Launch a Liquid-Alt Fund
If you are launching a registered alternatives fund, you confront all the decisions faced by advisers of conventional funds. You also need to take into account additional considerations related to using a registered vehicle to invest in alternative assets.
If you are used to operating in the unregistered market, some of these considerations impact your strategy. They include:
Managing everyday liquidity
If you run a hedge fund, you may be accustomed to knowing your fund’s inflows and outflows in advance and planning accordingly. When managing a mutual fund or other registered vehicle, you give up that visibility.
It is especially important to prepare for redemptions in advance. Regulations mandate a degree of liquidity in that mutual funds are required to hold at least 85% of their assets in liquid securities. While the SEC technically allows mutual funds to delay redemptions for up to seven days, distribution platforms demand much greater liquidity.
Agreements with distribution platforms typically obligate fund sponsors to honor redemptions within 24 hours. The upshot: You may come into the office one morning and discover that you have $5 million in cash that day. A fund services provider with experience helping alternatives managers make the transition to the registered world can help you understand the ways those kinds of liquidity demands affect various parts of your business, and plan accordingly.
Establishing and managing tri-party agreements
Alt funds’ investment strategies typically involve some degree of short-selling. Selling short in a registered fund requires you to strike agreements between your firm, your custodian (which handles long transactions) and a prime broker (which handles short sales). Advisers frequently underestimate the time and effort this task will take.
The process involves setting up an account with a prime broker and coordinating contract negotiations between the prime broker and the custodian for your fund. The contract may run to 600 pages, so these negotiations can be extensive.
The process may take 30 to 60 days on the short end—if you are simply modifying an existing tri-party agreement, say, or using the same firm as your custodian and prime broker. The more complicating factors and parties are involved—for example, if you use multiple prime brokers—the more time you can expect the process to consume.
An experienced provider can help you understand and prepare for the process of striking tri-party agreements, and help shepherd it along so you can get your fund up and running.