Citi launches turnkey solution for liquid alternatives
Citi, CAIS, a third party alternatives distribution platform and Atlantic Fund Services, a fund administrator, have joined forces to create ALTX Trust, the first series trust designed to provide a turnkey solution for hedge funds seeking to launch ’40 Act mutual funds.
ALTX is designed to reduce the internal operational overheads that come with launching a ’40 Act mutual fund. CAIS, with its expansive registered investment adviser and broker-dealer network, will list funds on its platform and provide distribution. Atlantic Fund Services will provide fund administration, governance and compliance support while Citi will act as global custodian and preferred prime broker. Mercer will conduct due diligence and provide funds with a rating.
“Launching a liquid alternatives product requires hedge fund managers to adopt a different approach towards compliance, not to mention their operations where they will have to provide daily valuations. The turnkey platform will help them with these operational changes and give them distribution. Many hedge funds are not set up to tap into the retail market, but again the turnkey will help them target registered investment advisers,” said Sandy Kaul, global head of business advisory services at Citi Prime Finance.
Service providers have been bullish on 40 ‘Act hedge funds. Citi Prime Finance predicted $939 billion of the $12.8 trillion in retail assets would flow into liquid alternatives by 2017, while McKinsey & Co pointed out retail alternatives as an asset class had grown by 21% annually since 2005 and currently managed around $700 billion. A report by SEI highlighted assets in US alternative mutual funds and exchange traded funds (ETFs) had more than doubled since 2008, standing roughly at $554 billion. “The growth prospects for regulated alternatives are enormous and very exciting,” Kaul said.
ALTX will be targeting large institutional managers. “It is only really the largest hedge funds which can launch a ’40 Act product. The compliance requirements are too substantial for a small or mid-sized hedge fund to cope with and they typically do not have the brand appeal to pull in retail participants,” continued Kaul.
The risk of contagion on the platform is also minimal, she added. “The average hedge fund will have less than 500 investors, while the average mutual fund will have around 150,000. The sheer scale of this investor base reduces the risk of contagion,” she said.
While the distribution benefits are hard to faulter, regulated alternatives such as 40 Act hedge funds are subject to onerous restrictions. The absence of leverage (capped at 33% of gross assets), lack of performance 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, at a time when profits are rapidly receding.
One of the key investor targets among managers running regulated alternatives is the DC plan market, said SEI. Sixty per-cent of the DC plan market’s $5.1 trillion in assets are in mutual funds, and this investor class has historically been averse to alternatives. Nonetheless, some plan sponsors are becoming bolder and are increasingly investing in real-estate, inflation protected Treasuries and commodities in search of greater yield.
Several brand name private equity and hedge funds, most notably AQR, Blackstone and Apollo Global Management have recognised these potential opportunities, and have developed alternatives vehicles aimed at retail, with minimum investments as low as $2,500 in some cases. AQR has been one of the biggest enthusiasts for retail alternatives, having launched 20 mutual funds which are now running $9.2 billion.