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Introduction and Overview of 40 Act Liquid Alternative Funds
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mandate that 90% of profit, net of all fees, be
paid out to the investors in the fund. Unlike a
traditional hedge fund investment, investors into these
continuously offered funds do not receive a K-1 for
tax reporting; instead, they receive a 1099, similar to
open-end mutual fund products and alternative ETFs.
Examples of these interval funds include the Blackstone
Alternative Alpha Fund and the Private Advisors
Alternative Strategies Fund, both of which were
launched in 2012. The Blackstone fund is distributed
directly through its broker-dealer and the Private
Advisors fund is distributed by New York Life, which
also acts as the IM overseeing the fund’s operations.
Business Development Companies
The final category of CEF that has emerged as
a publically available alternative strategy is the
business development company (BDC). The BDC is
essentially a public private equity fund that is treated
as an RIC for tax purposes and which qualifies as an
emerging growth company for benefits under the
Jumpstart Our Business Startups Act (JOBS Act).
The BDC raises capital in an IPO and then invests the
capital in the stated investment strategy typically
investing in small, upcoming businesses. The BDC
is listed and trades on the stock exchange and, like
the alternative ETF, this type of fund is considered
a permanent capital vehicle. There is no direct
ability to redeem capital from the fund. The fund
pays out >90% of its net income to the investors
on either a quarterly or annual basis, as defined in
the prospectus.
By offering the BDC as a fund on the public market,
the investment adviser can quickly raise substantial
capital for the strategy and expand its potential
audience beyond the traditional private fund high
net worth and institutional audience. The investment
adviser can also include a performance fee in the
terms of the fund, typically over a defined hurdle
return for the shareholders, and therefore earn an
income stream similar to that of a privately offered
PE or real estate fund. The BDC model is illustrated
in Chart 6.
Good examples of BDCs include Apollo Investment
Corporation (offering retail exposure to secured loans,
subordinated debt and CLOs) and BlackRock Kelso
Capital Corporation, which has a similar investment
portfolio. These funds are providing financing to
middle market companies and stepping into the
traditional role of the investment and commercial
banks, which have a lower appetite for riskier lending
since the Global Financial Crisis.
Chart 6: Business Development Corporation
Chart 6
Business Development Corporation
Business Development Company -
Registered
Investment Company - Emerging Growth Company
Security Listed on Public Exchanges
Key Service
Providers
Independent Board
of Directors
Investment Manager
Aggregated Pool of Public Capital
Distribution Agents
Key Service
Providers
Administration
Issuer via IPO
Primary Market
Capital Raise
Custodian
Investor
Services
Middle Market
Companies
Middle Market
Companies
Debt
Financing Yield
on Debt
Debt
Financing Yield
on Debt
Debt
Financing Yield
on Debt
Middle Market
Companies