Thursday, 30 March 2017
Last updated 4 hours ago
Apr 30 2015 | 7:18am ET
By Susan Ferris Wyderko
President & CEO, The Mutual Fund Directors Forum
The convergence of the hedge fund and mutual fund worlds continues unabated, as each week brings news of another hedge fund manager porting his strategy into a vehicle that can be offered to the retail market.
There is a seemingly endless list of considerations for those looking to enter “40 Act” territory for the first time, including whether a manager will be able to effectively implement his or her strategy in a mutual fund or ETF wrapper; identifying the right sales and marketing approach; and managing relationships with gatekeepers at large platforms and RIAs, among others. However, one consideration that often does not get enough attention is the fund’s board of directors.
With the SEC making no effort to hide its interest in funds and firms under the “alternatives” banner, having an effective board in place is not something that can be treated as an afterthought. Your board members will have legal and fiduciary duties owed to both the fund and its shareholders, and can be your most important line of defense in building, vetting, and ensuring the long-term viability of your retail-focused offerings.
If you’re reading this, you likely know what makes an effective portfolio manager, analyst, or fund marketer – but what makes an effective director? Since we help connect fund companies with director candidates every day, we have quite a bit of experience in answering that question. For alternative funds, we would recommend looking for candidates who can:
Understand complex investment strategies. The rise of alternative mutual funds and ETFs presents even experienced directors with a new set of challenges, and it is essential that board members continue to educate themselves about emerging trends and sophisticated strategies.
Consider the regulatory environment. As the number of alternative funds has risen so too has the attention the space has been attracting from the SEC. Managers launching registered funds for the first time will quickly come to realize that the restrictions and requirements they face are dramatically different from what they encountered in the private fund space. Restrictions on leverage and exposure to illiquid securities, diversification rules, and the required daily calculation of a fund’s net asset value (NAV) may all be new experiences. Directors who understand what does and does not work in a ‘40 Act format can play a crucial role in shepherding registered products through to launch and in ensuring their ongoing viability.
Conceptualize key relationships with service providers. Understanding the background and skill of the manager will obviously be key, but an effective board will also be able to oversee the potential effectiveness of auditors, administrators, fund accountants and attorneys, since alternative funds often call for specialized expertise, even in such “back office” functions.
Ask the right questions. An engaged, effective board should be involved in the creation of a fund from the idea stage on, and should be able to ask probing questions about a fund’s ability to adhere to its mandate in a retail vehicle, the manager’s experience and the details of his or her strategy, and more. An adviser must be able to explain a fund’s investment strategy and how various market conditions may drive performance. He or she must also be able to discuss proper benchmarks and the firm’s approach vis-a-vis its peers. An effective board will demand well thought out responses to all such questions and more.
The growth of alternative mutual funds and ETFs does not appear likely to slow down anytime soon, as retail investors and advisors are drawn to the potential for uncorrelated returns to the broad equity and fixed income markets. In fact, the only thing growing more quickly than the number of “alternative” funds is the attention they’re drawing from regulators.
Effective board oversight can play a crucial role in helping a new fund family adhere to the relevant regulatory requirements, manage relationships with key service providers, and ensure that a fund and its manager adhere to their respective mandate. All are important in the building of a successful fund and fund complex. Identifying effective, experienced board members can be its own unique challenge, which is why organizations like ours can be an excellent place to start when seeking candidates.
Susan Ferris Wyderko is the President & CEO of The Mutual Fund Directors Forum, a nonprofit membership organization for investment company directors.