Best Practices for Conducting Due Diligence on Registered Funds
Registered funds have been extremely useful for enabling more accredited and retail investors to access hedging strategies, as well as private credit, private equity, and other alternative asset classes. One reason these investment vehicles are attractive for accessing alts is because they are subject to Investment Company Act of 1940 provisions, and oversight by the Securities and Exchange Commission (SEC).
But while registered funds offer greater transparency and protections for investors, they should be researched in depth just like any potential investment. Depending on its investment objectives, risks, fees, and management, a registered fund may not be appropriate for certain investors. These are factors that investors need to examine while considering investment.
Below are some best practices to follow for evaluating registered funds during the due diligence process:
- Check the Fund’s Investment Objective & Focus: Investors should make sure they understand whether a registered fund’s long-term investment strategy focuses on growth or income, or both. They should also research the fund manager’s methodology, and how the fund will seek to navigate market changes and volatility.
- Make Sure You are Comfortable with the Fund’s Risk/Return Profile: Alternative asset classes and strategies often come with some risk. Depending on the asset and market exposure a registered fund will provide, investors may not be comfortable with the level of risk that accompany the possibility of higher returns. Investors need to understand what exposure they would be taking on by investing in a registered fund, and feel comfortable with the fund’s risk/return profile. Researching the fund manager’s approach to managing and/or mitigating risk over the long term, and in varying market conditions, is vital.
- Look Into the Fund Manager’s Track Record/Background: Registered funds sometimes have thin performance histories for prospective investors to check, especially if they focus on private investments or hedging. If that is the case, investors can research the fund manager’s professional background and history, and look into the performance of funds with similar strategies they have previously managed.
- Compare Fees to Those of Similar Funds: Registered funds typically have three types of fees—upfront, operating, and liquidation fees. Upfront fees encompass commissions and marketing costs, while operating fees can include performance-based fees and costs related to financing or real estate property management. Liquidity fees can include expenses involving the sale or liquidation of fund assets, such as loan termination and real estate disposition costs. Since these fees can vary widely depending on fund structure and asset/strategy focus, investors should evaluate a registered fund’s fees by comparing them to those of similar funds.
Our AXIS Platform seeks to simplify research and due diligence by offering real-time, accurate, and clean data on registered funds. Investors can seamlessly obtain information about investment objectives, fees, risk, and other details for registered funds listed on our mobile-first platform—and also take advantage of state-of-the-art modeling and visualization features to create model portfolios and estimate long-term performance.
But cutting-edge data and models aren’t enough to truly determine whether or not a registered fund or other alternative investment vehicle is a good fit—investors also need to be able to engage with the asset managers behind these vehicles. The AXIS Platform’s built-in social network enables investors to securely ask questions, send direct messages, exchange information, and facilitate virtual or in-person meetings with asset managers. These engagement opportunities allow investors to learn more about an asset manager’s investment approach and long-term outlook, as well as the performance history of registered funds and/or similar funds the manager is overseeing (or has overseen).