Introduction and Overview of 40 Act Liquid Alternative Funds

Introduction and Overview of 40 Act Liquid Alternative Funds

July 2013

Citi Prime Finance

Introduction and Overview of 40 Act Liquid Alternative Funds

I. Introduction

5

II. Overview of Alternative Open-End Mutual Funds

6

Single-Manager Mutual Funds

6

Multi-Alternative Mutual Funds

8

Managed Futures Mutual Funds

9

III. Overview of Alternative Closed-End Funds

11

Alternative Exchange-Traded Funds

11

Continuously Offered Interval or Tender Offer Funds

12

Business Development Companies

13

Unit Investment Trusts

14

IV. Requirements for 40 Act Liquid Alternative Funds

15

Registration and Regulatory Filings

15

Key Service Providers

16

V. Marketing and Distributing 40 Act Liquid Alternative Funds

17

Mutual Fund Share Classes

17

Distribution Channels

19

Marketing Strategy

20

Conclusion

22

Introduction and Overview of 40 Act Liquid Alternative Funds | 3

Section I: Introduction and Overview of 40 Act Liquid Alternative Funds

This document is an introduction to '40 Act funds for hedge fund managers exploring the possibilities available within the publically offered funds market in the United States. The document is not a comprehensive manual for the public funds market; instead, it is a primer for the purpose of introducing the different fund products and some of their high-level requirements. This document does not seek to provide any legal advice. We do not intend to provide any opinion in this document that could be considered legal advice by our team. We would advise all firms looking at these products to engage with a qualified law firm or outside general counsel to review the detailed implications of moving into the public markets and engaging with United States regulators of those markets. For introductions and referrals to qualified lawyers who have experience with these products, please contact us at prime.advisory@.

What is a '40 Act fund?

A '40 Act fund is a pooled investment vehicle offered by a registered investment company as defined in the 1940 Investment Companies Act (commonly referred to in the United States as the '40 Act or, in some instances, the Investment Company Act (ICA). Such pooled investment vehicles fall into two broad categorizations: open-end and closed-end. When combined with the Securities Act of 1933 (the '33 Act) and the Securities Exchange Act of 1934, the '40 Act defines the way in which these types of pooled investment vehicles can be packaged and sold to retail and institutional investors in the public markets, and places their governance under the responsibilities of the Securities & Exchange Commission (SEC). The '40 Act also contains a number of exemptions, including one for privately offered funds such as hedge funds, private equity funds, and real estate or infrastructure investment funds. All '40 Act funds are registered as securities with the SEC and are therefore considered to be publicly offered, a very different process than the creation of a private co-mingled fund (typically a limited partnership, or LP).

Both the 1933 and 1940 Acts were originally based upon a philosophy of disclosure, and require that the issuers of open-end or closed-end public funds fully disclose all material information that an investor would require in order to make the most informed decision about an investment. Unless they qualify for an exemption, securities offered or sold to the public

in the United States must be registered by filing a registration statement with the SEC. The prospectus for the investment is included as part of the registration statement and must describe the offering, its management, details about the investments which will be made across asset classes and details of the key service providers for the security. This document will explain the different types of funds being offered and provide an overview of the key requirements.

What is an alternative '40 Act fund?

There is no universal definition that describes what makes a '40 Act fund `alternative', but the tag can be applied broadly to any investment strategy that is not purely pursuing long-only investing in equities or debt instruments. The scope of alternatives therefore includes traditional hedge fund strategies (equity long/short, market neutral, global macro, eventdriven, fixed income, relative value, etc.) and also includes investing in commodities and currencies. It also extends to private equity and real estate investment vehicles; however, for the purpose of this primer we will cover mainly the liquid public market strategies where investments can be bought and sold on exchanges, either bilaterally or via brokerdealers. An alternative '40 Act fund is therefore a fund structured to allow for the implementation of an investment strategy that engages in techniques or asset classes that differentiate them from fully paid for, long-security investments.

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