Thursday, 23 February 2017
Last updated 13 hours ago
Oct 28 2016 | 5:52pm ET
Editor’s note: The past several years have seen a distinct push towards easier and cheaper access to top alternative asset managers through the use of cloud-based platforms. Chicago-based Kettera Strategies operates one of the best known of these platforms, Hydra, which allows qualified investors the ability to quickly and easily invest in a carefully curated array of CTA, FX, and Macro strategies. Hydra utilizes pooled vehicles for each investment, which provides the advantages in separately managed accounts as well as commodity pools, such as notional funding, increased transparency, semi-monthly liquidity, limited liability, and aggregated reporting.
FINalternatives recently caught up with Jon Stein, Kettera’s CEO, to discuss the advent of alternative investment platforms and what they mean for the industry as a whole.
FINalternatives: What is Hydra?
Stein: Hydra is an independent custody-based managed account platform. It is an online marketplace offering access to global macro, FX, commodity programs and CTAs. Hydra offers investors access to managers through a hybrid of a limited liability structure and a managed account investment. One of the advantages of a platform like ours is independence and objectivity – we’re free from the conflicts of interests that can occur with bank, brokerage or self-administering groups.
Why is Hydra important in today’s markets?
Today’s investors are more sophisticated and knowledgeable than ever. They demand more control over their alternative investments, and platforms like Hydra give them that control. Hydra offers customized portfolio construction, gives the benefits of managed accounts inside the limited liability fund structure, uses third-party administrators, structured so all assets are independently verifiable, generates daily transparency and risk reporting, provides a high level of liquidity, and offers cash efficient investing through notional funding.
Managed accounts are a tried-and-true way to allocate. Why does the market need anything else?
While some investors find SMAs attractive, they demand significant time and resources, and investors bear potentially unlimited liability for losses. If an SMA investor’s broker does not provide risk reporting, investors must either buy or build tools to process that data themselves.
On the other hand, direct investing in a fund can be attractive to some investors, since such pre-packaged deals can offer limited liability and limited maintenance. However, a direct fund investment requires 100 percent funding and liquidity is often restricted.
Hydra gives investors the benefits of SMAs, such as the ability to partially fund, daily transparency and liquidity, and the attractive fund-structure features such as partnership accounting, better tax treatment and limited liability.
Our custody-based, independent platform streamlines and simplifies this process while providing investors with economies of scale with all of its service providers.
What kind of investor uses Hydra?
A broad array of sophisticated allocators, such as fund-of-funds, family offices, wealth management groups, RIA’s, banks, pension funds and insurance companies. They are both domestic and offshore, and share a common denominator - they all are looking for a custody-based solution giving them access to sophisticated trading strategies within a transparent, liquid, and cash-efficient platform. Hydra provides that benefit.
Walk us through the benefits for a manager on Hydra?
By being listed on our platform, Hydra provides another means of exposure to investors by being listed on our platform. Managers also use the platform to structure U.S. domestic funds to more easily access U.S. investor capital, while others do the same overseas – use Hydra to structure non-U.S. based funds for investors outside the U.S.
Additionally, managers use Hydra to roll-up multiple managed accounts into one simplified structure.
Why would an allocator want to get onto the Hydra marketplace?
The company’s principals, myself included, have deep experience on the fund management side of the business, with more than two decades of portfolio management and due diligence exposure. As a result, we know the needs of institutions and HNW allocators. Our platform is on the cutting edge of offering outstanding user experience – we’ve worked hard to include online access to deep due diligence of managers, customized portfolio building, and daily customized risk reports. These features are coupled with the best of direct fund and managed account investing: cash efficiency, liquidity, limited liability, transparency, and daily independent asset verification.
There are an increasing number of alternative investment platforms out there. What’s your edge?
Yes, there are certainly many different ways to allocate to alternative investments. But we look at it a little differently, and ask how exposure to a manager’s trading strategy is actually achieved. It is a key difference. Investors who access these strategies through bank-owned, swap-based platforms have to contend with a broad range of additional complexities, including swap agreements and complicated tax treatment. Meanwhile, some platforms are owned by groups who self-administer their own funds, and others are owned by brokerage or clearing firms and as a result share in brokerage fees. None of them are free of conflicts of interest, whereas Hydra is 100% independent and free from all of them – we offer custody-based exposure with independent administration and asset verification, an agnostic view towards brokerage and clearing, and complete independence from manager’s fees.
How does is the rising popularity of liquid alternatives affecting you?
Consultants and wealth management advisors are largely entering the alternative space via ‘40 Act mutual funds, which unfortunately are not the most efficient way to gain exposure to global macro, FX, commodity managers and CTA’s.
These products are limited in number of managers and strategies, while multi-manager products are inflexible in selecting new manager allocations, are generally laden with fees, and the returns are frankly not that enticing.
To us, the more effective way to allocate to alternative strategies is via the Hydra structure. For an institutional or HNW investor, allocating to managers with access to deep due diligence, daily risk analysis, and the ability to efficiently fund the investment are key features differentiating Hydra from 40-Act funds.
Where do you see opportunities going forward?
We see tremendous growth potential for our company, the investors we serve, and this sector of the alternative investment industry. In particular, we are constantly assessing the timetable of expanding Hydra into hedge funds. We believe our transactional marketplace is distinctly different and our technology sets us apart to bring deep value to the larger hedge fund sector.