A guide to fund of funds structures for Japanese investors

Traditionally, many Japanese investors have been conservative in their outlook when it comes to investment decisions, with the majority of assets held in products with stable income streams such as domestic bonds. However, with the uncertain outlook for yields on low-risk bonds and negative interest rates, investors are looking to diversify into alternative asset classes which offer the potential for higher returns.

As a result, investment into alternative asset classes, such as private equity, real estate and infrastructure, is on the rise. Major players, including Japan’s national government pension fund, have already decided to allocate significant sums of money to an investment strategy in alternatives, while many other institutional investors are likely to follow suit and diversify into the alternatives space for the first time.

For those investors without the resources or know-how to successfully build a well-constructed alternatives portfolio, the type of structure used to access alternatives will be one of the key decisions that need to be made. For such investors, investing in alternatives via a fund of funds structure could be a smart decision and a good introduction to the alternative asset classes.

What is a fund of funds strategy?

‘Fund of funds’ is an investment strategy in which one investee fund invests into multiple direct funds, rather than investing directly in the asset itself. The direct funds are typically selected to ensure that the fund of funds structure has access to various alternative strategies and exposure to a mix of European and US assets. For Japanese investors looking to access these investment funds outside of the domestic market, an offshore structure is usually required.

The typical fund of funds structure

A typical fund of funds structure uses companies and limited partnerships that are established in an offshore jurisdiction. The company, otherwise known as the general partner, is responsible for making the investment decisions on behalf of the limited partnership and has a fiduciary responsibility to act in the best interests of the limited partners at all times. The general partner engages a fund of funds manager (or investment advisor) with specialist knowledge of alternative asset sectors to help source investment funds for the limited partnership to invest into.

Benefits of investing through a fund of funds structure

There are several reasons why an investor may benefit from investing in alternative asset classes through a fund of funds structure, including:

  • Diversification

As a fund of fund structure typically invests in multiple direct funds across various strategies and geographies, greater diversification is achieved than would be the case investing directly in individual funds. It is common for a fund of funds structure to invest in funds that specialise in different alternative strategies such as buy-out, venture capital or distressed debt, and those that offer a mix of currency exposures. Top fund managers usually specialize in one alternative strategy; therefore fund of fund strategies can be attractive to investors who want to gain exposure to a range of top fund managers while taking fewer risks than compared to directly investing in assets.

  • Manager selection

For those investors who are looking to diversify their asset mix and invest into alternatives for the first time, access to a fund of funds manager with a strong track record and experience of the market is likely to be very important. Doing so helps ensure that the best managers are selected – which, in turn, increases the likelihood of good returns.

Further, access to funds run by the best performing fund managers can be difficult for investors with no background in the asset class. Fund of funds managers can help investors overcome this barrier.

For the more sophisticated investor, meanwhile, the flexibility of investing in a fund of funds means that managers can be hand-picked based on investor appetite for a particular market sector and jurisdiction.

  • Administration and cash flows

For a Japanese investor considering investing into funds outside of the domestic market via an offshore structure, factors such as language, administrative complexity and time zone can sometimes be seen as barriers to entry. However, if the investment is made through a fund of funds structure, a considerable part of the administrative burden is outsourced to the provider of administration services to the structure. Such a provider is responsible for efficiently processing the high volume of transactions typical of a fund of funds structure.

Further, through sensible cash flow management at the level of the investee fund – including the recycling of distributions received from the underlying funds – the level of investor involvement required once the structure is established is further reduced.

A specialist independent provider of offshore fund administration services such as Moore Management can provide great value to a fund structure. At Moore we utilize our cutting-edge systems and extensive experience of working with large institutional clients both in Asia and in Europe to provide the full suite of offshore services required to efficiently run a fund of funds structure. We also work hand-in-hand with the client to produce bespoke reporting and investor notices based on their specific requirements.

If you would like more information on Moore Management’s fund of funds administration services, please don’t hesitate to get in touch:

E: Joel.Speight@mooremanagement.com
T: +81 (0) 3 6441 3091

 

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