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Infovest21 '40 Act Survey: 53% of managers surveyed have launched or are in the process of launching a '40 Act fund

Monday, July 29, 2013
Opalesque Industry Update - In a first-of-its-kind survey on '40 Act funds, Infovest21's "Hedge Fund Use of '40 Act Registered Investment Funds" survey found that 53% of the surveyed managers have launched a '40 Act mutual fund, are in the process of launching a '40 Act fund or are considering doing so. Another 25% are a subadvisor to a '40 Act fund or considering becoming a subadvisor. 8% have decided not to launch a '40 Act fund.

Lois Peltz, president of Infovest21, said, "The survey also found that over three-quarters of the managers said launching a '40 Act fund was worth the time and effort. The remainder of respondents said it was too early to tell."

Other interesting findings include:

Hedge fund managers'; use of '40 Act funds is more widespread than most expect

While launching a liquid alternative fund is considered by most to be a recent development, almost 30% of the respondents have been managing a '40 Act fund for more than 10 years.

In fact, 42% of those surveyed have more than one '40 Act mutual fund.

Hedge fund performance outperforms liquid alternative performance

As one would expect, the manager's generally reported that their hedge fund performance has been higher than its mutual fund counterpart. On a year-to-date basis (January -June), hedge funds have returned 6.8% compared with 4.1% for the '40 Act fund.

Start-up considerations

For 57% of the respondents, it took 6-12 months to launch a '40 Act fund.

43% of the respondents said the start-up costs ranged between $50,000 and $99,999.

The average estimated breakeven assets under management for the flagship '40 Act fund was $39 million.

Cost is top criteria for selecting a service provider

Cost was the top criteria for managers selecting their service provider while culture/fit came in second at 77% and 69%, respectively.

Asset raising is the biggest challenge

Asset raising is the biggest challenge, as cited by 47% of those surveyed. Lack of investor education and performance were each cited by 35% of those surveyed.

Costs and cannibalization of existing product were the other primary concerns with establishing and managing a mutual fund.

David Sandrew of Atlantic Fund Services, observed: "Private fund managers are seeing the benefits of positioning their firm as asset managers offering different investment vehicles (products/strategies). Despite the perceived difficulties and costs, clearly most managers recognize that enhancing their distribution is worth the effort."

Scott Mackey of McGladrey, added, "Daily liquidity requirements, regulatory restrictions on investment strategies, lower fees and margins, governance requirements (dealing with independent board members, holding regular board meetings), and issuing reports that include quarterly portfolio holding statements and accompanying disclosures all require a different way of thinking for alternative fund managers. Moreover, managers have to learn a whole new way of marketing and distributing products. Investors and advisors will also need to understand these new offerings and how alternative strategies align with their portfolio performance goals."

Over 130 hedge fund managers responded to Infovest21's which was conducted in June. The survey, which was sponsored by McGladrey and Atlantic Fund Services, also explores managers' motivations; how they determined the structure and service providers used; their considerations regarding cost, time and other required resources; challenges and concerns in managing a mutual fund.


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