The days of an investment manager defining itself as a private fund manager, separate account manager or regulated fund manager are gone. In an effort to fully capitalise on growth opportunities and sustain existing relationships, investment managers must be flexible and consider offering their strategies in multiple packages, particularly with convergence well underway, and facing an extremely competitive landscape with an investor-empowered marketplace.
As stated in our early 2013 paper, The Retail Alternatives Phenomenon, given market conditions in the last five years, the demand for retail alternatives is not difficult to understand. Alternative strategies traditionally utilised by hedge funds are increasingly being packaged as UCITS in the European market and as mutual funds in the US. Still in the midst of a multi-year market rally, a slew of hedge fund firms are launching predominantly long-only funds, betting that at least some stocks have further to climb.The moves come amid a brutal stretch for hedge managers dedicated to shorting. The new funds also represent a shift by hedge fund managers into the kind of old-fashioned stock-picking more associated with High Street OEICs or Main Street USA mutual funds. Individual investors are also moving to absolute return investing and embracing alternative strategies for the same reasons institutional investors have: they need to tamp down volatility, hedge against major downturns and bridge the gap between actual and targeted returns.
This trend presents private fund managers with a vast new market at a time when the growth of institutional allocations to alternatives, while strong, may be slowing. Alternative assets have more than doubled since 2008 and are expected to double again in the next five years, according to Strategic Insight. Cerulli also reports that close to 90% of asset managers questioned in the US are looking to develop four or more alternative mutual funds over the next 12 months, perhaps because the retail market offers private fund managers the chance to diversify their revenue streams, earn more consistent fees and market their capabilities with fewer restrictions.
European managers looking across the pond at the $13 trillion US mutual fund market  may salivate at the potential opportunity. Yet, in this packaging-agnostic environment, one size does not fit all. Rather, the investment manager’s specific investment strategy and target investor segment(s) drive the necessary product structure – whether it be an open-ended ’40 Act mutual fund, limited partnership, collective investment trust, separately managed account, UMA model submission-only or other structure. We also created a sort of roadmap to help managers think through the steps needed to successfully launch and distribute products in the US. The nine steps below don’t provide the answers, but are intended to help managers think through the issues and make the “go/no go” decision with eyes wide open.
In determining the most appropriate structure, managers should carefully consider the following nine questions:
1. What type of investor do I want to target?
2. Is the investment strategy I employ suitable for this target investor type?
3. Within the target investor base, what sub-classification of investor am I looking to target?
4. Will the productpackaging allow me to employ my strategy effectively?
5. Which distribution channel(s) should I consider attacking in order to penetrate the prospective investor base?
6. What is my plan to differentiate myself from the competition?
7. What infrastructure/resources do I need to distribute my product(s) effectively?
8. Do I understand the regulatory and technical framework to effectively deliver my strategy to market?
9. How long will it take to gain traction (assuming performance is not a negative factor)?
The important role of the consultant in building a US distribution strategy
Aligning with respected consultants who can act as coaches, as well as potential allocators in the large retirement space, sub-advisory community, and other institutional markets in which they dominate, may be a smart first step. Additionally, many consultancies have refocused to develop customised plans for their corporate clients, including those offering outsourced CIO (OCIO) services and custom target-date/target-risk strategies that could present an interim step to full US distribution. Collective Investment Trusts and institutional separate accounts may also be the preferred vehicle, due to the low-cost advantages and holdings flexibility that they offer.
Another consideration for building a consultant-focused approach to US distribution is the migration of consultants from being based predominantly on the defined benefit-oriented retirement system to one based on defined contributions.
Having traditionally been focused solely on the institutional space, these consultants have started playing an increasingly important role in the retail arena. Indeed, they have been hired into, or consult for, retail platforms to apply their robust due diligence processes against traditional and alternative packaging.
Building an infrastructure that supports the consultant community and aligning with well respected service partners that have a dominant US footprint can open doors to a vast distribution landscape that is in constant search of innovative and differentiating products.
For the EU fund manager, ’40 Act packaging in products, such as mutual funds and ETFs, provides an extremely flexible and potentially lucrative vehicle to deliver best thinking to the public at large. Mutual funds and ETFs have a clear foothold in the retail market and are pervasive through individual investors’ pension, 401(k), 403(b) and personal accounts, but require significant resources and patience to penetrate. The considerations laid out above act as a decision tree to help managers identify the strategies that best fit the myriad avenues in which the products can be consumed. While opportunities abound, it should not be underestimated that the barriers to entry and costs associated with achieving the generally accepted milestones for successful US distribution are high. However, for managers willing to make the strategic bet and take the risk, there are clear paths to aid in their success.