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Securitisation for Hedge Fund Distribution SPONSORED POST

What is securitisation?

Securitisation is the issuance of tradable financial instruments backed by one or a group of assets. Through securitisation, assets receive an additional layer of accessibility in the financial markets, allowing for the funding of an investment strategy, or for financing based on creditworthiness, cash flows, and/or collateral of an organisation. The result of securitisation is a tradable financial instrument that can be purchased globally through brokerage accounts.

One of the primary reasons for the growing popularity of securitisation in recent years is its flexibility in the choice of an underlying asset. As a Relationship Manager, my personal clients have turned anything from highly liquid assets, such as stocks and bonds, to more illiquid assets, such as real estate, into a security.

The advantages of a global securitisation program, such as those arranged by FlexFunds, are that investors access these securities from their existing brokerage accounts, imposing no additional Know Your Client (KYC) or Anti-Money Laundering (AML) requirements. Assets stay within existing custodial accounts, and any redemptions or distributions are delivered directly to the investors. Top-tier service providers, each serving a different role in the program, are key to ensuring the program’s robustness and trustworthiness.

Securitisation, as with any other alternative investment vehicle, is most useful when customised to each specific situation. To choose the most advantageous investment structure, asset managers may consider the:

  • degree of applicable regulatory impact;
  • burden of administrative diligence;
  • complexity of accessing global investors; and
  • speed with which the investment structure can capture opportunities.

For investors, some of the key aspects are typically the:

  • ability to target assets;
  • flexibility to choose passive or active strategies;
  • cost efficiency of the vehicle; and
  • simplicity of the on-boarding process. 

Challenge

Asset managers that ramp up distribution into any banking platform have certain objectives that traditional structuring choices, including offshore funds, UCITS and AIFMDs, do not efficiently fulfi l. Asset managers must decide which distribution or capital raise solution will work best based on the size of the fund.

In scenarios where funds are seeking a single investor, a private offshore investment may be ideal. If larger investments are placed into restrictive institutional asset management like pension, insurance or sovereign funds, UCITs or AIFMDs may be viable vehicles. However, most funds look for efficient distribution among investors of various sizes, in any bank and in any region.

Hedge funds seeking additional distribution in new markets typically target investment ranges from US$20 million to US$200 million. Investing in private offshore funds adds risk and additional administration burdens, becoming a less than optimal choice for buyers. European fund structures like UCITs and AIFMDs typically pose cost and timing challenges and require approval from individual investors’ banks as a prerequisite to trading.

Securitisation works best in this latter scenario because it allows access to multiple investors within a wide array of financial institutions. It does so in a timely and cost-efficient manner, independent of the initial distribution amount.

“An important issue in the hedge fund industry that might affect the relation between asset flows and performance is that flows of money into and out of hedge funds are restricted. There are typically lock-up periods (i.e., minimum initial investment periods) and redemption notice periods restricting withdrawals. There are also subscription periods limiting inflows. Additionally, if a fund has reached the maximum limit of 500 investors it might be closed to new investors, while it may also be the case that given diminishing returns to scale in this industry, hedge fund managers are unwilling to accept new money before reaching the critical size. Thus, while in the mutual fund industry investors’ decisions in supplying capital ultimately drive the flow-performance relationship, in the hedge fund industry liquidity restrictions and other organisational aspects on the demand side for capital are likely to have some influence on the shape of the relation.”1

Currently, funds face challenges receiving capital from certain types of investors, and investors have difficulties subscribing to funds in a traditional way. Securitis ation solves these challenges by providing a bridge between the funds and investors. The hedge fund securitis ation solution allows funds to sell to investors through a new channel of broker dealers and private banks and allows international investors to easily access these funds.

Securitisation as a solution

Securitisation for hedge funds provides quick and broad investor access to private investments. The security created to access the hedge fund becomes a tool for broker dealers, private banks and registered investment advisors to purchase these funds for clients through their execution platforms, avoiding the direct subscription process.

Hedge fund securitisation is widely used, as it allows for investment at any banking platform or family office. It is a valuable resource since it provides client base confidentiality and keeps assets in custody, as well as offering a placement fee incentive, if appropriate.

Investors’ primary benefits include the lack of additional KYC/AML requirements on existing accounts and, in certain programs, such as FlexFunds’, the ability to transfer securities to other investor accounts without affecting underlying positions.

While securitisation can be used as a standalone solution for hedge funds, it is also utilis ed as an additional distribution channel for existing subscription methods, such as UCITs and AIFMDs. Securiti sation allows asset managers to focus on their core competencies: managing underlying assets to maximize economic returns and raise capital by expanding their distribution capacity.

Key advantages of securitisation

  • No additional KYC or AML requirements for investors
  • Immediate distribution to investor’s existing brokerage account
  • Facilitates capital raising with banking platforms by aligning incentives

Molly McVeigh works in Global Sales at FlexFunds. Her focus is helping clients structure customised investment vehicles for international distribution, including hedge funds, private equity firms, real estate developers and other asset managers. Molly’s experience includes managing positions in private equity and institutional investments at New York-based J.P. Morgan Asset Management. She also has a strong entrepreneurial background, having played a role in the launch of RoomSurf, a Miami-based startup. Molly graduated Cum Laude from the University of Miami School of Business with a double major in Marketing and Legal Studies.

With over $2.5 billion in total funded amount and a presence across the Americas, Asia and Europe, FlexFunds is a recognised leader in providing customised investment vehicles for asset managers, hedge funds and family offices through its robust asset securitisation program. FlexETPs are distributed through a listed Euroclearable security with an ISIN number, a price (NAV) calculation, a Bloomberg listing, and trustee and audit services. FlexETPs provide unique operational and distribution advantages for asset managers globally.

FlexFunds’ securitisation program delivers major advantages to asset managers:

  • Speed and Efficiency: Issuances are launched within 4 to 6 weeks and include a turnkey solution and banking platform setup.
  • Global Distribution: Listed securities with ISIN codes are widely circulated through capital markets.
  • Access: Investors on worldwide trading platforms require no additional KYC or AML processes.

FlexFunds’ securitisation program offers:

  • FlexETP Fund, which securitises a portfolio of publicly traded assets such as equities or debt;
  • FlexETP Loan, which securitises a private loan agreement; and
  • FlexETP Wrapper, which securitises private shares of a company or fund.

FlexFunds works with selected service providers, such as Bank of New York Mellon, Euroclear, PricewaterhouseCoopers, Sanne Fiduciary Services, Reuters and Bloomberg.

For more information, please visit www.FlexFunds.com or write to info@flexfunds.com. For inquiries in Asia Pacific, please contact Jose Manuel Lopez, Region Manager atjose.lopez@flexfunds.com.


Footnote
1 Baquero, Guillermo and Verbeek, Marno, “A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money.” RSM Erasmus University, August 11 (2005).

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