How European Alts Managers Can Target The Market for ’40 Act Funds

By Philip Masterson, Senior Vice President and Managing Director at SEI Investment Manager Services


The $15.7 trillion United States imageedit_2_8943188980mutual fund market represents a huge opportunity, in theory, for enterprising European alternative investment managers to bring differentiated strategies to an investor base thirsty for new ideas and solutions. These investors range from sophisticated institutions, including pensions, university endowments, and charitable foundations, to the DIY individual investor using platforms such as Tapping into this market is not merely a function of a firm’s global aspirations. Rather, what’s needed is a material change to a manager’s mindset from product development to sales & marketing and investor servicing.

All of these components must be in complete alignment in order to have a fighting chance of succeeding in entering the US mutual fund marketplace in a meaningful way. If they are not, or there isn’t the appetite to fund such an endeavour, focusing on your home pitch may be the most prudent decision. Those with a long-term commitment and ready to accept the challenge, will need to educate themselves on the ’40 Act regulatory construct and have a laser like focus on their product and distribution strategy.

For over 25 years, SEI has helped managers across the globe enter, or indeed decide against entering, the ’40 Act space. Our turnkey series trust platform currently has over $30 billion in assets under management and helps managers bring ’40 Act products to market quickly and efficiently; in particular, managers can leverage the distribution pipes we’ve built with several of the top intermediaries. That being said, launching ’40 Act mutual funds is not for everyone and shouldn’t be seen as a panacea for developing a long-term sustainable global brand. As the topic of, and investor interest in, liquid alts, or registered alternatives, has gathered steam, we’ve spoken with several of the top London-based hedge fund managers and as we’ve gone through the process of educating them, it is often clear that ’40 Act products are not appropriate for them.


For those managers ready to commit to the US, we’d suggest that they must answer the following questions before taking their first steps:


What objective are you trying to achieve by launching ’40 Act funds?

This question needs to be asked and resolved before moving forward. The answer to this question will affect every other decision you make.

  • Satisfy investor demand for our strategies in a mutual fund structure?
  • US wirehouses, such as Merrill Lynch or Morgan Stanley, the large “workhorses” in US fund distribution, are often key partners in distributing European hedge fund strategies today. Would you be able to leverage current relationships with these firms to offer a ’40 Act alternative fund to a wider set of investors at these firms?
  • More efficiently manage small institutional accounts in a pooled vehicle?
  • Add a retail investor base to diversify your firm’s revenue sources?
  • Focus more heavily on institutional investors?


Is the relevant investment strategy suitable for this target investor type? 


Once you have decided to target a certain type of investor, you also need to ensure that the investment strategy your firm pursues is one that that your target investor finds suitable and appropriate.


Follow-up questions are:


  • Does the strategy comply with ’40 Act rules and regulations?
  • Can it be offered it to all investor types or only a few?
  • How long of a track record is needed in the fund before there’s market acceptance?
  • Will a (lower priced) mutual fund cannibalise parts of your investor base?
  • Is it possible to carry over performance from separate accounts currently managed?
  • Can similar fees be charged?


Is there a clear understanding of the regulatory and technical framework to effectively deliver the strategy to market? 


Not only must the management company be registered with the SEC, but the SEC also requires that all mutual funds must be registered and each such fund must have a designated chief compliance officer.


Things to consider:


  • It is extremely difficult to charge a traditional performance fee in a ’40 Act fund and, barring exceptional circumstances, we wouldn’t recommend pursuing as it complicates the sales process.
  • Should an experienced CCO be hired or should those compliance duties be assigned to another employee?
  • How much will it cost to establish a sound compliance program?
  • In addition to the operational and marketing aspects needed, there are very important regulatory and other issues that need to be addressed.
o   Many investors demand strict risk management and compliance policies and procedures as industry best practice, regardless of whether they are required by law or significantly more stringent.


  • The operational infrastructure must handle the nuances that the US mutual fund market demands – determine whether this should be built internally or instead consider aligning with a turnkey solution such as a series trust that has the compliance programs and established infrastructure already in place.


What is the plan to differentiate from the competition?


The US investment market is huge – close to $15.7 trillion in total net assets is invested in mutual funds alone – but rife with fierce competition.


To have any chance of success, managers must have:


  • A quantifiable and repeatable alpha-producing strategy.
  • A strong brand or a plan to build one early in the launch phase.
  • Established relationships with consultants, platforms, and other economic buyers in advance of coming to market.


Which distribution channel(s) is best in order to penetrate the prospective investor base?  


A well-developed distribution strategy should clearly define the channels and advisor type that the strategies in question can be best matched against.

Your sales and marketing arm must understand the following:

  • Platforms such as Schwab OneSource, Merrill One, and Raymond James dominate the distribution landscape and are key mechanisms through which sales teams deliver funds to the end investor.
  • There are key factors such as fund AUM, fund track record, and Morningstar® ratings that dictate fund selection even despite having a strong brand name.
  • Performance fees that are part of everyday life in the alternative space are very hard to obtain in the ’40 Act construct, and while possible, the roadblocks and intermediary reticence make for a complicated and difficult sales process.
  • A strong web and social media presence is crucial to establishing brand awareness amongst individual investors and financial advisors.
  • Thought leadership materials need to be developed regularly and maintain consistent themes to establish your firm as an industry leader.



SEI has decades of experience in the ’40 Act space and we’ve discussed best practices and successful strategies with hedge fund managers to answer these questions and form their own opinions on if going that route is the best decision for them. Sometimes going through this process has helped managers make decisions that have positively affected their bottom lines by helping them effectively develop a mutual fund and line up distribution efforts, while in other cases prevent them from entering a market where success may be very hard to come by and the distractions could adversely affect the remaining parts of their business.

For those managers that have concluded that going down the ’40 Act path is appropriate, it would be prudent to partner with a firm that has the infrastructure in place to help them establish an SEC registered office, build a sophisticated compliance program, and participate in a world class administration/distribution solution all of which collectively is designed to efficiently bring new products to market.

The US market offers managers tremendous potential opportunities, but they must go in “eyes wide open”, commit and accept that initially asset-raising will likely be slow and sometimes choppy, and expenses may overwhelm revenues for some period. However, for the EU fund managers that have differentiated products able to fit in the ’40 Act structure and invest in smart, forward-thinking marketing practices and a flexible operational infrastructure, the opportunity to capture market share in the long run is there for the taking.




For further information on how SEI can help you to set up a ’40 Act fund please contact Dan Petrovic at