Multi-manager alternative funds often utilize a separate account structure, as opposed to the traditional fund-of-funds model, and this ensures position-level transparency for the portfolio managers on a daily, or even real time, basis. It allows for greater risk oversight and improves the ability of the portfolio manager to react to changing market conditions. Additionally, certain regulatory requirements applicable to registered funds require that all securities be maintained at a custodian bank and, therefore, the fund maintains total control over its assets.
Corporate governance
It is not always clear that hedge fund directors are sufficiently engaged in governance, and in traditional funds of funds investors have little oversight of the selection of prime brokers, administrators and auditors. As part of the comprehensive regulation provided by ’40 Act and UCITS, regulated funds’ boards, which include members that are independent of the manager, provide a much-improved governance framework. For multi-manager funds, they can help improve the process of monitoring the underlying managers and often allow the fund, and not the underlying managers, to select and directly oversee other fund service providers.
Encouraging Trend
The fact that more and more products are being rolled out to fit this investor-friendly profile is encouraging. Morningstar and Barron’s have tracked 475 launches since 2009, and the 118 new products for 2014 represented a significant jump from the 89 that appeared in 2013.
This reflects an increasingly competitive hedge fund industry: Managers are both more willing to adapt their hedge fund terms to match those of regulated funds and more willing to launch regulated funds to access a bigger pool of investors. This is happening largely without injurious hedge fund-style terms being smuggled into regulated fund structures, or the watering down of hedge fund strategies. That is why we believe this growing phenomenon has earned its distinguishing descriptor: “liquid alternatives.”
