Mastering the Operational Challenges of Hybrid Funds

Hybrid funds emerged from the turmoil of the 2008 financial crisis, when hedge funds experienced a huge amount of redemptions and disorderly liquidations. Hybrid funds share characteristics with both hedge and PE/real asset funds. They are typically structured similarly to closed-end funds, but give managers more flexibility to make long term investments in a variety of asset classes. The idea of having access to both liquid and illiquid investment strategies through a single vehicle is appealing to both individual and institutional investors.

Although these funds offer managers the flexibility to deploy investment capital as opportunities arise while addressing the liquidity expectations of investors, they also pose operational, administrative and accounting challenges.  

Common challenges include:

• Valuing Assets: Assets are often hard to value, and therefore difficult to account for accurately.
• Complexity of P&L: Profit and loss allocations among investors are much more complex than with a hedge fund structure.
• Technology: Administrators need a technology platform that can handle complex portfolio transactions and partnership accounting, including automated waterfall calculations.
• Reporting: The fund industry has been challenged to develop standardized reporting practices. Limited Partners want to know how their capital is invested and expect clear and accurate reporting in compliance with Institutional Limited Partners Association (ILPA) reporting standards.

Fund managers need to recognize these challenges and the inherent operational complexities of hybrid funds, which can increase the risk of erroneous fee calculations and inaccurate reporting. Hybrid funds are likely to continue to grow in popularity and garner a larger share of alternative assets. They give managers the flexibility to control liquidity while giving investors access to a diverse range of asset classes with the potential for higher returns.

To find out more about hybrid funds and the associated operational challenges, download our latest whitepaper, Mastering the Operational Challenges of Hybrid Funds.