Okay, so launching your own investment vehicle in an environment such as this might seem a bit ...daunting (to say the least). But there are solid economic and customer service reasons for doing so. And it's not as hard as you think. Andrew Rogers, president of Gemini Fund Services, a provider of pooled investments for independent advisors, fills us in.
Why would an advisor want to launch their own investment vehicle?
As an advisor, your goal is to provide investment solutions to your clients that meet their needs. Once you've acquired a large number of clients, it becomes increasingly difficult to service them while continuing to raise new assets. And, in a separate accounts environment, it can be very difficult to run a complex investment strategy. Creating your own investment vehicle can solve these issues that come with growth.
Additionally, many financial advisors face the challenge of handling smaller accounts, such as those belonging to children of a client or so-called orphaned retirement accounts. For an advisor with a client account minimum of $500,000 or more, having to service a $50,000 account can add up to more work than it's worth.
Some advisors also look to launch their own funds to increase the reach of their investment strategy. If you have your own fund, you can sell your fund to other investment advisors, obtain broker/dealer agreements or become part of a variable insurance trust, thus expanding your client base.
What are the keys to advisors successfully bringing their own investment vehicles to market?
We believe there are four keys to a fund's success: operational efficiency, economies of scale, regulatory compliance and board oversight and fund sales. Without each of these bases covered, it's very difficult to successfully launch your own fund.
Why are economies of scale so important for a fund's success?
If a fund can obtain some economies of scale, it may reduce fund operating expenses, thereby improving the total return to the shareholder.
Most small- to medium-sized fund families have a very limited number of portfolios. At that level, all services provided by auditors, fund counsel, trustees and custodian banks, blue sky filings, etc. and their related fees, are all negotiated on a one-off basis. One way to combat these expenses involves combining separate funds in a shared trust. Once in the trust, the administrator can negotiate economies of scale that could not be achieved on an individual fund basis.
Are there any types of hedge fund strategies that work best, or least, in the retail space?
There are numerous hedge fund strategies and alternative asset classes that will work in a mutual fund. These include tactical asset allocation, managed futures, long/short equity, market-neutral, arbitrage, absolute-return, real estate, quantitative and strategic asset funds.
But, there are also certain strategies that face limitations in the retail space. For instance, mutual funds have restrictions on the amount of leverage they can use. Similar restrictions apply to the amount of commodities a manager can use, because commodities generally don't qualify as passive income for a mutual fund. In addition, regulations require mutual funds to have daily liquidity, so illiquid assets are limited to 15%. This can put a damper on strategies investing in, say, distressed and high-yield bonds.
This is why, usually, managers need to devise specialized investment strategies and structures in order to convert a hedge fund into a mutual fund. To come up with the right solution, working with an experienced administrator and outside counsel is important.
What do you see as the major trends in the fund and advisor world in 2010?
We are seeing a trend toward greater transparency and specialization. This is leading more advisors, for instance, to consider launching an alternative mutual fund. Out of several thousand U.S. mutual funds, under 100 fall into the "alternative" category. There is tremendous growth potential here, and as investors look to create more diversified portfolios, we believe the number of alternative funds will only grow.
In addition, the sense of scrutiny on financial services is leading more advisors and investors to seek greater transparency from the products they buy and sell. This means, for instance, that more hedge funds might consider providing daily valuations instead of only monthly reports.
Why would an advisor want to launch their own investment vehicle?
As an advisor, your goal is to provide investment solutions to your clients that meet their needs. Once you've acquired a large number of clients, it becomes increasingly difficult to service them while continuing to raise new assets. And, in a separate accounts environment, it can be very difficult to run a complex investment strategy. Creating your own investment vehicle can solve these issues that come with growth.
Additionally, many financial advisors face the challenge of handling smaller accounts, such as those belonging to children of a client or so-called orphaned retirement accounts. For an advisor with a client account minimum of $500,000 or more, having to service a $50,000 account can add up to more work than it's worth.
Some advisors also look to launch their own funds to increase the reach of their investment strategy. If you have your own fund, you can sell your fund to other investment advisors, obtain broker/dealer agreements or become part of a variable insurance trust, thus expanding your client base.
What are the keys to advisors successfully bringing their own investment vehicles to market?
We believe there are four keys to a fund's success: operational efficiency, economies of scale, regulatory compliance and board oversight and fund sales. Without each of these bases covered, it's very difficult to successfully launch your own fund.
Why are economies of scale so important for a fund's success?
If a fund can obtain some economies of scale, it may reduce fund operating expenses, thereby improving the total return to the shareholder.
Most small- to medium-sized fund families have a very limited number of portfolios. At that level, all services provided by auditors, fund counsel, trustees and custodian banks, blue sky filings, etc. and their related fees, are all negotiated on a one-off basis. One way to combat these expenses involves combining separate funds in a shared trust. Once in the trust, the administrator can negotiate economies of scale that could not be achieved on an individual fund basis.
Are there any types of hedge fund strategies that work best, or least, in the retail space?
There are numerous hedge fund strategies and alternative asset classes that will work in a mutual fund. These include tactical asset allocation, managed futures, long/short equity, market-neutral, arbitrage, absolute-return, real estate, quantitative and strategic asset funds.
But, there are also certain strategies that face limitations in the retail space. For instance, mutual funds have restrictions on the amount of leverage they can use. Similar restrictions apply to the amount of commodities a manager can use, because commodities generally don't qualify as passive income for a mutual fund. In addition, regulations require mutual funds to have daily liquidity, so illiquid assets are limited to 15%. This can put a damper on strategies investing in, say, distressed and high-yield bonds.
This is why, usually, managers need to devise specialized investment strategies and structures in order to convert a hedge fund into a mutual fund. To come up with the right solution, working with an experienced administrator and outside counsel is important.
What do you see as the major trends in the fund and advisor world in 2010?
We are seeing a trend toward greater transparency and specialization. This is leading more advisors, for instance, to consider launching an alternative mutual fund. Out of several thousand U.S. mutual funds, under 100 fall into the "alternative" category. There is tremendous growth potential here, and as investors look to create more diversified portfolios, we believe the number of alternative funds will only grow.
In addition, the sense of scrutiny on financial services is leading more advisors and investors to seek greater transparency from the products they buy and sell. This means, for instance, that more hedge funds might consider providing daily valuations instead of only monthly reports.
