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Introduction and Overview of 40 Act Liquid Alternative Funds
Sign with a Fund Sponsor
The fourth strategy we want to discuss is the ability
to connect with a fund sponsor that will promote
funds to its large distribution networks under its
brand umbrella. These fund sponsors typically
promote established funds that have critical size and
track records to their investor network. Because of
their market brand and vast relationships with RIA
networks distributing funds on their platform, fund
sponsors can prove to be instrumental in raising
significant assets for mutual funds.
For many fund sponsors to consider placing a fund on
their platform, the mutual fund should have at least
$200 million in assets in addition to the manager
having significant assets under management in
the same or similar strategy. This asset threshold
is a validation test of sorts for the fund sponsor
to justify offering the fund to their advisers. Also,
these platforms typically work solely with funds
that have an established track record that can help
to provide the advisers with information on how the
fund has responded to market conditions, even if only
recent performance.
To get access to a fund sponsor’s distribution network,
the mutual fund may have additional fund fees, such
as a platform fee, trailer fees and marketing fees
(depending on the share class). These fees are paid
directly from the fund to the fund sponsor. In addition,
the fund manager may need to pay the sponsor a
listing fee for accessing its clients. If agreed to with
the fund sponsor, the fund manager may also provide
the sponsor with a portion of the fund’s management
fee. This fee-sharing arrangement can be up to 50%
of the management fee paid by the manager to
the sponsor.
If the fund has the requisite assets and track record,
by agreeing to the fee arrangements with a fund
sponsor the manager’s marketing strategy can be
designed and executed while not committing to
hire in-house wholesale marketing resources. The
manager should, however, have resources to account
for the continual updating and educating of the fund
sponsors’ financial advisers and investors.
Fund sponsor platforms are designed to be a full-
service offering to their investor networks, so they
need to have a full range of funds across assets
classes, exposures and strategies. Connecting with a
fund sponsor and providing its network of investors
with a product that they do not currently offer,
would likely prove valuable to raising assets for an
alternative mutual fund manager. The burden of
educating the sponsor’s distribution agents on the
attributes and benefits of the fund resides with the
fund manager, which may entail regular contact and
interaction with the sponsor’s RIA networks.
Citi Prime Finance has developed a full set of resources
that we can introduce across each of these models via
our Capital Introductions & Business Advisory teams.
Please contact us at prime.advisory@citi.com if you
are interested in learning more about specific firms or
if you are interested in accessing eligible individuals.
Conclusion
As illustrated throughout this guide, there are many
areas that hedge fund managers must consider
when thinking about expanding their product range
into the ’40 Act publically offered fund space. Such
considerations include a broad set of products and
specific restrictions on the types of investment
techniques that can be used in each portfolio, new
types of regulatory reports, compliance procedures
and service providers, an entire range of share
classes, a very different and resource-intensive
distribution model and significant changes in the way
they market their funds.
While this may seem daunting at first, the United
States market for publically traded funds may be
one of the largest remaining untapped pools of
assets available for hedge fund managers to consider
globally. In particular, retail investors in this market
that have less than $5.0 million in net worth, and
the wealth advisers that often have discretion over
their accounts, have not had access to privately
offered hedge fund strategies in the past. They see
substantial potential in diversifying their portfolios to
include funds that use hedge fund like techniques to
create resiliency and stability in their portfolios, just
as the institutional audience realized in the past.
Even many of the high net worth investors that do
qualify for investment into privately traded hedge
fund products may end up being interested in adding
publically traded alternative ’40 Act funds into
their portfolios because of the 1099 versus K-1 tax
treatment on such funds.
Citi Prime Finance stands ready to assist our clients in
thinking through their approach to this marketplace
and determining the right path for them going
forward. Please contact us for additional information.
http://www.citibank.com/icg/global_markets/prime_
finance/business_advisory.jsp