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Introduction and Overview of 40 Act Liquid Alternative Funds
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21
Build/Buy
The strategy that allows for the most control but
requires the most commitment of time and resources
by a fund manager is for a manager to develop its
own wholesale distribution team. By building and
hiring sales and marketing staff dedicated to selling
alternative mutual funds, the manager is in control
of the branding, messaging and development of its
product. It has direct access to its investors and
subsequently possesses greater understanding of
their needs and requirements. Also, by developing
these relationships directly, the manager is able
to collect the full set of fees on the fund because
it is not paying a portion of its fees to a third party
for distribution.
Building or buying a wholesale distribution team
will add to the manager’s overhead and headcount
expenses; the individuals comprising these teams will
be full-time employees. Moreover, the individuals will
be coming from a significantly different background
in many instances, and may be accustomed to
working at firms that are substantially larger than
the typical hedge fund organization. This can cause
cultural issues to surface. Finally, the number of
resources required to focus on the publically traded
fund space may be substantially larger than the
hedge fund’s traditional marketing team; the number
of channels to be covered is substantially larger in the
public domain, and the need for the sales force to be
out in the field working across these channels is quite
different from the “by appointment” nature of hedge
fund sales.
Finally, this strategy can take a longer time to fully
execute. The impact of adding individuals to focus
on the publically traded fund space may be difficult
to gauge until the team reaches a certain level of
critical mass. Even if an existing wholesale team is
acquired, integration into their new employer may
be challenging.
Third-Party Marketers
Hiring a third-party marketing (TPM) firm is a strategy
that requires less infrastructure and fewer dedicated
management company resources to distribute
alternative mutual funds. The fund manager does not
employ additional people; instead, it engages with
an existing firm with sales representatives that can
distribute multiple products from multiple firms. TPM
sales teams are registered representatives who have
existing relationships with the target retail audience
and RIA networks. This option of tapping into existing
relationships of the TPM can be attractive to the fund
manager as a way to speed their time to market and
more quickly build the assets of their fund(s).
The fee arrangement with a TPM can be a retainer fee,
a fixed percentage of assets raised or a combination
of both. The asset-based fees apply to assets raised
by the TPM, and are set either as a split of the
management fees earned or as a fixed basis point fee
on new assets raised.
A fund manager’s degree of control and access to
the TPM can be more limited in these arrangements,
as the TPM may have multiple clients and will most
likely be selling multiple products at any given time.
Getting dedicated resources and attention from the
TPM to sell your fund may prove challenging, because
the fund manager is not in direct control of the sales
team. Even if alternative mutual funds are positioned
as better risk-adjusted solutions for retail investors’
portfolios, TPMs may be more apt to promote the
best-performing funds they represent. This may
result in active product distribution being dependent
on recent performance. Also, the branding and
messaging of the fund and the asset manager are at
risk of being lost on the end investor by introducing
the TPM as an intermediary.
Mutual Fund Packagers
Another strategy is to work with a mutual fund
packager that will assist in creating, structuring and
packaging an alternative mutual fund in addition to
actively distributing the fund. These firms provide
the manager access to their existing fund structures
for an off-the-shelf solution for fund creation. As
part of this service, some of these platform providers
will help with product design and construction
while considering retail distribution needs and
requirements. This design process will likely result in
a product that is well-suited for the retail audience
soon after launch.
Along with product design and creation, these firms
also have distribution and wholesale teams that will
promote the funds on their platform. Sales teams for
these firms are knowledgeable about the benefits
to an investor’s portfolio of alternative mutual
funds, and they have established relationships with
the buyers of these funds including the RIA and
wirehouse networks.
This strategy of working with a platform provider
allows the manager to have some degree of control
regarding the development of its alternative mutual
fund product, but the ultimate responsibility for
distribution and investor relationships still resides
with the platform provider—not the manager. Some
of these platforms co-brand these funds to leverage
both their own and the hedge fund manager’s brand
and reputation.