The thirst for liquid alternatives in the form of ’40 Act investment vehicles has upped the ante for experienced fund managers that not only are versed in alternative investment strategies, but are also skilled in packaging those strategies into a mutual fund format.

“Within alternative mutual funds, the multi-strategy, multi-manager approach can be very appealing because you can put together a diverse mix of non-correlated strategies that will have different headwinds and tailwinds,” said Dorothy Weaver, co-founder of Collins Capital.

Collins Capital’s Collins Alternative Solutions Fund is a diversified alternative mutual fund which targets non-correlated, risk-adjusted returns by tactically allocating capital across multiple and complementary hedge fund strategies.

“When one strategy is facing a tough environment, another is likely in its sweet spot,” Weaver said. “This can lead to very steady performance at the aggregate fund level with low volatility and little to no correlation to equity or bond markets.”

Weaver’s involvement with hedge funds dates back 20 years, when she was working in Latin America in a turnaround situation for one of the largest companies in Colombia.

“I have always been a big believer in diversification, but diversification only works if the underlying strategies are non-correlated,” she said. “Because we are trying to reduce risk and volatility within a portfolio, we’re not trying to chase either the bond market or the equities market.”

In 2011, investors asked Collins Capital whether the hedge fund concept could be packaged into a mutual fund.

“They said that they needed the kind of diversified, non-correlated strategy we offered as a limited partnership, but were looking for the same mix of managers and exposures in a mutual fund format,” Weaver said. “We were extremely skeptical at first, as we knew there were corners being cut by others and that was not what we were interested in doing. But being client-centric, we went to prove that it couldn’t be done.”

Upon reading the ‘40 Act, Collins Capital found that it was possible if it put the proper structure in place. “If we were willing to build the structure that allowed managers to execute their strategies in the same way they do in their private funds, we could map over essentially everything (90% of our strategies) from a limited partnership to a mutual fund,” said Weaver.

As it entered the mutual fund space, Collins Capital worried about adverse strategy selection.
“We learned that many of the other multi-strategy funds are pushing the regulatory responsibility (to stay within the restrictions of the 40 Act) from the Advisor down to the individual subadvisers,” said Weaver. “That results in adverse manager selection, as many managers don’t want the hassles associated with compliance.”

Indeed, evidence shows there are increasing challenges relating to the aspects of operational efficiency, regulatory and risk management, and investment decision-making in hedge fund operations, according to Aite Group.

“A frequent problem area cited in regards to technology relates to risk management,” said Danielle Tierney, senior analyst at Aite Group. “Decision-makers often express a desire for better risk capabilities, particularly related to the integration of risk systems, and the clear need for risk-system integration throughout the portfolio management process is likely to drive increased spending in this area.”

Collins Capital approached the problem differently: it asked managers what they needed (such as multiple prime brokers, ISDAs, etc.), and did the heavy-lifting in order to get the benefit of having exposure to their strategies within its portfolio.

“There are many strategies that cannot be run as standalone mutual funds,” Weaver said. “For example, one of our equity managers runs a concentrated portfolio which means, based on the ‘40 Act rules, that he would not be able to run a standalone mutual fund in this strategy. In our case, the structure we have put in places increases our ability to access a broader base of managers and strategies.”

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