Why Feeder Funds are Outdated and Bankable Products are the Future

Feeder funds remain the most common way to access alternative investments, though market dynamics are shifting rapidly. These traditional structures, while proven effective for hedge funds and private equity access, face growing competition from newer solutions. Bankable products have emerged as a compelling alternative, changing how both investors and managers approach alternative investment access.

The Traditional Approach

Feeder funds developed as a practical way to democratise access to alternative investments. The structure pools money from multiple investors into a single vehicle, which then invests directly into a master fund handling the investment strategy. This approach solved a fundamental problem – it let smaller investors participate in alternative investments that typically require large minimum investments.

But times change. The financial markets have evolved, and so have investor expectations. Today’s investors want simpler, more cost-effective ways to access alternative investments. This shift has driven innovation toward newer solutions, particularly bankable products, which address many of the limitations of the traditional feeder fund model.

 

Limitations of Feeder Funds

1. Complexity and Cost

Feeder funds involve a multi-layered structure that adds complexity to the investment process. The additional layers of administration and compliance translate into higher operational costs, which are often passed on to investors. These expenses ultimately reduce investor returns, making feeder funds less efficient than simpler investment structures.

2. Liquidity Constraints

One of the main drawbacks of feeder funds is their restrictive redemption terms. Investors typically face long lock-up periods, often several years, with limited withdrawal windows. This illiquidity can pose significant challenges for investors who may need faster access to their capital.

3. Transparency Issues

The multi-tiered structure of feeder funds often obscures visibility into the underlying investments. This lack of transparency makes it difficult for investors to fully understand their investment exposure and properly assess risks. It also complicates the due diligence process, as information must flow through multiple layers.

4. Regulatory Challenges

Managing feeder funds across jurisdictions involves navigating complex regulatory requirements. Different countries have varying rules for fund structures, investor eligibility, and reporting. Meeting these diverse regulatory demands increases operational complexity and can limit the ability to accept investors from multiple jurisdictions.

 

The Rise of Bankable Products

Bankable products let investors access alternative investments through their regular bank or brokerage accounts. These typically take the form of structured notes or securitised investments that are designed to work within existing banking infrastructure. What makes them “bankable” is that they can be held and traded through standard custody accounts, just like other securities.

The key is that these products integrate with standard banking systems. When a product becomes bankable, investors can hold it in their regular accounts and track it alongside their other investments. This approach makes alternative investments more accessible through the traditional financial infrastructure.

 

Advantages of Bankable Products

1. Enhanced Liquidity

Bankable products are designed to be easily bought and sold through bank and brokerage accounts, providing investors with greater liquidity. While actual trading frequency depends on the specific product structure and terms, the integration with standard banking infrastructure can simplify the overall process.

2. Cost Efficiency

By eliminating the multi-layered structure of feeder funds, bankable products can significantly reduce administrative and operational costs. These savings can enhance net returns for investors and make alternative investments more attractive to a broader audience.

3. Transparency and Simplicity

Bankable products offer greater transparency and streamlined performance reporting. This transparency simplifies the due diligence process and allows investors to make more informed decisions based on readily available data.

4. Scalability and Accessibility

The streamlined nature of bankable products makes them more scalable and accessible to a wider range of investors. Through collaboration with International Central Securities Depositories (ICSDs), global banks, and paying agents, financial institutions can easily integrate these products into their offerings, broadening the reach of alternative investments to accredited investors and smaller institutions that were previously excluded.

5. Regulatory Compliance

Bankable products follow established securities frameworks, making certain compliance aspects more straightforward. This structure can ease cross-border distribution challenges, though specific regulations still apply based on jurisdiction and investor classification.

 

The Opportunity with Bankable Products

Broadening Access to Alternative Investments

While these products do not change investor qualification requirements, they make alternative investments easier to handle within standard banking infrastructure. Qualified investors can access and monitor these investments through their existing bank and brokerage relationships, alongside their other securities.

Discoverability

Bankable products improve the discoverability of alternative investments. Through a centralised database investors can access a wide range of investment opportunities. Similar to how you would via stocks and bond options on public exchanges. This central access point reduces the time and effort required to research and identify potential investment opportunities. 

Accessibility

Using familiar banking and brokerage services lowers the barriers to entry for investors. Unlike feeder funds, which still have high minimum investment thresholds and complex subscription processes, bankable products offer a more simple path to investment. This means that certain types of alternative investments can also be made available to smaller institutions and retail investors. 

 

Monitoring and Transparency

By using bankable products – there is an extra level of transparency involving the process. Bankable products have streamlined reporting processes, similar to public market investments. Investors can track the performance of their investments through regular updates and access to detailed reports via their regular bank or brokerage accounts. This extra level of transparency helps investors to understand their investments and builds trust. 

Operational Efficiency

For investment managers, bankable products help to streamline operations by reducing the amount of administrative pressure and governance complexities. The standardised nature of these products allows for easy reporting, auditing and ensures regulatory compliance. By simplifying the process, bankable products allow managers to focus more on their investment strategy and less on administrative tasks. 

Global Distribution Potential

Bankable products facilitate global distribution through the use of ICSDs, global banks and paying agents. Investment managers are able to tap into a wider range of investors and scale their offering across borders more effectively than traditional feeder funds. 

Conclusion

The alternative investment industry has undergone substantial transformation over the past decade. While feeder fund models continue to be a popular choice for some, the rise of bankable products has presented a modern solution that better aligns with the evolving needs of investors and the broader financial ecosystem. 

 

Bankable products provide improved liquidity, cost effectiveness and transparency that investors require, while also being easier to manage and scale for managers. As the industry continue to evolve and adapt, the adoption of bankable products is set to accelerate. For firms looking to seize the opportunity, bankable products can unlock new opportunities for growth and success, as well as servicing the needs of their investor base. Here at FundFront we specialise in structuring bankable products and other alternative investment fund structures. If you would like to learn more about our services and software solution, please reach out to us at hello@fundfront.com or visit our contact page here. 

 

Disclaimer

FundFront provides operational and technological solutions for fund structuring, securitisation and management. We do not provide legal, tax or financial advice. We recommend that you consult with professional legal or financial advisors to ensure compliance and appropriateness for your specific situation.