Key Considerations for Liquid Alt Funds in Choosing a Series Trust
Alternative mutual funds, or liquid alternatives as they’ve have come to be known as, are no longer an investment afterthought. They are gaining significant traction with investors and are becoming a much more common vehicle for alternative managers looking to expand their reach into the retail space. In fact, according to Citigroup, assets in liquid alternative funds have surged from $95 billion in 2008 to over $300 billion last year. And there are no signs of a slowdown, as Citi estimates that number will swell to $1 trillion, or nearly one-third the size of the hedge fund industry, by 2017.
In fact, according to Citigroup, assets in liquid alternative funds have surged from $95 billion in 2008 to over $300 billion last year. And there are no signs of a slowdown, as Citi estimates that number will swell to $1 trillion, or nearly one-third the size of the hedge fund industry, by 2017.
While some managers entering the space set up their funds as standalone trusts, many are utilizing series trust offerings to reduce administrative burdens, operational costs and ultimately time to market. But as more managers enter the space, more and more series trusts are popping up as service providers look to get to get their share of the assets in the growing liquid alts land grab.
It’s important for managers to understand that not all series trusts are created equal. There is a huge disparity when it comes to experience, assets, costs and technology, to name only a few factors. So how does a manager entering the liquid alts space evaluate and choose the right series trust in this cluttered and often confusing market? Unfortunately, without the tools to make an informed decision, many managers default to the lowest common denominator – cost.
And while cost should be one factor to consider, it’s certainly shouldn’t be the only one, or the most important one for that matter. Managers that are penny wise and fund foolish will almost certainly experience operational, compliance or other issues that will make it harder to succeed. To help managers entering the liquid alts space, below are a set of tips and considerations for choosing the right series trust to increase the chances for the long-term success.
It Starts with a Quality Service Provider
A service provider carries the brunt of the operational load when it comes to a series trust– from fund accounting and administration to compliance and technology capabilities and reporting systems. Given their prominence, due diligence on the experience and resources of a service provider is one of the most critical steps in the process. A manager has to ask the right questions to make sure they get the right partner for their needs. Some key questions include:
How much, if any, experience does the provider have in the liquid alts soace? Do they service these type of strategies in their client base outside of a series trust?
Do they really understand my investment objectives?
Do they have the right systems in place to deal with the unique accounting issues that liquid alts creat, including multiple pricing vendors and sources?
Do they have the ability to integrate with custodians, prime brokers and accounting sources or to execute tri-party agreements?
Can they handle the financial reporting requirements and disclosures associated with complex strategies?
Do they have an understanding of the current compliance landscape and the resources to carry out a strategy?
Can they handle the volume and the diversity of investment vehicles that some liquid alts strategies require?
Do they have the ability to scal with me as my fund’s assets grow or if I want to start additional funds down the road?
When it comes to judging a service provider, knowledge is power and the answers to these questions will go a long way in the decision process. If a service provider isn’t skilled
Remember that Counsel, Auditors and Custodians Count too
Liquid alts are complex strategies and the professionals that support them must have the expertise to add value and put a manager in the best position to succeed – legal counsel, auditors and custodians are no different.
Legal counsel must be well versed in the area, so when they draft the registration statement, they know exactly what’s needed in terms of disclosures, investment objective, strategy and risks. A poorly crafted perspective can be a real barrier to success. Strong experienced counsel can create a perspective that provides an adviser maximum flexibility to implement the strategy the way they want to and need to.
Auditing a liquid alt fund is a specialized skill as well. Auditors must have experience and knowledge in financial reporting, disclosures, and financial statements to ensure they are compliant. Be very cautious of smaller service providers using auditors with little direct experience in the liquid alts space.
Much like counsel and auditors, custodians must have direct liquid alts experience to minimize risk and safely and effectively execute transactions.
The Board Better Be a Good Fit
Most alternative managers aren’t used to reporting to a board at all, so the fit, qualifications and knowledge of a series trust board is extremely important. A board’s role is to do things that are in the best interest of the investors but that also means they must have the depth and breadth of experience to fully understand a manager’s strategy so they can fill that role properly.
Take a hard look at the qualifications of the board as a whole and those of the individual trustees. Do they have knowledge of complex transactions? Can they identify risks? Do they even have the capacity to govern the amount of funds and assets in their series trust? Some series trusts have gotten so large that’s it unreasonable to expect the board to be able to fill that role effectively. These are important questions because a board serves a critical and strategic function in the success of a series trust and the funds inside it.
Don’t Take Distribution for Granted
Distribution is no longer a relationship exercise, it’s a strategic endeavor. Don’t accept distribution promises; do your due diligence. Talk to advisers currently in the trust. Get their perspective. Make sure the distribution team has the knowledge and experience to help position, design and price the fund. Do they know the right share class? Do they have an understanding of the ever-increasing peer group a fund is competing in to get the desired distribution? The answer better be yes because without assets a fund won’t be around for very long.
The Payoff
When you look at the due diligence it requires in so many areas, choosing a series trust can seem like an overwhelming task. Hopefully the tips and questions above can help simplify the process and serve as a guide for alternative managers making the leap into the retail space. Because choosing the right series trust is a step in the right direction to a long and prosperous liquid alts business.
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