Hybrid funds must tackle operational challenges
By Ras Sipko – The alternative investment industry has had to reinvent itself over the past few years following the financial crisis, which has resulted in the emergence of a number of hybrid schemes that make use of both hedge fund and private equity strategies.
Hybrid funds are a response by managers to the challenges of striving to manage investor expectations regarding alpha generation and seeking a wider range of investment opportunities offering better returns.
They are basically hedge funds that invest in a variety of illiquid assets such as collateralised loan obligations and distressed debt, held by the manager over a longer period than the rest of the portfolio and that tend to be separated into side-pockets.
Increasingly hybrid structures are being launched in which investors are happy to have their committed capital deployed progressively as opportunities ariseand thereafter locked up for longer periods of time. In fact the hybrid approach addresses the liquidity problems faced by many single-manager vehicles and funds of funds during the financial crisis.
These structures enable managers to access a variety of asset classes, from fixed income to real estate and private equity. Hybrid funds have also focused on distressed and intrinsic value assets in strategies that allow managers to acquire investments at attractive prices.
Most hybrid funds have highly illiquid portfolios of marked-to-market assets managed with a long-term view, using side-pockets that enable managers to take advantage of potential gains at exit or liquidation over the longer term.
Although hybrid funds allow managers to enjoy opportunities from both the private equity and hedge fund worlds, the operational and administrative challenges they entail should not be underestimated if managers are to offer an efficient service to their clients.
To be successful, it is essential that managers can work with the right service providers, which in turn must have appropriate software in place in order to deliver the right level of support.
As a software provider, Koger is prepared for the rise in the number of hybrid funds thanks to the flexibility built into its NTAS fund administration and transfer agency system, which gives users the ability to build complex multi-layered fund structures containing both liquid and illiquid assets.
As well as having a flexible system architecture, NTAS allows rules to be created easily using the system’s built-in rules engine, enables P&L allocations to be automated, and facilitates other business processes. Rules can also be customised to meet specific client needs.
NTAS boasts a full reporting suite and portfolio valuation dashboard reports. These can pull up assets from hedge funds, private equity funds and hybrids to be made available in a single report.
Managers can also take advantage of automated fund accounting calculations, support for complex waterfall calculations for private equity, and standard incentive fee calculations for hedge funds. The software also supports side-pockets and capital lock-ups as well as providing incentive fee functionality.
One Koger client running a hybrid fund on the NTAS platform reports that it has improved efficiency by enabling the fund to be set up as a master-feeder structure with multiple feeder funds. The hybrid fund structure shows the underlying investments and illiquid assets that can be moved to side-pockets as needed.
Complex fund structures need systems that make their management and administration as simple, efficient, and cost-effective as possible, a crucial factor in ensuring long-term success for both managers and their clients.
Ras Sipko is chief operating officer at Koger
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