Bill Hortz's picture

Bob Dorsey has a very unique perspective of the financial services industry as the co-founder and managing director of Ultimus Fund Solutions. His firm is one of the largest, independent mutual fund service providers for RIAs in the country and is in the forefront of helping RIAs expand their investment capabilities and market reach. As part of the Institute for Innovation Development interview series, we recently asked him about the ongoing evolution of independent financial money management firms with the mutual fund industry.

Bill Hortz: “Bob, of the major 40-Act vehicles that you create for your advisor clients (mutual funds, closed-end funds, limited partnerships), what has been some of the biggest innovation trends that you have seen and what has been driving that activity?”

Bob Dorsey:  “Well Bill, when Dodd Frank came about, it required hedge fund managers with assets greater than $150 million to register with the SEC. For years, many hedge fund managers avoided registering with the SEC because they didn’t want to go through their examination process, extensive filings, and so forth. Now that they are registered, they have become more comfortable looking at SEC registered products. As a result, we are seeing, two major trends over the last few years. 

The first trend is that many of these hedge fund managers have increasingly been willing to get into the funds space by converting some of their limited partnerships or hedge funds into mutual funds. Since many of their strategies lend themselves to the mutual fund space, conversion now allows investors of all sizes to be able to invest in their types of strategies, expanding their market reach. As you know, you have to be an accredited investor to invest in typical hedge funds, so they’re now taking these hedge funds to the mass affluent, the retail market place, and, more importantly, they’re taking them to the financial intermediary marketplace which includes the independent broker dealer community and fee-based advisors. We’ve assisted in numerous conversions in the last two years from hedge fund managers. Now, not every hedge fund manager wants to be in the fund business and not every hedge fund strategy works well in the mutual fund space. So, when we talk with them, we help them understand the liquidity issues in the mutual fund structure, the daily pricing requirements, the various credit limits, board governance, board reporting, and get them comfortable with transparency; so it is an education process that we go through with them.

The second trend is the funds they developed have helped substantially expand the fund category of liquid alternative funds - from long/short equity, market neutral, arbitrage, managed futures, or newer variations on those themes and other institutional money management practices. This has lead to an explosion of liquid alternative strategy funds that are now available and will continue to be created. So, that’s what we’ve been busy working on over the last couple of years.”

 Bill Hortz: “Has this transition of hedge fund strategies to mutual funds led to different ways of looking at and performing their investment process? Are you seeing any experimentation that some of your clients may be doing in response to these structural constraints?

Bob Dorsey: “Sure, that’s a good question. As I mentioned before, some of the strategies translate well into the 40-Act space so the hedge fund manager, or now, the mutual fund manager, doesn’t really need to change or innovate too much with some of the strategies.  A long-short strategy in a hedge fund may work just as well as a long-short strategy in a mutual fund, but there are some strategies that just don’t translate well.  In the mutual fund space it may be difficult to get into certain investment vehicles or sectors because of the liquidity issues of buying the securities directly.  For instance, the distressed debt and certain other types of strategies are just not liquid enough to be in the mutual fund space. As an example, when a hedge fund manager wants to create some of those types of funds, they may get their strategy exposure by investing in ETFs or derivative products. However, we do see this need and interest in experimenting with new options and variations on strategies as being a potentially strong force for continuing innovation in this area of the mutual fund marketplace.

What we are also seeing from an ongoing evolution perspective, is an option for alternative funds being structured as non-exchange traded closed-end funds, commonly referred to as interval funds or tender-offer funds. Sometimes those terms are all used interchangeably and what that really means is you buy the funds by using a tender-offer or subscription agreement but they are priced typically monthly or quarterly, which allows the fund manager more investment flexibility. So you’re seeing a real plethora of product in the non-exchange traded closed-end fund space and in particular funds of hedge funds. I think that’s going to continue simply because these hedge fund managers are looking for new clients, new sources of asset-gathering, and these products do provide a certain amount of transparency that the financial planner or the ultimate investor doesn’t get in a standard hedge fund.“

Bill Hortz:Besides the hedge fund managers, what trends do you see from other money managers who want to build out their own mutual funds?  What does that do for them and can you give us a couple of examples.”

Bob Dorsey: “The other types of clients coming to us are your traditional investment money management firms who, for the most part, have separately managed accounts (SMAs) and they might have some limited-partnership products for some of their high net-worth clients. When an investor walks in their door that doesn’t have enough for their SMA minimum, they can still put them into their mutual funds. Many of those types of money management firms simply look at their mutual fund as a very large SMA. So we’re seeing those types of money management firms coming to us, not wanting to be Fidelity or Vanguard, but, strategically, they want to have a mutual fund for consolidating smaller accounts and benefit from the marketing and exposure of the public fund to be more easily discovered.

The other example I will give you, we recently brought on a firm that is a family office for over 20 wealthy families. When you have 20 families and all the multi-generations, the grandparents, children and grandkids, the family office ends up with a large number of accounts for all these generations as a result of estate and gift planning. We were approached by the family office who wanted to manage the money and all those accounts but do it in a more cost-effective way for them. Instead of having to open brokerage accounts for each of these children and grandkids on their brokerage platform or custodian platform, they are now using a mutual fund that they manage as a way to streamline their operations, but also provide high quality money-management to all of those family members, from the oldest to the youngest. “

Bill Hortz: “Any other applications or markets that having your own mutual funds can help?”

Bob Dorsey: “The retirement plans arena is another market potential. As you know, the mutual funds space is very public, very transparent. You have NAVs calculated each day; you can track performance through Morningstar or many other services, so when you’re in the funds space, you’re out there in the public eye. Investors can find you, see you, and monitor you literally 24-7. You can’t do that in the hedge fund or limited partnership space because they don’t have the same transparency and reporting requirements. So the mutual funds are the vehicle of choice for 401K plans, and many of our investment manager clients would love to be in 401K plans. We help them understand and plan for the unique challenges of developing new business in that space.

Bill Hortz: “Thank you Bob for sharing your perspective and world with us.”

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial services firms. We position our members with the necessary ongoing innovation resources and coaching to drive and facilitate their growth, differentiation and unique community engagement strategies. The Institute was launched with the support and foresight of our founding sponsors--Innovation Equity Partners, Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, MeridianIQ/AdviceIQ, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information or to join click here.


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