Hybrid funds are an innovative development in the cross-border funds industry that are intended to allow a wider range of investors to access private markets. Take our survey on to gain insight into this new part of the industry.
Although no standard definition exists, generally, a hybrid fund will have at least one of two features.
First, they invest in illiquid private assets but can also put a portion of their capital into liquid public-markets securities.
Secondly, hybrid funds offer more frequent redemption periods (or ‘liquidity windows’) to investors than what private-capital funds have historically offered. This blends the closed-end structure of private markets funds with the open-ended structure of traditional, pubic-markets funds. This liquidity is the reason for a portion of assets being invested in public markets so that redemptions (and subscriptions) can be managed.
The best-known iterations of hybrid funds in recent years are the ‘ELTIF’ in the EU and the ‘LTAF’ in the UK.
As traditional fund managers continue to build their private-markets businesses (driven by demand from ‘traditional’ investors who wish to diversify their investments and gain from the ‘illiquidity premium’ that is offered by holding illiquid assets) it is anticipated that more hybrid funds will come to market, particularly since the EU revised the ELTIF rules – a measure widely welcomed by the industry.
Hybrid funds have an important role to play not only in allowing a wider range of investors (e.g, smaller DC pension funds and less sophisticated wealthy individual investors) to access private markets, but also in providing finance to ‘grassroots’ companies in the EU and UK and, therefore, boosting economies.
But do fund managers consider these structures too complex? How do firms feel about the risk of misaligning liquidity risks? Will investors expect a deeper level of transparency than private capital has traditionally offered and can fund managers provide it? How do they view the challenge of valuing these funds? And is there a role for hybrid funds in ESG portfolios?
Funds Europe, in partnership with fund administrator CACEIS, seeks to identify how successful these funds will be at financing the UK & European economies by gaining insight into the appetite among fund managers for creating and distributing hybrid funds.
