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Introduction and Overview of 40 Act Liquid Alternative Funds
Several firms are known for offering traditional
ETFs, including Barclays Global Investors, which
was subsequently acquired by BlackRock in 2009;
State Street Global Advisors and Vanguard. These
firms have all dominated the ETF marketplace since
2000, but there is now a newer set of entrants
launching these alternative ETFs and pursuing more
hedge fund-like strategies. These firms include PIMCO
and Nuveen.
Continuously Offered Interval or
Tender Offer Funds
Continuously offered interval funds, or tender offer,
are typically open monthly for subscriptions and
offered to accredited investors (with at least $2
million in net worth). They can be distributed either
directly by the fund manager or through the broker-
dealer networks. Unlike the alternative ETF, where
trading occurs only in the secondary market, these
funds allow investors to withdraw their capital.
Redemptions are structured as tender offers and are
conducted at the discretion of the board of directors
for the corporation or unit trust. Tenders are typically
done quarterly to give investors an opportunity to
exit the fund; therefore, liquidity of the fund is usually
defined as quarterly.
The most common example we have seen come
to market is an interval fund, which invests in
nonaffiliated funds (i.e., invests into external hedge
funds). In this model, the IA manages the CEF like
a fund-of-fund investor, allocating capital directly
to managers’ existing commingled underlying
funds. These underlying funds do not need to be
registered investment companies and are either LP
or LTD structures.
The CEF charges a fixed management fee that can be
shared between the IM, IA and distributor. Although
these CEFs do not charge a performance fee, the
structure allow for a performance fee to be paid
to the underlying hedge fund manager so the 2/20
fee structure can remain intact which can provide
exposure to top-tier managers. All fees need to be
fully disclosed in the prospectus of the CEF.
Minimum investments are typically $50,000 for a
single share of the CEF, which is listed as a security
with the SEC. Profits from these funds are paid out
to shareholders annually because IRS requirements
Chart 5: Closed-End Continuously Offered ’40 Act Fund of Hedge Funds
Chart 5
Closed-End Continuously Offered ‘40 Act Fund of Hedge Funds
Closed-End Continuously Offered Fund -
Registered Investment Company
Security Listed on Public Exchanges
Key Service
Providers
Independent Board
of Directors
Aggregated Pool of Capital
Distribution Agents
Key Service
Providers
MF
Administrator
Sponsor
Custodian
Investor
Services
Hedge Fund #1
Co-Mingled
Vehicle or
Fund of One
Hedge Fund #2
Co-Mingled
Vehicle or
Fund of One
Hedge Fund #3
Co-Mingled
Vehicle or
Fund of One
LP
Investment P&L
Net of Fees
LP
Investment P&L
Net of Fees
LP
Investment P&L
Net of Fees
Key Service
Providers
Executing
Brokers
Prime
Brokers
HF
Administrators
Investment Manager