This publication examines the regulatory frameworks applicable to multi-manager funds and fund of funds in Ireland, a leading key European "exporting" fund domicile, including the opportunities available through the use of pooling techniques.
Multi-Manager Funds v Fund of Funds
It is important to understand at the outset that multi-manager funds and funds of funds are different products and are subject to quite different regulatory regimes, even though one finds that the term "multi-manager" is often loosely used to describe both fund types. The principal differences between the two fund types can be summarised as follows:
A fund of funds is one which has as its main object the investment of its assets in other funds, whereas a multi-manager fund, instead of investing in other funds, engages different portfolio managers to directly manage its assets in separate accounts, with discrete asset portfolios being allocated for management across those individual portfolio managers.
A fund of funds will generally be just one of many investors in the underlying funds into which its invests, whereas in a multi-manager fund the assets remain within the scheme, simply being managed on a separate account basis.
Multi-manager funds set parameters for discrete mandates for each portfolio manager to whom assets are allocated, with the capacity to readily alter those mandates and to re-allocate assets between portfolio managers to achieve particular styles. A fund of funds controls its own allocations across different funds but has no control over the objectives or styles of management of the funds it invests in other than the capacity to redeem (where allowed).
Multi-manager funds are generally not regulated as such (other than in relation to portfolio manager appointments and prospectus disclosure) but the fund itself will have to comply with its own applicable investment restrictions (whether UCITS or non-UCITS) tailored for its investment objective. The true multi-manager element is a management style, not a separate product type. A fund of funds is specifically regulated, normally by reference to the types of underlying funds into which investment may be made (UCITS, non-UCITS, open or closed-ended, or limited liquidity, regulated or unregulated etc.) and the maximum permitted exposures to any one underlying fund.
A fund of funds will normally not have frequent access to detailed portfolio information from the underlying funds, receiving such information only periodically, whereas a multi-manager fund, because it retains its portfolio under its delegates management, will be able to see at all times its portfolio holdings which can more readily facilitate its allocation strategies and enable greater compliance monitoring.
A fund of funds is subject to the aggregate fees of each of the underlying funds (management, administration, custody, audit etc.) in which it invests although may be able to negotiate rebates of management fees or invest in classes with lower management fees, depending on size of investment. Regulations may dictate treatment of rebates from underlying managers and entry/exit charges. The fees of individual portfolio managers within a multi-manager scheme are negotiated on a portfolio manager by portfolio manager basis, depending on the type and size of portfolio allocated, the required management style/performance criteria etc.
For small funds, adopting a multimanager approach may not be commercially appropriate or practical – the mandates it can allocate may be too small for most portfolio managers and the structural costs (selection process, portfolio and compliance monitoring, account administration and custody) too great to justify such a structure – pooling may offer a solution to this difficulty. A fund of funds benefits from economies of scale as it is generally only one of many investors in other managed funds. Provided it can meet any minimum investment requirements of its target funds, its own size is generally not relevant and relatively small portfolios can readily be managed on a fund of funds basis.
In a fund of funds, the central compliance focus is on fund selection (due diligence) and monitoring the allocations across underlying funds to ensure both regulatory and self-imposed maximum exposure criteria are met. The fund of funds does not have a contractual control over the management of the underlying funds nor can it monitor the underlying portfolios other than on a periodic basis. The position is quite different for a multi-manager scheme – it manages its own portfolio within its own product limits, contracting directly with portfolio managers to manage discrete portfolios giving each tailored mandates, benchmarks, performance targets, etc. It is for the multimanager fund or its investment manager (responsible for portfolio manager selection and monitoring) to blend those mandates/portfolios to meet the overall fund objective and to comply, on an aggregate basis, with the investment and borrowing restrictions at the fund level. Additionally, as the portfolio managers are delegates of the multi-manager fund, it retains a responsibility over the portfolio managers for asset management and for monitoring performance and other developments at portfolio manager level.
Regulation of Multi-Manager Funds in Ireland
There is no specific regulation of multi-manager funds in Ireland, the applicable rules being those of the actual fund type (UCITS or AIF, vanilla or alternative etc.) and the general rules relating to the process of appointing portfolio managers, continuing filing obligations and prospectus disclosure. The following diagram shows a basic multi-manager structure.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.