2. 2 Information Classification: Confidential
• Liquid Alternative Funds Overview
–Liquid Alternative Funds are relatively new to the market and growing
–The Liquid Alternative space utilizes strategies similar to Hedge Funds
–BNY Mellon services this new investing product under its Global Prime
Custody Model
• Client Solutions Services
–Trade File Development
˃Custom Trade File
–Trade Enrichment
˃Enrichment is expanding to meet global prime custody client needs
–Customized Reporting
Executive Summary
3. 3 Information Classification: Confidential
• Funds registered under the Investment Company Act of 1940
• Also known as ‘40 Act Funds
• Set up like mutual funds
• Single-Manager Funds, Multi-Alternatives, and Commodities
(Managed Futures) Funds
• Managers are prohibited from charging performance fees
• Funds are required by the ‘40 Act to assign a custodian, fund
administrator, and investment services provider
Liquid Alternative Funds
4. 4 Information Classification: Confidential
Comparison of Hedge Funds vs. Liquid Alternative Funds
Hedge Funds
• Funds usually are not registered
under the 40 Act
• Periodic liquidity (quarterly, semi-
annually, annually) and no limit to
percent of liquid assets
• Unlimited use of leverage
• Only accredited investors or qualified
purchasers may invest
• Treated as a partnership for tax
purposes
• Performance based fees permitted
• Periodic NAV
Liquid Alternative Funds
• Funds registered under the 40 Act
• 85% of their portfolio must be in
liquid assets (instruments that take
no longer than one day to liquidate in
public markets)
• Use of leverage limited to 33% of
gross asset value of the fund
• More frequent investor reporting
• Daily Net Asset value
• Daily Liquidity at current NAV
5. 5 Information Classification: Confidential
Liquid Alternative Fund Strategies
Due to the daily liquidity requirement, many strategies are shifting
towards trading in highly liquid securities such as equities and
listed derivatives.
6. 6 Information Classification: Confidential
• Liquid Alternative Funds are growing rapidly
–2013: 43% growth industry-wide1
–2013: New alternative mutual fund industry brought in 66 cents on every dollar
of new assets invested in hedge funds despite being 18 times smaller than the
hedge fund industry1
• The Hedge Fund industry is continuously changing
–2013: 15% industry growth driven by performance, not new client flows1
• Hedge Funds and Mutual Funds are looking to expand into the
liquid alternative space
Importance of Liquid Alternative Funds
1. According to Barclays Strategic Consulting
7. 7 Information Classification: Confidential
• $400 Billion Assets under Management in Liquid Alternative
Strategies as of 3Q 2013
–Represents 2% of industry assets
–Forecasts estimate that
liquid alts will represent
14% of industry assets by
2023
Importance of Liquid Alternative Funds
8. 8 Information Classification: Confidential
Coverage Flow
GFI - Client
Implementation
Legal
Risk
Compliance
Steering Committee
AIS/AS
Client
Service
Enterprise
On-Board
AIS Service
Delivery
AIS Client
Solutions
CLIENT
Sales/RMReview requirements and Pricing
Assess, evaluate, and vet each
potential new relationship against
our proposed service model
Each supporting discipline will
participate in weekly meetings
and provide updates for their
areas of responsibility
9. 9 Information Classification: Confidential
• BNYM provides a global service model to Liquid Alternative Funds
• Liquid Alternatives middle managers often do not fully understand the
complexity of how a custodian bank supports the strategy
–Many advisors have little to no interface with middle managers
• Liquid Alternatives Funds are serviced similarly to Hedge Funds with a
partial Prime Custody Model
• Comprehensive Onboarding
–Dedicated Project Managers
–Adaptable Steering Committee
BNY Mellon Service Offering
10. 10 Information Classification: Confidential
• Client Solutions deals with Franklin Templeton and Virtus, both Liquid
Alternative Funds new to the Liquid Alt market
• Client solutions recently has a client launching in Europe
(Guggenheim)
• Day-to-Day Services
–Multiple Trade Feed Options
–Reporting Solutions
–Multiple Technology Platforms
• Client solutions deals with on boarding new clients in addition to day-
to-day issues with client-facing technology
AIS Client Solutions
11. 11 Information Classification: Confidential
• Offers an alternative solution to clients with trade automation
limitations
–Many clients are not SWIFT compliant
–Custom file combats high-cost options
• Trade file allows for testing and production of settlement message
types (system request pending for cash messages)
• Global and Domestic Trades, Repo Processing, and Block Trading
are all supported by the custom trade file
• To date, 44 clients have automated their trade feeds by utilizing the
custom trade file
AIS Custody Trade File
12. 12 Information Classification: Confidential
• Client Solutions builds and maintains settlement instructions upfront
for all brokers of the client
• Clients do not have the capacity to store broker data
• Providing enrichment for our clients provides a more prime-like service
model
• Clients are increasingly seeking enrichment
–Client simply supplies a Broker Code
–Client Solutions updates the Broker Mapping Table
Trade Enrichment
13. 13 Information Classification: Confidential
• BNY Mellon meets the needs of clients who cannot store broker
information
• To date, 24 custody clients have benefitted from our trade enrichment
services
• Enrichment is only available with the custom file
• Enrichment mitigates settlement risk by preventing exposure to the
client
• Enrichment prevents “fail cost”
– The cost to the client for not settling on the settlement date
Trade Enrichment
14. • “Alternative or Hedged Mutual Funds: What Are They, How Do They
Work, and Should You Invest?” from Forbes
• Barclays Strategic Consulting
• CNBC
• Internal Training from Zubin Yacoobi and Mark Kamienowski
• “Introduction and Overview of 40 Act Liquid Alternative Funds” from
Citi Prime Finance
Sources
