Opinion Piece by Joachim Mogck

Welcome to our "Opinion Piece", a format that perhaps takes a different look at topics in the fund universe –?but in any case hopefully stimulates discussion.?

Today we hear Joachim Mogck ′s opinion. Have fun reading and commenting.

Three reasons why open-ended funds are not the right choice for institutional investors in Alternative Assets, particularly in rainy times:

Open-ended only when you do not really need it.

In an open-ended fund, investors can exit their investment at any time through a redemption of shares.

BUT: Redemption rights are only viable in times of continuing economic interest in the invested Alternative Assets. Alternative Assets are illiquid in nature. In case of a significant downturn, an open-ended fund (as much as others) runs out of liquidity options. Once investors try to leave the sinking ship, redemptions are quickly suspended. The open-ended fund enters a “zombie” state – with fewer options for investors than in a closed-ended structure and a high risk to further diminish remaining value in the fund’s portfolio.

During times of continuing economic interest in the relevant Alternative Asset, however, an investor in a closed-ended fund will also be able to broker a healthy secondary sale of its investment. Managers of closed-ended funds can additionally offer liquidity options for LPs in a structured process, of course always subject to economic feasibility – much like with an open-ended fund.

You pay with investor rights.

With an investment in an open-ended fund, investors trade off contractual rights against a potential exit option (regarding its validity, see above). Open-ended funds traditionally offer reduced levels of investor rights and discourse between management and investors e.g. through advisory boards. Conceptually: “If you do not like it, you can leave at any time.”

BUT: What happens in economically turbulent times when actually no one can leave? Investors are stuck in contracts without much of a course of action or leverage to take means in their hand. In this legally weak position, they must rely on the potentially disincentivized manager of a fund slipping into a vegetative state (that is not reporting updated NAVs once the redemption of shares is suspended).

Less control over your portfolio composition.

Open-ended funds do result in a very fast exposure to the relevant class of Alternative Assets. This will continue to be an economic differentiator.

BUT: Are chasing built up NAV and targeted portfolio allocation enough of reasons to buy into open-ended funds? Closed-ended funds also can partially close the gap, e.g. through warehoused portfolios, asset roll-overs from previous funds and building investment holding platforms below fund levels. Nevertheless, different NAV-building paces as much as J-curves will continue to remain with closed-ended funds. At the same time, this ringfenced type of investing in closed-ended funds enables to build portfolios which are well diversified across vintages, economic cycles, and thematic theses. Continuously selecting and investing the best managers and closed-ended fund products empowers investors to actively build their portfolio. After all: Alternative Investments are not speed dating but require vision, sophistication and patience.

Is this point of view unpopular or do you share it?