InvestHedge
global distribution
Nine key considerations for
European managers approaching
the US market
I
How do managers wanting to attract investors from further afield go about it?
SEI Investments explains
By Claire
Makin
n the past, most European fund managers,
whether they specialised in alternative
strategies or long-only,
considered it madness
to launch themselves
into the daunting US
market. But many of
them are having a tough time raising assets close to home, and are
increasingly looking to the US and
Asia for new investors.
The US hedge fund industry has
posted a faster and stronger recovery than other regions of the world.
In Europe, meanwhile, uncertainty
over the new AIFMD framework
and investors’ enduring memories
of the 2008 financial crisis have
held back asset raising in some
quarters, despite record inflows for
the industry as a whole in 2013.
“The US is a hubbub of activity. It
is twice as big a market as Europe,
and a lot of our European clients are
asking us, ‘How do we attack the
US market?’,” says Ross Ellis, head
of the SEI Knowledge Partnership,
which is the thought leadership
programme of Pennsylvania-based
fund administration and investment operations outsourcer SEI.
As a result, SEI has put together
a guide for managers who want to
raise assets in the US. In Nine key
considerations for European managers
approaching the US market, SEI walks
managers through nine questions
that they should consider when
Ross Ellis
deciding on the most appropriate
structure to adopt for their US foray.
There is no quick and easy
solution, so ultimately managers must decide if they have “the
brand, commitment and resources” to tackle the market, says
Jonathan Dale, director of distribution at SEI’s Inv­estment Manager Services division.
SEI’s guide is set against the wider
background of extreme competition in the global funds marketplace, and increasing investor
choice. SEI says that managers must
be prepared to remain flexible and
consider offering their strategies
in multiple packages to make the
most of the growth opportunities
and powerful distribution networks that the US has to offer.
“The landscape changes all the
time. Each [distribution] channel
has its own nuances; each segment has its own challenges. That
Jonathan Dale
is one reason for the ‘nine key
considerations’,” Ellis says.
There is no one-size-fits-all best
product structure for managers
new to the US market. Instead, the
‘packaging’ that managers choose
for their products should be driven
by the types of investors that they
want to target, and the specific investment strategy they are offering
to these investors, according to SEI.
Managers can then decide
whether to go for an 1940 Act-Only
Registered Investment Company,
a mutual fund, ETF, collective investment trust, separately managed account or another of the US
market’s regulatory structures.
SEI’s goal is to help managers, traditional or alternative, to focus on
the right issues in the right order,
which is not what they have been
doing. “They really didn’t have a
logical roadmap at all,” Ellis says.
The most common mistake that
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global distribution
US and EU: major products a glance
US product packages
• Closed-End Fund (CEF)
• Collective Investment Trust (CIT)
• Exchange-Traded Fund (ETF)
• Interval Fund (INF)
• US Mutual Fund
• Private funds 3(c)(1) and 3(c)(7) funds
• Separate and Wrap Account (SWA)
• 1940 Act-Only Registered Investment Company
EU product packages
• Irish Qualifying Investor Alternative
Investment Fund (QIAF)
• Irish Variable Capital Company (VCC)
• Luxembourg SICAV
• UK Authorised Unit Trust
• UK Open-Ended Investment Company (OEIC)
• Undertakings for Collective Investments in
Transferable Securities (UCITS)
managers make is to approach the US market
with fixed ideas about a product structure, instead of first identifying a target investor group
and a suitable investment strategy. “Managers
should be product-agnostic because they are
selling a strategy, not a vehicle. They shouldn’t
be defined by product packaging,” he notes.
Typically, managers believe that the key is to
set up a mutual fund under the 1940 Act, especially if they already run an EU-regulated UCITS.
“Managers are starting from the wrong place if
they come in and say definitively, ‘I want a ’40
Act fund’ and pound the table. There are a lot
more strategic thoughts that you need to have
before taking this tactical decision,” Dale adds.
In the worst case, an exotic flagship strategy
that has been shoehorned into ’40 Act requirements for liquidity, leverage and diversification
will probably not track the flagship and may
hurt the firm’s reputation if it underperforms.
Failing to match the strategy to the target
investor group is a major stumbling block for
managers. “We have had conversations with
clients who are gung-ho about the US market,
but halfway through, we convince them they’ll
fail if they continue along their pre-conceived
one-dimensional path. A lot of conversations
start and finish within an hour,” Ellis says.
SEI managed to dissuade a systematic macro
manager from targeting the mass retail Individual Retirement Account market, for instance.
“Not one adviser would understand it and with
their reputation on the line, not to mention
potential litigation, they are not going to recommend the product to the unsophisticated
‘widow and orphan’ investor,” Ellis notes.
The defined benefit market is better suited to
more complex alternative strategies. For smaller
pension plans or the retail market, more appropriate strategies are long/short equity, managed
futures, or “something the plan sponsors or the
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platform are already comfortable with”, Dale says.
Only when managers have got these details
right should they look at product packaging
and a distribution channel.
The US distribution landscape can appear very
alien to European managers, who are used to
forming alliances with bank distribution networks. In the US, large platforms run by the likes
of Charles Schwab dominate mutual fund distribution, while the largest distribution networks
are run by the national wirehouses and by independent broker/dealers, not the national banks.
While setting up a 1940 Act vehicle will open
up huge opportunities, managers must be
aware of other requirements. “It is easy enough
to comply with the ’40 Act guidelines from a
regulatory standpoint, but all the other things
that Charles Schwab, Fidelity and other platforms or distributors want are not as easy to
figure out,” Ellis observes.
For instance, some historically open-architecture Registered Investment Adviser (RIA) custodians now require start-up fund families to
provide asset expectations and expressions of
interest from their RIA network, meaning that
the fund families must have RIA relationships
prior to or shortly after launch. In general,
“managers need to be better educated and prepare up front for the distribution and platform
requirements facing them in the US”, Dale says.
Managers must also be aware of the wide variety of payments made by funds and advisers to
distributors and intermediaries, which go under different names, are made for many different services, and are closely watched by the SEC
to ensure that they are not fraudulent, connected to preferential treatment or harm investors.
Another option is to develop relationships
with consultants, who are increasingly reaching
into retail territory by designing customised target date funds for 401(k) retirement plans, and
adding alternative strategies for diversification.
Alternatively, managers could go for a subadvisory relationship with another manager,
which is a good route for those who simply want
to manage money rather than build a brand.
Branding is a major red-flag area. “Brand can
be powerful but it is difficult. It is also expensive and notoriously hard to build in a short
period of time,” Ellis says. SEI has come across
several European managers who launched in
the US, only to exit shortly after because their
brand was not as well known as they believed
and would take longer to become profitable
than the home office anticipated.
For this reason, SEI sees a lot of managers
choosing to focus on the RIA market. “It is
more open to boutique and newer managers,”
Dale notes. The challenge is that these are small
firms and the successful ones use social media
and other digital networks effectively, which
requires marketing expertise in a highly regulated environment, he adds.
The most successful managers take a targeted
approach by choosing a very narrow distribution
channel and strategy, so as not to be vulnerable
SEI’s ‘nine key considerations’

What type of investor do I want to target?
Is the investment strategy I employ suitable
for this target investor type?
Within the target investor base, what
sub-classification of investor am I looking
to target?
Will the product packaging allow me to
employ my strategy effectively?
Which distribution channel(s) should
I consider to penetrate the prospective
investor base?
What is my plan to differentiate myself
from the competition?
What infrastructure/resources do I need
to distribute my product(s) effectively?
Do I understand the regulatory and
technical framework to effectively deliver
my strategy to market?
How long will it take to gain traction
(assuming performance is not a
negative factor)?
to competition on all fronts. Rather than building multiple relationships, they tend to leverage
existing ties with a select few wirehouses/IBDs
or turnkey asset managers, Ellis says.
All these choices lead to the question of resourcing, and whether the manager has deep
enough pockets to distribute effectively.
The institutional market is not nearly as resource-intensive as the mass retail market, and a
manager who goes down the consultant-driven
route will need only two or three experts on the
ground to network. “But you still do need patience building relationships,” Dale points out.
Managers must also have a firm grasp of the
regulations and operational framework necessary for their product choice. The SEC requires
all mutual funds to designate a chief compliance
officer, for instance, while the 401(k) market is
wedded to strategies that offer daily liquidity.
Having considered all these options, managers naturally want to know how long it will
take to gain traction in the US, assuming they
achieve decent returns.
Success does not come easily or quickly, SEI
warns. To attract notice from major allocators,
mutual funds, ETFs and separate accounts all
set asset and track record requirements for
products, and it can take anywhere from two
to five years to gain a foothold in the market.
But managers should not be discouraged. According to Ellis and Dale, intermediaries are looking for
more alternative strategies to offer, and they want
to learn about these investments and how they fit
into portfolios. “They are very, very hungry for information but they are afraid to make mistakes.
Education goes a long way,” Ellis points out.
Their message to managers who think they
have a winning strategy to offer the US market:
“Don’t wait. The longer you wait, the higher
the likelihood you will be in an even more
competitive situation,” Dale says.
March 2014