Investors want quicker access to their investment, and hedge fund managers want in on the USD$15 Trillion mutual fund market. Data from Preqin finds 22 percent of fund managers say they offer alternative mutual funds to their clients, and 11 percent plan to introduce them to their product line-up in the next year.
Most of us understand the growing appeal of instant access to investors, particularly after the recession. What’s more is we’re seeing retail and institutional investors seeking increased exposure to alternatives. All of this has amounted to a surge of investor interest in liquid alternatives. In July 2014, Preqin found that 35 percent of investors currently have an allocation to liquid alts (including UCITS-compliant hedge funds), with another 16 percent willing to consider these funds in the future.
For you, the hedge fund managers, it would seem like an easy decision to start attracting capital in the mutual fund space. However, going the ‘40 Act route means hedge funds need to subscribe to a whole new host of regulations on top of the basics like Form PF and Dodd-Frank. You’ll be required to report daily NAV and portfolio performance, and maintain 85 percent of portfolios as liquid assets. For most hedge fund managers, these rules and requirements will be brand new.
They might feel a little daunting, but as much as it creates a burden on our end, investors really appreciate the increased transparency and regulation that applies to ’40 act structures. So when creating a ‘40 Act fund, remember this:
- You’ll be required to work with a range of partners: a dedicated custodian, a fund administrator, an independent board of directors, a prime broker, an independent transfer agent, an investor services provider, and possibly more.
- Every single party needs to be compliant with ’40 Act restrictions and the usual regulations affecting hedge funds.
Compliance is probably posing the greatest challenge to introducing liquid alternative structures, but fortunately hedge funds don’t need to navigate it alone. Partnering with a third-party technology provider can help managers run a regulated vehicle and stay within compliance guidelines. To learn more about solutions for simplifying compliance for liquid alternatives, check out this Hedgeweek US Fund Services 2014 Report.
Martin Sreba has been with Advent since 2000, holding a variety of senior roles in product services and sales. Currently he is a Principal in the Global Accounts Sales Organization.