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Introduction and Overview of 40 Act Liquid Alternative Funds
directly to the RIA networks. The IA acts as a sub-
adviser to the fund and is responsible for making and
executing all trading decisions. Depending on their
arrangement and roles, the IM and ISA will typically
split the mutual fund’s management fee.
A good example of a single-manager alternative
mutual fund with an affiliated sub-adviser is the
Mainstay Marketfield Fund (MFADX), which is owned
by New York Life as the IM and is sub-advised by
Marketfield Asset Management as the IA. New York
Life is also the primary distributor for the fund. The
fund has a broad mandate classified as Equity Long/
Short by Morningstar and Lipper.
Multi-Alternative Mutual Funds
The second alternative mutual fund structure is a
newer offering called the multi-alternative, or ‘multi-
alt’. This structure combines different sleeves of
hedge fund strategies managed by different IAs
into a single investment portfolio that is offered to
the public. In many ways, the structure is similar to
a traditional fund of fund offering in the hedge fund
space. Rather than the IM making an investment
into the IA’s LP, however, the IM can set up a
series of separately managed accounts managed
independently by each IA.
Multi-alt funds engage with multiple sub-advisers
who all need to be compliant with ’40 Act operational
and compliance standards, but do not need to be
registered investment companies themselves. These
funds offer a diversified return stream by allowing
investors access to multiple strategies within a single-
fund product. The fund must observe and fulfill the
short selling requirements, leverage constraints, and
liquidity parameters of the open-end fund structure.
This structure is illustrated in Chart 2 below.
There are two models for how the multi-alt is
administered by the IM. In the first, which is also
the most common approach, each sub-adviser to the
fund must individually subscribe to the trading
restrictions laid out for ’40 Act structures. This
ensures that when the portfolio rolls up to the
aggregate level, it will always be in compliance with
the required liquidity and leverage guidelines. The
second model is one in which some of the sleeves of
the multi-alt may be more illiquid, and other sleeves
may be highly liquid and potentially even long-only.
In this model, the IM is responsible for ensuring that
Chart 2: Open-End Multi-Alternative Mutual Fund Structure
Chart 2
Open-End Multi-Alternative Mutual Fund Structure
Mutual Fund -
Registered Investment Company
Security Listed on Public Exchanges
Key Service
Providers
Independent Board
of Directors
Aggregated Pool of Assets
(No Look-Through to Underlying Accounts)
Distribution Agents
Key Service
Providers
MF
Administrator
Sponsor
Custodian
Investor
Services
Investment Manager
Sleeve 1
Hedge Fund
Manager
Sub-Advising
Sleeve 1
Hedge Fund
Manager
Sub-Advising
Sleeve 2
Hedge Fund
Manager
Sub-Advising
Sleeve 3
Sleeve 2
Sleeve 3
Trading & Financing
Counterparties
Executing
Brokers
Separate
Accounts
Prime
Brokers