Citi’s alternative mutual fund platform live
Citi Investor Services is live with its ALTMFX liquid alternatives platform (www.altmfx.com), a turnkey solution for unaffiliated hedge fund managers launching US ’40 Act mutual funds, as hedge fund firms continue to be bullish about the growth of liquid alternatives.
ALTMFX reduces the operational overhead and burden of launching a ’40 Act mutual fund, while combining leading service providers around an umbrella series trust in the US, and introducing hedge funds to a broad distribution network for the retail market. ALTMFX Trust is governed by an independent board comprised of industry experts in the alternatives and traditional fund industries, which Citi believes is a key differentiator in overseeing how new liquid alternative products come to market.
The platform is a joint initiative between Citi Investor Services and Atlantic Fund Services, a global fund administrator with offices in the US and Europe. Atlantic Fund Services provides fund administration, governance and compliance support while Citi acts as global custodian and preferred prime broker. Citi Investor Services provides the core infrastructure for the platform and provides access to the range of capital markets products that liquid alternative funds require. The initial hedge fund managers live on the platform include Sandell Asset Management (Equity Event & Merger Arbitrage) and NapierPark Global Capital (Strategic Municipal). Additional high pedigreed firms joining the platform are expected to be announced in the coming weeks.
CAIS, a 3rd party alternative fund distribution platform with an expansive network of registered investment adviser clients, and a partnership with Fidelity, is an active distribution provider for Castlerigg Equity Event and Arbitrage Fund and NP Strategic Municipal Fund. The CAIS platform engages Mercer investment consulting to provide independent due diligence on funds sold through by their broker-dealer.
“We intend to be selective about on-boarding best of breed hedge funds onto the ALTMFX platform. We believe there is a huge amount of potential for managers running ’40 Act funds, and that the platform will enable firms to outsource the bulk of their mutual fund infrastructure and gain access to high quality retail distribution channels in the US,” said Richard Webley, US head of Business Advisory Services and product owner for ALTMFX at Citi in New York.
Service providers have been bullish on ‘40 Act hedge funds. Citi predicts $939 billion of the $12.8 trillion in retail assets will flow into liquid alternatives by 2017, while McKinsey & Co points out that retail alternatives as an asset class have grown by 21% annually since 2005 and currently are about $700 billion in assets.
One of the key investor targets among managers running regulated alternatives is the DC plan market, per the SEI report. Sixty percent of the DC plan market’s $5.1 trillion in assets are in mutual funds. While this investor class has historically allocated to alternatives, some plan sponsors are becoming bolder and are increasingly investing in real-estate, inflation protected treasuries and commodities in search of greater yield.
It is not just the US institutional market that is buying into liquid alternatives. “The Solvency II Directive imposes tough capital requirements on European Insurers investing in private placement hedge funds. If they invest into public liquid alternative funds they are afforded more transparency and this allows them to lower their capital charge whilst gaining access to a range of alternative strategies,” added Webley.
While the distribution benefits are hard to falter, regulated alternatives such as ‘40 Act registered funds are subject to restrictions that alternative managers have not had to factor into their trading techniques. Asset segregation requirements with respect to use of leverage, absence of performance-based advisory fees (with a management fee of between 70 bps and 1.5%), restrictions on investing in illiquid assets (capped at 15% of AUM), rigorous corporate governance standards and mandatory third party custody will all lead to higher compliance costs, during a time where some asset managers are facing headwinds.