Basic HTML Version
Introduction and Overview of 40 Act Liquid Alternative Funds
|
7
Chart 1 below provides an overview of the single-fund
mutual fund structure and the key relationships and
service providers required.
Due to the daily liquidity requirement, the most
common alternative strategies being implemented
in these single-manager mutual funds are equity
long/short, equity market neutral and global macro.
These strategies trade in highly liquid securities
such as equities and listed derivatives. In order to
meet the liquidity and leverage requirements of the
’40 Act open-end funds, some hedge fund managers
exploring these structures are refining the execution
of their investment strategies to comply with the
mutual fund trading limitations.
The most common way of achieving this aim is to
carve out the most liquid subset of trading signals
used in the manager’s private fund offering and
create a mutual fund wrapper around this set of trade
ideas. As a result, these simplified trading strategies
offer a different risk-return profile when compared
with the hedge fund manager’s private fund product.
Articulating the difference in trading style between
publically offered and privately offered funds helps
the manager justify the divergent fee schedules and
limit the potential of investors wanting to leave a
higher fee product in favor of a lower fee offering.
The management fee for the mutual fund can be
shared between the IM and the IA depending on their
arrangement and functions.
A good example of the single-manager alternative
mutual funds is the PIMCO Long/Short Equity
Fund (PMHAX), which was formed by PIMCO after
acquiring hedge fund manager Catamount Capital
Management in Q2 2012. They were able to convert
Catamount’s private fund into a mutual fund because
it was determined that the historical performance
was generated by the fund, which used strategies
and leverage that was compliant with the ’40 Act
regulations. PIMCO now acts as both the IM and the
IA to the fund. If a private fund can be converted into
a mutual fund, it can maintain the track record of the
hedge fund. If that track record is 3 years or longer,
the IM can potentially have its fund more readily
recognized on the mutual fund ratings sites such as
Morningstar and Lipper, which can increase attention
and interest in the product.
In the sub-adviser version of the single manager
product, the IM is either affiliated or distinct from the
IA and provides operations and oversight functions
for the fund. The IM in this model is often also the
primary distributor for the fund, offering either their
own distribution network and/or ensuring that the
fund is available via broker-dealers, wire-houses,
mutual fund supermarkets and platforms as well as
Chart 1: Basic Open-End Mutual Fund Structure
Chart 1
Basic Open-End Mutual Fund Structure
Mutual Fund -
Registered Investment Company
Security Listed on Public Exchanges
Key Service
Providers
Independent Board
of Directors
Investment Manager
& Adviser
Single Pool of Assets
Investment Adviser
Distribution Agents
Key Service
Providers
MF
Administrator
Sponsor
Executing
Brokers
Prime
Brokers
Custodian
Investor
Services
Trading & Financing Counterparties