Things to Consider When Launching a Hybrid Fund
April 05, 2022
By Eugene Tetlow
When managers want to launch a hybrid fund, there are a handful of things they need to consider. On March 24, 2022, EisnerAmper hosted a roundtable at the ALTSLA 2022 alternative investment conference for the California industry to discuss the topic.
- Eugene Tetlow, Director, EisnerAmper (Moderator)
- Courtney Alexanderson, Partner, EisnerAmper
- Keith Miller, Partner, EisnerAmper
- Matei Odobescu, Partner, EisnerAmper
Advantages of a Hybrid Fund
Traditionally, when deciding where to allocate their capital, investors had to decide between open-ended funds such as hedge funds or closed-ended funds such as private equity, venture capital, etc. Hybrid funds look to bridge this gap by incorporating attributes of both open- and closed-ended products. Several benefits of hybrid funds were discussed including the increased liquidity for investors compared to a closed-ended fund, where capital is typically locked up for a number of years. Another benefit was the exposure to a wider number of investment opportunities without the need to be invested.
The Structure of Hybrid Funds
There are several structures available for general partners (GPs) looking to launch a hybrid fund, and three common types were discussed during the roundtable. First was the creation of side pockets (and having a competent CFO or COO is key to ensure that side pockets are unwound equitably). Second, the series fund structure was also discussed. This structure allows investors to choose which investment(s) to participate in within the fund. One consideration with the series structure is the potential additional costs associated with having multiple series (i.e., separate tax returns for each series and separate financial reporting for each series). The final option was the creation of special purpose vehicles (SPVs). This is a good option for a manager who specializes in either closed- or open-ended investments and wants to branch out to take advantage of an opportunity outside of their initial mandate.
The lines between public and private investments are more interlinked than they have ever been before. Limited partners (LPs) want access to both types of investments and GPs are responding to the demand giving their investors access to both. The structure of a hybrid fund is different from both a public focused fund and a private focused fund. With that in mind, connecting with the right advisors to ensure the most efficient structure is taken advantage of is increasingly important.