Anybody have any experience doing this? We run about $400 m in separately managed accounts now, about half institutional, half private client. The institutional money has dried up for small cap domestic value guys like us, so we are kicking around the idea of marketing a mutual fund. I know b/e is going to be around $25 million, but I would love to hear your experience of success or failure in this arena. We are willing to put the money toward it now if there is a payoff. I realize it is all about selling, but how did you go about it, did you do it yourself, hire a third party etc. Thanks all.
Setting up a 40 Act fund is a pain in the ass. It’s costly to set up and then once you do you have to do things like daily accounting and other mundane crap. Not to mention distribution. That said, there aren’t a lot of small value funds out there. The good ones close almost as soon as they open. If you’re any good at it, you wouldn’t have any trouble gathering assets.
Thanks, STL. We have plenty of capacity in the back office, so I am not too worried about the compliance headache. We would likely go the series trust route to keep costs to a minimum. What I am worried about is gathering assets. Our SMA performance is quite good, especially risk adjusted, so I am hoping there is a market out there for it. I am willing to do the roadshow, the phone calls, etc., but I need a receptive audience.
Why not start a hedge fund instead?
ManMythLegend Wrote: ------------------------------------------------------- > Why not start a hedge fund instead? Good question, maybe you should tell me why we should go that route. But my initial thought based on my prelim research is that the buyers of our product would likely be wealth managers, RIA-types who want daily pricing and liquidity.
Why can’t you provide that with a HF on a managed account platform?
goes to eleven Wrote: ------------------------------------------------------- > ManMythLegend Wrote: > -------------------------------------------------- > ----- > > Why not start a hedge fund instead? > > Good question, maybe you should tell me why we > should go that route. But my initial thought > based on my prelim research is that the buyers of > our product would likely be wealth managers, > RIA-types who want daily pricing and liquidity. HF’s will undergo a lot less regulatory scrutiny and you’re pretty much king of your domain. You set the rules pretty much as long as you’re being honest with your shareholders. If you’re trading small cap domestic equities, I don’t see any reason why you can’t provide daily pricing and liquidity to your hedge fund investors. Maybe if you do it, you will start a trend within the HF industry that will make it a healthier place to park capital. Just a thought.
Mutual Fund: Pro: ability to raise massive amts of capital from any investor. Easier to work with brokers and RIAs Con: 40 Act Rgistrtion reqs to setup and run are ridiculous, slanted toward lrg established asset mgrs Comp regs mean no asymmetric incentives (eg profit % without risk on downside) Hedge Fund: Pros: your rules, your choice on comp Con: Marketing & Distribution is difficult if relying on 3rd parties or $$$$. Reqs for checking Accred or Quality status, avoiding anything resembling open solicitation (the rules around this are ludicrous), govt is starting o regulate and may lose advantages
If you guys are running a pretty decent SCV SMA then you guys shouldn’t have much of a problem raising assets from the MF/40 act side of things. Decent SCV funds that are open to new investments are a rare breed in the current marketplace. A majority of the long tenured funds that have $7-10 billion AUM are closed to new investors for obvious reasons. It may take a little while before you get some decent flow into the fund, but you should look towards the various DC (401k/defined contribution) platforms and channels. As others have said, the daily accounting and reconciliation will get rather expensive, but there’s a massive amount of money at play. Another route your firm could consider is assuming a sub-advisory role for a shop looking to launch a branded SCV product. Your firm manages the assets and in-return they provide the distribution function. One issue you will likely run into is that most platforms may require an incubation period before the fund goes live so it could be some time before the fund reaches the investing public.
These structures are things I don’t really know much about; you guys seem to be very knowledgeable about it. Can you recommend books, articles, and/or other stuff I can read to get up to speed on this kind of stuff? I’m seeing it’s becoming more important in stuff that I do.
^ Same here. I thought most HF set up in Caymans with a Master Trust offshore / onshore structure but I only read that in the Anson book - Handbook for Alternative Investments. Otherwise I hardly have a clue and leave it to the structuring teams.
Thanks for all the insight. I am in beginning stages of exploration, so the help is appreciated. I don’t even really know where to start with the hedge fund idea, but I think I will have a conversation with one of the fund servicing firms I talked with who (I think) also offers hedge fund establishment.
Just to add to the distribution part… With a 40 Act fund, you really only need to worry about setting it up with Schwab and Fidelity to start. That way you can work with the RIAs. From there you’ll have to work with the home offices of whatever BDs you want to reach out to. Some, like the wirehouses, are very difficult to gain access to their platforms. Others, like Ameriprise, are extremely easy. The good news is, once you’ve set them up you don’t have to do much to maintain them. Going the HF route I’m not as familiar with, but I do believe you can only sell to qualified investors. That’ll hamstring you pretty quick unless you have a few institutional investors in mind. Do you have a composite track record that’s GIPS compliant? That’ll help selling a new fund until you get a track record on Morningstar.
High conviction small cap value managers that are open can be difficult to find. So, if you’ve got those qualifications and a good track record via your SMAs I’d say you’re in decent shape. Looking for a sub-advisory role is a good thought, I know we’ve sometimes had difficulty finding managers that meet that profile for our multi-mgr funds.
I think we are okay on the performance numbers. Our GIPS compliant composite beats the Russell 2000V for 1, 3, 5, 10 and since inception with a 5 year Std Dev of 17.8 vs 23.0 on the R 2000V. One thing I will have to research is to what extent we can use our composite numbers while marketing a mutual fund with the same process, investment team, etc. Obviously cant attach it directly, but in a one-on-one conversation I suppose I could use our SMA pitch book to point to our historical SMA performance, right?
I should know this for sure, but I’m nearly positive you can use composite performance data for the first 12 months of the new funds launch.
I think you are fine to use your composite performance for marketing the mutual fund. That is really the whole purpose, to show how the strategy has performed, regardless of what vehicle was used.
As long as the strategy is managed the same way, why wouldn’t you be able to join the sequences? Obviously if the previous sequence wasn’t GIPS compliant, or was simulated, then that would be a problem, but I’m assuming that those aren’t the cases. Or is it that the previous firm was not GIPS compliant?
We have always been GIPS compliant, but I find it hard to believe (although I would love to find out) that we can use our SMA performance and “attach” it to a new mutual fund. I would assume when I see performance numbers for a fund, it is for the fund itself, not the manager’s old composite numbers. What am I missing? I would LOVE to be able to have fund marketing materials with our composite performance enclosed.