Use of Sub-Advisers and Liquid Alternative Funds

In recent years, many investment managers that traditionally manage private funds have been opening retail funds or establishing investment advisory relationships with investment advisers to retail fund products. These managers generally use the same or a similar investment strategy for retail funds that they use to manage private funds. These investment strategies may include, among others, “long/short,” “managed futures,” funds of hedge funds (or hedge fund-linked investments) and quantitative strategies. Retail funds that are managed using alternative or non-traditional strategies are generally referred to as “liquid alts funds.”

There are numerous alternative approaches available to private fund managers looking to develop retail fund business lines, including launching a proprietary retail fund complex, opening a fund on a shared trust platform or serving as a sub-adviser to a fund managed under a “manager of managers” structure. Depending on the targeted investors, liquid alts funds can be U.S. registered funds, such as open-end funds, closed-end funds, exchange traded commodity pools or business development companies, or UCITS (retail funds offered to investors within the European Union), among other structures.

Private fund managers’ investment strategies must be modified to some extent to comply with relevant requirements under the Investment Company Act of 1940 relating to liquidity and leverage, among others. This outline focuses on U.S. registered open-end funds operating alternative strategies under a manager of managers structure. The outline reviews key requirements that may impact alternative investment strategies and manager of managers relationships and provides an overview of recent developments relevant to these funds.

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