TeamCo Advisers, a privately owned investment advisory firm that manages portfolios of select hedge funds and other opportunistic alternative assets, has released an in-depth overview and analysis of Special Situations Funds (SSFs).
The white paper, entitled: “Special Situations Funds: A Private Party Worth Crashing,” which was co-authored by TeamCo Managing Directors Kurt L Braitberg (pictured), CFA, CAIA and Aimee F. Kish, CAIA, outlines the factors investors should consider when evaluating these funds for inclusion in their portfolios.
In the report, TeamCo notes that:
• SSFs enable hedge fund managers to capitalise on illiquid, potentially high performing investment opportunities, and investors and allocators are increasingly viewing these funds as an attractive way to diversify, balance, and/or fortify their portfolios.
• Investors find SSFs compelling for a number of reasons, including their ability to often deliver returns uncorrelated to broader liquid markets and offer more favourable pricing structures relative to typical private market funds. Notably, SSFs typically have significant participation from the hedge fund’s general partners, an indication of the manager’s confidence in the investment opportunity.
• SSFs are idiosyncratic in nature, and their characteristics – investment horizons, fee schedules, and liquidity profiles – are derived from both private equity and hedge funds. While these hybrid traits can help stabilise an investment program, they can also pose challenges when trying to place the fund in a specific asset class. Additionally, the process for evaluating SSFs can be burdensome for investors due to time constraints and other factors.
• As SSFs become more prevalent, investors need to carefully evaluate these funds and the people running them, and weigh the benefits within the context of their portfolios, including determining the motivations behind the creation of the fund.
Braitberg says: “Special Situations Funds can present attractive rewards for investors, particularly in low return environments. As these funds become available to a wider investor base, investors must have a full understanding of SSFs’ benefits and challenges so that they can select the right fund – led by the right manager – to meet their overall investment objectives. Not only is it crucial that investors evaluate the individual(s) managing the fund to ensure that they have the qualities and skills necessary to succeed, but they must also consider the degree to which their interests are aligned with those managing the fund.”