The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: 401(k) Plans

  • From Vol. 6 No.20 (May 16, 2013)

    Dechert Partners Aisha Hunt and Richard Horowitz Discuss Strategies and Challenges for Hedge Fund Managers Wishing to Enter the Alternative Mutual Fund Space

    For hedge fund managers, entering the alternative mutual fund space can be attractive for various reasons, including expanded distribution, diversification of product lines, permanent or at least more resilient capital and economies of scale in investment analysis (i.e., getting more mileage out of similar investment ideas).  However, hedge fund managers entering the alternative mutual fund space must confront challenges with which they often have little or no experience – challenges relating to regulation, operations, distribution, marketing, fees, personnel, industry structure and related topics.  We recently explored the opportunities and challenges of the alternative mutual fund space in a two-part series.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013); and Part Two of Two, The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  Fortunately for hedge fund managers wishing to access the alternative mutual fund opportunity, there are a number of ports of entry into the space – different structuring tactics, different strategies and different levels of required resource commitment.  To explore the range of the opportunity and the various ways of accessing it, The Hedge Fund Law Report recently spoke with Aisha Hunt and Richard Horowitz, both partners at Dechert LLP focusing on structuring and advising alternative mutual funds.  Among other things, our interview with Hunt and Horowitz covered: the benefits and costs of offering advisory services through a series trust versus a stand-alone alternative mutual fund; the time and resources necessary to launch alternative mutual funds; open-end versus closed-end funds; trends in the use of fulcrum fees; offering commodity strategies through alternative mutual funds; cannibalization considerations; and the role to be played by 401(k) plans in the future of alternative mutual funds.

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  • From Vol. 2 No.19 (May 13, 2009)

    401(k) Plans Offer a Powerful Distribution Channel for Hedge Fund Managers Willing to Tackle ERISA, Liquidity and Non-Discrimination Concerns

    Traditionally, the investment options available to participants in 401(k) plans have been staid and sleepy, consisting primarily of stock and bond mutual funds, money market funds and similar products.  However, since around 2005, 401(k) plan sponsors have been offering hedge funds or hedge fund strategies as alternative investment options for plan participants.  Inclusion of hedge funds can benefit both sides.  For participants, it can expand the range of investment and diversification opportunities.  For hedge fund managers, it can offer a potentially far-reaching distribution channel and access to a large and largely untapped market.  But offering hedge funds in 401(k) plans raises legal and practical issues, for both hedge fund managers and plan sponsors.  On the legal side, hedge fund managers are concerned that the 401(k) plan or its participants can be construed by the Department of Labor as “benefit plan investors.”  If such investors hold more than 25 percent of any class of equity interests offered by one of the manager’s funds, the manager can be subject to the Employee Retirement Income Security Act of 1974 (ERISA).  Plan sponsors have to contend with non-discrimination rules, which generally require participants at different income levels in the same plan to receive the same investment options.  At many companies, certain employees would qualify as “accredited investors” and “qualified purchasers,” and thus would be eligible to invest in most hedge funds, while other employees would not qualify.  Plan sponsors that wish to offer hedge funds have to figure out how to do so without discriminating against the employees who would not qualify, outside of the plan, to invest in hedge funds.  Plan sponsors also have to be cognizant of unrelated business taxable income issues.  On the practical side, hedge fund managers and plan sponsors have to contend with potential discrepancies in the liquidity offered to plan participants and investors in the relevant hedge fund.  This article explores structures and approaches being used by plan sponsors and hedge fund managers to address or mitigate the various legal and practical hurdles involved in including hedge funds or hedge fund strategies in 401(k) plans.  In the course of our discussion, we offer specific strategies for addressing ERISA concerns and the liquidity mismatch between 401(k) plans and most hedge funds, and thereby provide the beginning of a roadmap for managers interested in vastly expanding the scope of their distribution into retail or quasi-retail channels.

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