Many of our fledgeling fund managers develop their investment strategies by trading external money on a ‘managed account’ basis.
Typically, the manager’s client will establish an account with a brokerage firm and provide our manager with the power of attorney to trade the client’s account.
This certainly has its advantages for the manager in his early stages of gaining experience in managing external money.
It provides the manager with a platform on which to develop and test his investment strategy. At the same time, it provides the client with a degree of control.
After all, the broker account belongs to the client. So the client can ‘switch’ off the manager at any time by withdrawing his power of attorney to trade the account.
The problem comes when the manager starts to attract other clients, all with their own individual managed accounts.
It’s good news that the manager is attracting more client money. However, this usually comes with a potential administrative nightmare for the manager.
Not only is he managing his investment strategy across numerous managed accounts, he must also provide each client with their own activity and performance reports.
All of this takes up valuable time of the manager when he should be concentrating on what he does best: trading his strategy.
At this stage, the manager should be considering an investment fund vehicle as the next step in his development as a fully-fledged asset manager.
There are very clear advantages of an investment fund over a series of managed accounts, not just for the manager, but also for the clients/investors.
Advantages To The Manager
- The investment fund provides a regulated vehicle which pools the assets of all the previous individual managed accounts. The manager applies his investment strategy to a single pool of money, no longer having to apportion trades across a series of managed accounts;
- The pooled assets of an investment fund provide the opportunity of the manager to negotiate with the executing broker beneficial dealing rates as he is making larger trades rather than a series of smaller trades across numerous accounts;
- The investment fund is a regulated entity and as such is considered far more credible by the brokers;
- The administrative burdens placed on the manager associated with operating managed accounts disappear as the fund administrator takes care of all of this by independently calculating the fund’s net asset value and reporting on a regular basis to the investors;
- The investment fund is independently audited, providing the manager with an ‘audited track record’ of his trading strategy and performance;
- The investment fund provides the manager with a high degree of ‘asset continuity’. With the managed account the client can withdraw the manager’s power of attorney at a moment’s notice, whereas with a fund structure an investor (who has redemption rights) can redeem, but only after giving a period of notice to do so (typically 90 days). Therefore, the pool of trading assets in a fund vehicle is relatively stable;
- The investment fund comes with a legally drafted fund prospectus for marketing purposes, which details and explains the manager’s investment strategy;
- The investment fund comes with a Bloomberg ticker. Monthly performance is reported to Bloomberg by the administrator, so over time the historic performance of the manager’s investment strategy is in the public domain;
- The investment fund has an ISIN code which is necessary for attracting institutional investors.
Advantages To The Client/Investor
- The investment fund is a regulated entity and as such provides the client/investor with a high degree of credibility. As a regulated entity, the operations of the fund are governed by mutual fund laws, supervised by a regulatory authority. Strict controls are applied to the fund operations;
- The investment fund is valued externally by the fund administrator, providing the investor with ‘independent’ valuations and reports, typically monthly;
- The investment fund is annually audited and audited financial statements are filed with the fund’s regulatory authority;
- The investment manager must be a regulated person/entity;
- There is a board of external directors who oversee the affairs of the fund;
- Strict controls and procedures are adopted to ensure the protection of the fund’s assets, such as dual signing on all fund money movements.
Progress Your Development
The establishment of an investment fund is typically the third step our client managers take in their development as an asset manager.
The first step is managing their own money and testing and honing their investment strategy.
The second step is managing external money through the managed account route.
Once they have mastered the second step and start to attract more and more external clients to their strategy, the natural progression for our manager is to move to the regulated investment fund.
The regulated investment fund provides the vehicle through which our fledgeling asset managers grow.
It is for this reason that Ifina specifically designed its ‘fund platforms’ in Cayman and Malta, to provide new fund managers with the opportunity to take the third step in their development.
The Ifina fund platforms are low-cost fund solutions. However, they are fully regulated investment fund structures.
The Cayman Fund Platform offers a fund solution at USD 9,750 (all-inclusive).
The Malta Fund Platform offers a fund solution (with an EU passport for marketing purposes) at EUR 25,000 (all-inclusive).
Do you need help setting up your investment fund? Email email@example.com and we can arrange a call. If you have any questions, please leave them in the comments below.