digital payment processing, and the metaverse, rather than directly in cryptocurrencies.

Fidelity has also filed to launch Spot Bitcoin and Spot Ethereum exchange-traded funds (ETFs) with the U.S. Securities and Exchange Commission (SEC). The Spot Bitcoin ETF was approved and launched in January 2024.

Fidelity's focus on the cryptocurrency space is part of its broader strategy to provide alternative investment offerings and expand its range of products and services.

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