Global service provider IQ-EQ launched a hybrid funds desk to give fund managers the flexibility to invest in a range of asset classes and combine both illiquid and liquid investment strategies, expanding their pool of potential investors.
Although hybrid funds have become increasingly popular in recent years and offer several advantages over more traditional private equity funds, most notably enhanced liquidity and transparency, these funds present several challenges from an admin perspective.
Justin Partington, IQ-EQ’s global head of funds, said the hybrid funds desk offers a full suite of services at the fund, asset and investor levels, and combines the firm’s technical expertise with streamlined technology solutions.
One of challenges for private fund managers launching a hybrid fund is valuations, Partington noted.
“Traditionally, valuations have been done much less frequently, perhaps a couple times a year or quarterly, and this market tends to want valuations on a much more frequent basis. And if investors are coming in and out of funds, there need to be valuations that reflect their points of entry. The increased subscription and redemption puts a lot more pressure on managers to have current valuations, which requires more data, more technology, more comparables and a more timely process,” he explained.
And because investors come into hybrid funds at different times, they’re entitled to different amounts of upside for the period they are in, he added.
“Creating that through series accounting or parallel funds so that investors only get the value they are entitled to and only pay fees based on the value they acquire at is very tricky. And this creates a lot of operational accounting challenges.”
Another challenge, at least for larger funds, is simply having to onboard more investors.
“When you start to get more high-net-worth investors and there are a lot more investors in the fund, you have the operational challenges of onboarding investors, and calculating values for them, and it adds to the complexity. If you’re going from 30 investors to 500, you need a good, efficient platform to gather information in a tech-driven way,” Partington noted.
Finally, hybrid funds require greater transparency and enhanced reporting, especially from investors who are more familiar with open-ended or hedge fund structures.
“One way IQ-EQ has helped hybrid fund managers is by combining people with the knowledge of both open-ended funds and investors, and private market investment characteristics, and combining our systems to support the onboarding and set-up of the hybrid funds structure.”