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Arman Salavitabar, CFA

Arman Salavitabar, CFA

Founding Partner, FundFront

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Why Feeder Funds Are So Expensive

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Feeder funds provide a conduit for investors to access larger master fund structures. However, setting up and managing feeder funds can be notably expensive. This paper delves into the specific reasons behind the high costs, focusing on the duplication of costs and operational expenses that firms must navigate.

Duplication of Costs in Feeder Funds

High Legal and Regulatory Compliance Costs

Separate Legal Entities for Feeder Funds

Feeder funds are often established as separate legal entities, each requiring its own legal documentation, regulatory filings, and compliance checks. This results in duplicative legal costs, as each feeder fund must independently satisfy jurisdictional requirements.

Individual Regulatory Compliance for Feeder Funds

Every feeder fund must comply with the regulatory frameworks of its respective jurisdiction. This means separate AML/KYC procedures, filings, and audits for each feeder, leading to significant cost duplication. Firms often need to hire additional compliance officers or legal consultants to manage these processes.

Administrative and Reporting Costs for Feeder Funds

Multiple Administrative Processes in Feeder Funds

Each feeder fund requires distinct administrative processes, including bookkeeping, investor reporting, and record-keeping. This redundancy demands additional administrative personnel and resources, driving up costs.

Independent Financial Reporting for Feeder Funds

Feeder funds must prepare their own financial statements and reports. This entails separate accounting work, audit processes, and reporting to investors, duplicating efforts and increasing expenses.

Tax and Audit Costs for Feeder Funds

Distinct Tax Filings for Feeder Funds

Feeder funds must file their own tax returns, often dealing with different tax regulations across jurisdictions. This necessitates multiple tax advisors and increased preparation time, leading to higher costs.

Separate Audits for Feeder Funds

Each feeder fund requires an independent audit to ensure compliance and accuracy in financial reporting. This results in multiple audit fees, significantly adding to the overall cost burden.

Operational Expenses in Feeder Funds

Technology and Infrastructure Costs for Feeder Funds

Multiple Technology Platforms for Feeder Funds

Operating multiple feeder funds often requires several technology platforms for fund administration, investor relations, and compliance monitoring. Each feeder fund might necessitate customizations or separate licenses, leading to increased technology costs.

Data Management Systems for Feeder Funds

Maintaining separate data management systems for each feeder fund to ensure accurate record-keeping and reporting can be costly. Firms need to invest in robust systems that can handle the complexity of managing multiple entities.

Investor Relations Costs for Feeder Funds

Enhanced Communication Requirements for Feeder Funds

With multiple feeder funds, firms must manage investor communications for each fund individually. This includes sending out reports, handling inquiries, and organizing investor meetings, all of which require dedicated resources.

Customization of Reports for Feeder Funds

Investors in different feeder funds may have varied reporting preferences and requirements. Customizing reports to meet these needs increases the workload and costs associated with investor relations.

Custody and Banking Costs for Feeder Funds

Multiple Custodian Relationships for Feeder Funds

Each feeder fund typically requires its own custodian and banking arrangements. Managing multiple custodian relationships involves additional fees and administrative tasks, contributing to higher operational costs.

Segregated Asset Management for Feeder Funds

Assets held in separate feeder funds must be managed individually, leading to duplicated effort in portfolio management and oversight. This necessitates more personnel and resources, increasing overall expenses.

Transitioning to Bankable Products

Introducing Bankable Investment Products

Securitization as a Solution

One way to bring investment opportunities to market is through securitization, which involves issuing investment opportunities in the form of securities. This can help standardize the investment product, making it more attractive and accessible to institutional investors.

Enhancing Liquidity with Tradable Securities

Securitized products can offer greater liquidity compared to traditional private investments. By converting investment interests into tradable securities, investors gain the ability to buy and sell their positions more easily, which can enhance the overall attractiveness of the investment.

Making Investment Funds Bankable

Coordination with ICSDs

Coordinating with International Central Securities Depositories (ICSDs) can make investment funds bankable. ICSDs facilitate the global distribution and settlement of securities, increasing the fund’s accessibility and attractiveness to a broader range of investors.

Standardization of Fund Structures

Implementing standardized legal and operational documentation across investment products can reduce the complexity and cost of setting up each new fund. This approach helps streamline the compliance and administrative processes, making the funds more appealing to investors and reducing duplicated efforts.

Strategic Partnerships for Cost Efficiency

Partnering with FundFront for Integrated Services

FundFront offers consultancy services that integrate all necessary service providers for managing investment products. This holistic approach not only reduces operational complexities and costs but also ensures that the products brought to market are fully bankable.

Leveraging Technology Platforms for Efficient Management

Utilizing advanced technology platforms that offer integrated solutions for fund administration, compliance, and investor relations can significantly lower operational costs. Platforms like FundFront’s HUBS can streamline the discovery and access of investment products, making them more efficient and attractive to investors.

Conclusion

The high costs associated with setting up and running feeder funds are primarily driven by the duplication of legal, regulatory, administrative, and operational processes. Each feeder fund requires separate compliance measures, administrative support, and investor relations efforts, leading to substantial expenses.

Understanding these cost drivers is crucial for firms considering the establishment of feeder funds. By transitioning to bankable products through securitization, coordination with ICSDs, and strategic partnerships, firms can mitigate some of these expenses and enhance the overall attractiveness of their investment offerings.

Feeder funds offer significant benefits but come with inherent cost challenges. Firms aiming to manage these costs effectively may benefit from adopting bankable products and partnering with experienced service providers like FundFront, who can offer tailored solutions to streamline processes, bring products to market, and make them bankable.

Written by:

Arman Salavitabar

Arman Salavitabar

Founding Partner, FundFront

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