While competition amongst UCITS platforms remains fierce and the market is at present dominated by a small number of large banking platforms; there is a growing acceptance of the need for independent and unconflicted participants in the space. On the strength of this very focus, the Montlake UCITS Platform has earned this year’s Hedge Fund Journal award for the Leading Independent UCITS Hedge Fund Platform. An independent offering not connected to, or ultimately owned by any of the larger banking organisation; a platform driven by a small highly skilled team focusing on the delivery of the very best operating and distribution solutions for talented hedge fund managers entering the alternative UCITS arena.
The MontLake UCITS Platform is structured as an Irish regulated UCITS IV umbrella fund, with segregated sub-funds managed by regulator approved third party investment managers. MontLake partners with only renowned and respected industry names, such as KPMG (Audit), NewEdge (Financing Provider), Maples & Calder (Legal) and Citibank (Administrator, Trustee and Custodian), to ensure that managers and investors have access to the very best market leading service providers.
“Our platform does not sit inside a banking organisation,” says Cyril Delamare, CEO at ML Capital. “This is a key consideration for managers opting for an independent operation such as MontLake; as the reality is that managers demand that platforms assume full focus on the promotion and distribution of their products all the time, not just when the product is hot or is generating the highest fees. We offer a truly unbiased tailored service, which is something managers cannot guarantee they will receive in a more complex revenue driven banking environment.”
The alternative UCITS market is becoming increasingly sophisticated with a broader universe of funds for investors to choose from, which will inevitably lead to a risk for managers of getting side-lined on the larger platforms. Managers are forced to compete for assets with any number of other funds running similar or near identical strategies. Montlake, on the other hand, offers fewer managers a much higher level of attention through a careful process of research and selection to gauge investor appetite long before a product is actually launched.
“Whilst we have a sales team that is dedicated to raising money for all of our managers; we also offer advice on active distribution opportunities across a number of core and non-core jurisdictions, as well as guidance for managers looking for hosting or structuring support on various regulated products to complement their existing fund structures,” explains Delamare.
A turnkey solution
Montlake is a “one-stop shop” or turnkey solution for the fund manager looking for a fast and effective UCITS launch with minimal hassle. Fund managers are able to launch a fund on the existing Montlake UCITS Platform, or else they are able to appoint ML Capital as the promoter of their own stand-alone UCITS structure. Whether it is the suitability of the strategy for UCITS, using the right structure, appointing competent service providers and straight-through project management to ensure a seamless launch, all of this can be provided by the ML team of experts.
Speed to market is essential to most, if not all managers; a too often familiar story is one ofthe external launch capital diminishing due to protracted and superfluous time-frames of 9-12 months or more; leaving managers with expensive sub-scale and unsalable funds. Reasons frequently cited by incensed managers for unnecessary launch delays, amount to poor planning and a lack of understanding regarding the complexities of the UCITS directive. Providers like to pin excuses on regulators; but in truth the fund launches that do run into trouble have inherent problems stemming from the product development stage. ML have built an efficient model that allows for parallel running of time dependent stages; to enable UCITS funds to be launched on the MontLake structure within six to eight weeks. It also uses a very transparent cost structure, so that managers are not caught out down the line on typical fees incurred in the process. A lot will depend on the underlying strategy of course; however Delamare is confident that in 99% of cases ML will be able to bring a faster more cost effective product to market than its competitors.
ML assumes the burden of day-to-day maintenance and operation of the fund structure, allowing investment managers to focus on the running of the investment strategy for their clients. Part of the valuable added service is educating managers on the restrictions of the UCITS directive, as well as providing internal risk management who will flag risk areas and help resolve any potential breaches of the UCITS guidelines as and when they become apparent.
“Our operations team will take away most of the burden of overseeing the UCITS strategy so that the fund manager can focus on managing the fund,” says Delamare. “The fund manager needs to understand the guidelines and rules that apply to the UCITS framework and make sure he stays inside them.”
The main reason why fund managers opt for a UCITS launch is the increased distribution opportunities. Ever since the UCITS III directive was introduced, traditional hedge fund managers have been slowly building a presence in this space; capitalising on the growing pool of investors who have been burnt by or simply will not invest in Cayman Island structures. It is also worth mentioning the non-EU UCITS investors, as these sleeping emerging giants have been long-term UCITS enthusiasts and are now slowly building a desire for alternatives in this format. Our fund managers have found particular traction in Hong Kong, Singapore and Chile.
For Montlake, delivering a successful distribution formula is a key differentiating factor. The founders of Montlake have considerable third party distribution expertise with a strong European network and reputation for asset raising for both alternative and long-only strategies.
“We come at this from a distribution angle rather than just an operational angle,” says John Lowry, Managing Director. “Competing with the banks is a tough job; to do this you do need to add value through something distinctive or innovative along the line, or else you don’t survive in this business very long.”
Montlake is managed by ML Capital, itself authorised by the Central Bank of Ireland. ML Capital has developed its own substantial distribution networks in the European retail and private wealth markets, which can be costly for fund managers to access otherwise. It has dedicated resources selling into these markets. “Amongst the private banks and the family offices, the liquidity and transparency a UCITS offers is highly valued,” says Lowry. “A manager coming to us from outside Europe does not necessarily want the regulatory headache of having their own investor relationships in Europe and hence often do not have an existing client base here.”
Roughly 35% of MontLake’s active investor base is retail in nature; of the institutional client base, it has cultivated a considerable distribution network in both the French and Swiss institutional spheres. It also does business with most major allocators in Germany, which can be an extremely hard market to access for outsiders, as well as in Luxembourg, Austria and Italy.
“Because we are independent, we can offer fund managers a wider range of choice when it comes to the different components that make up a successful UCITS launch,” explains Delamare. “This includes offering a broader selection of external service providers. Yes, it is tough competing with the big banking platforms in this space, but to do so we have to offer something they can’t. For our clients, this has to include choice and flexibility.”
Such flexibility also extends to cost structures; Montlake does not follow a one-size-fits-all formula. Most fund managers and all investors are extremely sensitive to the operating cost of the fund, which means that we must tailor a structure that meets both the operational requirements and the cost limitations in order to keep expense ratios down in prevent it hindering performance. ML Capital has been known to support the launch of early stage managers, where the strategy is appropriate and investor appetite has been identified.
“We take on established firms and newly formed teams; so long as there is a proven calibre or a very compelling story,” says Lowry. “For example, we made the decision to work with Skyline Capital Management at a very early stage in its development on the back of the strong reputation of the lead PM Geoff Bamber. Columbia Wanger and DUNN Capital are a stark contrast as firms running considerable assets and very long-track records looking to grow their presence in Europe through a partnership with ML.”
The real success story of the last year has been the MontLake Skyline UCITS Fund, which has grown from a sub-scale $25 million to $91 million since its inception on the Montlake platform a little over a year ago. Lowry is also very positive for the prospects of the other funds on the platform this year, with substantial investment witnessed in the second half of 2012 flowing into 2013. “I think there is a lot of momentum out there for the right strategy, the right manager, who might already have $200 million plus in their core strategy,” he says. Newer managers aside, Montlake also hosts funds managed by established firms like Columbia Wanger, which has two funds on the platform and is owned by the Ameriprise Group. “Our biggest manager on the platform has over $30 billion in assets and a track record dating back to the 1970s,” says Delamare. “On the other side of the spectrum you have Skyline, an award winning fund manager. They are a younger firm with a little less than a three year track record and $120 million in AuM across the firm. As you can see, we talk to a broad range of fund managers. We go in and look at the opportunity those fund managers can bring and whether we can sell them to a growing UCITS marketplace.”
Delamare explains that for Montlake, a successful UCITS launch is a two way street: the platform doesn’t want to be a hosting-only solution. In part, an awareness of what investors are looking for significantly aids the process. The ideal scenario is to couple a fund manager with a willingness to launch a new regulated product that has the potential to perform over the long-term in all markets with a demand from investors within the UCITS market.
“We’re built differently from other platforms,” says Lowry. “It can be extremely difficult to raise assets in the current climate. Hence, we need to be quite selective when it comes to the fund managers we work with. Our model has always been to go with a limited number of managers. It is extremely difficult for any one firm to raise assets across a wide range of products. Pick a few good, uncorrelated strategies and half the battle is won!”
A good feel for the market
As UCITS specialists, ML has a good feel for the market. They want to make sure that funds on the platform are not competing with one another, but at the same time are going to make investors sit up and take notice. From an early stage in the development of the alternative UCITS universe, it was quite clear through ML’s proprietary research tools that there were obvious shortages in certain strategies represented in UCITS – in response to this, whilst ML are still seeking that illusive “stand-out” US long/short manager; they have brought a very strong Global EM product to market in order to fill a noticeable void. A lack of choice is a key concern for investors seeking alpha, whilst maintaining a diversified portfolio. Times are changing; however there are still opportunities out there for the right manager, who in the right environment fits the right niche.
Montlake services more than just hedge funds of course, lending its expertise to the long only and more traditional funds business as well. Its investor clients represent over €6 trillion in UCITS fund investment, an increasing proportion of which is moving into alternative UCITS. Much of its work on the marketing side still involves speaking with investors who have zero or a tiny allocation of alternatives, but Lowry observes that attitudes are changing, with more investors prepared to consider alternative UCITS. “We created the Montlake UCITS Platform for the long term, and with investors becoming increasingly active, we are well placed to handle the growing levels of business that we are now seeing.”
With the AIFMD directive due to be implemented this year, the UCITS option for hedge funds is likely to become increasingly attractive, perhaps even a ‘must have’ for managers who want to enjoy comprehensive coverage in Europe. The directive will bring more oversight for funds marketing into Europe, and UCITS platforms like Montlake will provide newcomers to this market with the most convenient and operationally robust solutions for meeting these new demands.
Delamare concludes, In terms of future strategy, we are at present very actively looking at a range of opportunities, from taking over existing UCITS platforms or other regulated fund structures, offering fund managers a full serviced offering ranging from offices, trading services and of course UCITS structures.