Part Two – Launching a ’40 Act Mutual Fund: Top Five FAQs

May 22, 2018

| Fund Structure

In part 1, we reviewed the considerations for long-term success when launching a fund, not just the immediate costs to organize and operate a fund. In the next two parts, we answer the top 10 questions that are most frequently asked by advisers exploring a mutual fund launch. As with any undertaking of this magnitude, there can be lots of questions and lots of variables to consider. These two blog posts will address typical questions and provide high level answers based on an open-end mutual fund launch.

What is the timeline for creating a ’40 Act mutual fund?

The organizational timeline typically ranges 4 to 6 months, from drafting initial registration statements to receiving an effective CUSIP and Ticker. The first 30 to 45 days are spent preparing and filing offering documents and fund agreements. Once filed, the SEC review period begins. For an established trust (Series or otherwise), the SEC has a set review period of 75 days. For a new trust (Stand-Alone or otherwise), the SEC does not have a set review period; however, typically the review period lasts 75 to 90 days (unless the strategy is very esoteric). Upon completion of the SEC review period and the registration statement being deemed effective by the SEC, the last 15 to 30 days are spent finalizing the operational setup. Once operational setup is complete, the fund is effective and ready to go live at the adviser’s discretion, though access to intermediary platforms may take additional time after operational effectiveness.

What is a Series Trust?

Mutual funds are required to be overseen by an independent board of trustees who provide oversight on behalf of fund shareholders. Advisers have the option of creating their own Stand-Alone Trust or using a Series or Shared Trust.

With a Series or Shared Trust, Advisers are requesting approval for their fund to join an established trust, generally sponsored by an administrator. The Series Trust oversees multiple independent advisers’ funds. The shared structure offers economies of scale which generally result in lower creation costs and ongoing operating expenses for new fund entrants. Since a Series Trust is already established, the adviser doesn’t incur the organizational expense of creating a new trust. Additionally, the scale and shared oversight used across the group of funds lowers the costs for trustees, insurance, outside counsel, and so forth. Ultimately, the role of a Stand-Alone or Series Trust is identical and generally the decision is simply a matter of adviser preference.

Advisers electing to create a Stand-Alone Trust will go through the trust organizational process, creating a trust sponsored by the adviser that oversees the adviser’s fund(s). As part of the organizational process for a Stand-Alone trust, the adviser is responsible for selecting trustees (a majority of whom must be independent of the adviser), officers, auditor, trust counsel, custodian, service providers, and distributor. While making these selections adds additional costs and time, the additional control is often cited as a principal advantage by advisers selecting the stand-alone trust alternative.

How much does creating a ’40 Act1 mutual fund cost?

Organizational costs (drafting and filing of initial registration statements, board approvals, etc.) can range from around $35,000 to $100,000 or more, depending on several factors. The fund strategy, trust structure, service partners, legal counsel, and so on impact the creation costs. A common fund strategy (Large Cap US Equity, for example) in a Series Trust will typically start in the $35,000 to $50,000 range, while more esoteric strategies in a Stand-Alone Trust can reach or exceed $100,000. When considering the creation of a fund, it’s important to speak with fund administrators to understand the estimated costs, the administrator’s role in the drafting and/or filing of fund/trust documents, and the coordination with outside legal counsel.

In addition to the organizational costs above, investment advisers will also need to consider the due diligence fees for platform access when budgeting for a fund creation. Due diligence fees for custodial and broker-dealer platforms vary widely, from as little as a $1,000 to $50,000 plus. Therefore, budgeting will depend on which platforms the fund will be listed on initially. Again, speak with fund administrators/distributors regarding your distribution plans, as they can provide insight to help effectively budget for platform due diligence costs.

1: ‘40 Act – The Investment Company Act of 1940, as amended, established the regulations investment companies are required to follow when offering and operating pooled investment funds. The Securities and Exchange Commission (SEC) oversees and regulates the requirements.

What is the typical breakeven for a mutual fund?

Most investment advisers voluntarily or contractually help a fund control its expenses by setting an expense limitation and/or waiving investment advisory fees. A good rule of thumb (assuming a competitive expense limitation) for fund breakeven (defined as: the fund covers all of its own operating expenses, except for advisory fees) is around $15 million to $20 million in AUM. The fund’s ability to cover operating expenses (ex-advisory fees) is an important first step toward fiscal solvency for the investment manager, but just the start towards reaching full fee breakeven (fund covers operating expenses and advisory fee within expense limitation) and eventually bottom-line profits. The amount of the advisory fee collected will begin and continue to increase as the fund assets grow beyond the fund operating expense breakeven ($15m to $20m approximately), eventually reaching the full investment advisory fee. Of course, breakeven can vary based on the fund’s set expense limitation/cap, strategy (trading volume, holdings), service fees, etc. The lower the expense limitation, the higher the breakeven and vice versa.

How much in seed assets are required to launch a fund?

If the fund is in a newly established trust, investment advisers are required to make at least a $100,000 seed investment, which is subject to an audit by the fund’s independent auditors. In an established trust there is no required fund seed amount. Obviously, the closer assets get to the fund breakeven or above, the better. Additionally, the asset level can have an impact on the adviser’s ability to effectively begin trading the portfolio. Once the fund goes live and begins striking a Net Asset Value (NAV), operating costs start accruing. If the fund assets are not sufficient to cover the operating costs within the expense cap, the payment responsibility falls to the adviser (through waiver of management fee and/or reimbursement to the fund).

In our next blog post, we’ll cover the next frequently asked questions dealing with compliance and regulatory issues.

Part 3 – Launching a Mutual Fund: Compliance and Regulatory

  1. What are the general limitations in a ’40 Act mutual fund?
  2. Can a performance fee be charged by the adviser?
  3. What is a fulcrum fee and how does it work?
  4. Can the track record from Separately Managed Accounts (SMAs) be used to market the fund?
  5. Can a hedge fund be converted into a mutual fund?

Institutional Strength | Boutique Service

The Ultimus Group, LLC is an Equal Opportunity Employer. All rights reserved.

DISCLOSURE: Information contained on this website is based on public data, historical agreements and dialogue with intermediaries. Such information represents our current understanding of the described platforms and the costs associated with them. In many cases, such costs may be negotiable. All pricing and fee information is subject to change without notice.

Ultimus Fund Solution

8778 UFS 2/18/2022

Ultimus Fund Solution