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Jill Calton, UMB Fund Services

Alternative managers capitalising on new product development opportunities


The days of the generic offshore hedge fund feel like a distant memory. Regulation and other factors, both in the US and Europe, have led to a proliferation of new fund products to cater to the changing needs and desires of institutional investors. Recent regulations have encouraged alternative fund managers to explore diversification in their investment types. 

The first clear wave of activity occurred five or six years ago when investment advisors, both in the hedge fund and private equity space, began launching registered alternative mutual funds and interval funds, in an effort to attract new investors. While in Europe, the UCITS regime saw the launch of a raft of liquid hedge fund strategies. 

Last year some of the largest fund launches in Europe included the AQR Systematic Total Return UCITS (GBP368 million), MLIS Milburn Diversified UCITS (GBP179 million) and CZ Absolute Alpha UCITS Strategy (GBP163 million). 

Products continue to emerge in response to new opportunities resulting from tax reform and regulatory changes. According to Jill Calton (pictured), SVP and Director of Alternative Investments, UMB Fund Services, one product that is seeing increased activity is the registered private equity fund.

“There are pros and cons in relation to structuring these funds in a regulated format, a notable benefit is the ability to provide tax reporting on a 1099 form rather than a K-1. This simplifies investor tax reporting because rather than waiting sometimes months for a K-1, 1099s are made available by 31 January. Regulated investment company qualification requirements afford significant restriction on investments, while traditional partnerships have no such limitations.

“Some of the larger private equity clients supported by UMB Fund Services are on a schedule to launch a new regulated vehicle every couple of years, with each new iteration designed to appeal to prominent broker/dealer distribution platforms.

“A lot of assets are being collected and registered PE funds continue to grow. It’s exciting to see these new fund products develop and managers continue to launch them because of their popularity,” says Calton. 

UMB Fund Services has been providing administration services to registered and private funds for decades. Its proprietary alternative investment fund accounting technology supports a broad category of investment types and has been developed to be quickly adaptable to support new and diverse product offerings. As popularity of unique investment types grows, such as registered private equity, so does demand for increased customization in private fund servicing. 

Indeed, with more regulation and product complexity to contend with, PE managers cannot afford to take their eye off the ball. More fund managers are looking to outsource the accounting and regulatory reporting functions to a specialist as they understand the demands for compliance, third party oversight and special data needs by institutional and sophisticated investors. 

“We are working to identify the concerns that PE managers might have with respect to outsourcing, and in our view it comes down to offering customisation and giving managers control of their data,” adds Calton. “What’s interesting with respect to registered and unregistered private equity funds is that investors are locked in for the duration of the fund meaning the fund sponsor doesn’t have to worry about the timing and volume of redemptions (as one would with an open-ended mutual fund). 

“The fund is in control because investors commit their capital up front and the fund dictates the frequency of capital calls and distributions triggered by underlying deal performance and activity. Managers have that guarantee that the assets will be there.”

One of the major benefits of this product evolution is that while private equity investing was previously reserved for the largest institutional investors with the deepest pockets, bringing the asset class into a registered structure is allowing a far wider universe of investors to build exposure. 

“Registered private equity funds provide easier participation. Investors can come into these pooled investment vehicles with a smaller allocation,” adds Calton. 

Because registered funds are typically distributed on broker/dealer platforms, administrators need to have the system capabilities to communicate with those platforms as they might need daily reporting, updates on capital calls and distributions and a direct feed to update quarterly valuations. 

Also, unlike private funds, the number of investors in registered funds can be substantially higher. This requires the ability to automate and to streamline investor servicing processes throughout a fund’s lifecycle. 

“We’ve worked closely with clients to determine data needs and have expanded and enhanced our system’s capabilities for capturing and sharing data with our clients and their related parties,” says Calton. “Every third-party data provider or platform has its own data format so we’ve had to ensure the data can be successfully migrated via the templates they prescribe. 

“We handle all of the customization needs of our clients in order to give them the information they need, so that they can get accepted on to distribution platforms and attract a wider number of investors to their registered fund(s).”

“Besides the rise in expanding private equity products and access for a broader investor pool, another product we are seeing is the Opportunity Zone Fund. This is specific to the US and stems from the Tax Cuts and Jobs Act of 2017 that was signed into law last year. Regions of the US have been identified as Opportunity Zones, which offer tax advantages for making investments into either businesses or real estate. If fund managers see this as an opportunity to pool money and make investments in these opportunity zones, it potentially presents them with a great opportunity to create a new fund vehicle,” explains Calton.  

Opportunity Zones are a new community development program established by Congress to encourage long-term investments in low-income urban and rural communities nationwide. 

According to the Economic Innovation Group, “the Opportunity Zones program provides a tax incentive for investors to re-invest their realised capital gains into Opportunity Funds that are dedicated to investing into Opportunity Zones designated by the chief executives of every US state and territory”.

Calton believes “we are on the cusp of fund activity”. It helps that the IRS issued guidelines on how to achieve Opportunity Zone Fund certification in April this year. 

“We are not actively working on any mandates but I would expect to see things happen within the next 12 months,” she adds.

Key to these fund product developments is the ability to deliver seamless operations at the back-office, so that fund managers have the confidence to launch them. 

Calton comments: “For Opportunity Zone Funds there are some unique requirements from an administrative perspective such as Opportunity Zone Fund status, reporting, qualifying property review, tax basis/adjustment tracking and pre/post tax internal rate of return.” 

In her view, technology not only allows administrators like UMB Fund Services to adapt to product evolution, it also helps to reduce risk by having a system that can handle complexity. 

“When a product emerges that is new and unique, like the Opportunity Zone Fund, you need to have a system that can track and handle compliance and reporting requirements and can capture the wide array of relevant data points specific to that product. 

“The technology framework we use has been in place for almost two decades. We look at it as a partnership with our clients. When they have an investor asking for specific information or a new compliance requirement, and they need specific information in a defined format, we work closely with them to find the right solution. We understand the importance of providing assistance to their effort to be accepted and to remain on a distribution platform,” concludes Calton.

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