Imagine yourself as a new investment manager. Being new to the investing world, you begin with limited capital and decide to start a hedge fund since they are less expensive to launch than a registered ‘40 Act mutual fund. Your hedge fund does well, but raising capital is difficult. First, you have to find high net worth individuals who are willing to put their trust and hard earned money in you, not only in the form of an investment, but in potential 2 and 20 fees as well. Furthermore, these investors are usually limited to a certain percentage of illiquid investments in their portfolios. Since the hedge fund has monthly valuations, it is considered illiquid, which limits its distribution to these high net-worth investors.
So, what should investment managers with hedge funds do? Find a partner with capital that can assist in converting your hedge fund into a mutual fund! Not only can the right partner provide capital, but they can also share knowledge and expertise with policies and procedures to help guide you along in the registration process.
Registered ‘40 Act mutual funds offer a larger distribution base with fewer barriers of entry for the average shareholder. By converting to a mutual fund, the hedge fund manager can bring over their track record from the hedge fund and begin to attract new investors. The distribution channels available for mutual funds allow them to reach a greater number of people.
A mutual fund can offer a low or even no-minimum investment, daily liquidity, and increased transparency into the funds’ investments. Those investors who have a limit on their illiquid holdings can now invest in the mutual fund because of its daily liquidity. As Jacob Pacini, Co-Founder and Chief Investment Officer for Pacini Hatfield Investments, said when he launched his hedge fund, “I couldn’t be in my own fund because the barriers were too high.” He recently partnered with Day Hagan Asset Management to make the switch from a hedge fund to mutual fund. Now more of his friends and family can participate in his investment strategy in the mutual fund!
So, why convert to a mutual fund from a hedge fund? It offers a much larger audience with more distribution options, daily liquidity, transparency, stronger regulations to protect investors, and fewer barriers to entry for the shareholders among other benefits.