WHAT IS A SERIES TRUST?
In order to operate, a fund like an ETF or interval fund must register as an investment company. This requirement, laid out in the Investment Company Act of 1940 (the ’40 Act), creates a system of standardized governance and reporting across the listed funds that fall within the ’40 Act’s purview.
Although this requirement – and the ’40 Act as a whole – exist to protect investors and provide a greater degree of transparency and accountability in the world of fiduciary management, it can place some arduous bureaucratic hurdles on the path to registering a new fund. A fund needs a board of trustees, advisors, compliance officers, legal counsel, and auditors, all of which costing both time and money to source and retain.
Enter: the series trust. This idea, which emerged in the early 2000s, creates an umbrella structure under which multiple individual funds can exist and share resources. When a fund advisor wants to avoid the upfront costs and lengthy waits inherent to registering a standalone investment trust, they can choose to instead incorporate within a series trust to save both time and money. Funds within a series trust share a board of trustees, legal counsel, compliance officers, and auditors, eliminating the need to source of those necessary components each time a fund is created. Each fund operates with its own advisor and branding, so its position in the shared trust isn’t visible to the public.
This allows the funds within a series trust to benefit from economies of scale, decreasing the new resources needed for each marginal increase in the number of funds. These saving are, in turn, passed along to the fund’s investors in the form of reduced management fees. Start-to-finish registration of a fund in a series trust can take months less than that of a standalone trust, allowing managers to more nimbly take advantage of emerging opportunities.
INTERVAL FUNDS CAN’T BE SERIES TRUSTS… YET
One glaring issue with series trusts: they’re only available to open-end funds like mutual funds and ETFs. According to the 1993 SEC mandate establishing interval funds and tender offer funds, both are required to incorporate as standalone trusts with their own officers, boards, and legal teams.
This contributes to one of the chief complaints about interval funds: their comparatively high fees. This characteristic is a result of several factors, including high legal fees and operational costs associated with the funds’ alternative investment strategies and the complicated filing requirements surrounding periodic redemption offering. But a major, unresolved contributor to these higher fees is an interval fund’s inability to benefit from the time and cost efficiencies of the series trust structure.
A PATH TOWARD EXPANDING ALTERNATIVE INVESTING
The current number of operational interval funds remains small, but it’s growing at an accelerating pace. As investors see the promise of high returns and diversification in the increasingly accessible alternatives market, interval funds will be one of the primary conduits between committed capital and hard-to-reach assets. However, for the sector to grow there must also be cost-saving innovation to continuously provide investors with attractive returns. Just as ETFs revolutionized low-cost index investing and modern brokers are embracing zero-commission and fractional trading, the alternatives space must continue to move forward toward a lower-cost, more financially inclusive management model. Series trusts reduce friction in the process of creating new funds, opening the space to smaller advisors and allowing more interval funds to fill the rapidly expanding demand for alternative strategies.
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