Wrapped Pool Funds: Innovation and Value for Wealth Managers and Their Clients

High-net-worth investors are often presented with strategies that fall short of cutting through the twin headwinds of a low-interest-rate environment and a volatile stock market.  These private wealth clients make up a valuable investor profile who often have the sophistication and appetite to invest in alternative investments, but may have limited access to strategies from top-tier hedge fund and private asset fund managers.  Financial advisors who have the tools to deliver cutting-edge strategies will have a competitive advantage in winning these sought after clients.

Generally, access to alternative investments tends only to be available-and within financial reach-of institutional investors such as pension funds and endowments.  Registered investment advisors ("RIAs"), however, can leverage certain tools to offer their clients the diversification and outperformance benefits afforded by alternative assets.  This can be effectively achieved by pooling assets from their high-net-worth investor clients, allocating this capital among a variety of wrapped pool funds.  This allows RIAs to deliver value by creating novel programs to meet individual client objectives.  When the options for pooled funds include access to top-tier alternative strategies, those investment programs become all the more attractive.

The Value Proposition of Alternative Assets in Wrapped Pool Funds

As an example, assume an individual investor who meets the requirements  of being an accredited investor but has an investment portfolio of a size that would typically preclude them from meeting the investment minimums to invest in alternative assets wants to allocate 20 to 30 percent of their portfolio into hedge funds, private assets and other alternative investments to improve risk-adjusted performance.  Historically, accessing these asset classes would be out of reach for an investor with this profile given the required investment minimums-usually in the millions-which has isolated the growing mass affluent investor segment from these asset classes.
 
Enter the wrapped pool fund.  The namesake pools, proprietary to the RIA, offer a convenient tool for discretionary asset management and facilitate diversification for investment advisors and their clients.  Using the example above, the investor could allocate 70 or 80 percent of their portfolio to traditional equity and fixed income strategies through mutual funds or direct investments.  Then, their RIA could allocate the remaining 20 percent to a wrapped pool that is a complementary mix of hedge funds and private assets to offer uncorrelated returns.

Wrapped pool funds put forward a next-level value proposition for RIAs and their clientele.  Advisors are afforded the ability to offer unique products that allow them to differentiate themselves, while also delivering maximum value for clients.  For the mass affluent clients themselves, the wrapped pool provides an avenue for tapping into alternatives that can help support the desired result of a well-diversified portfolio, structured to deliver optimal risk adjusted returns.

How Fund Administrators Can Help Private Wealth Managers with Alternative Assets in Wrapped Pool Funds

Many clients are drawn to smaller RIAs for their hands­ on, personalised service and easy access.  Yet matters of scale can both help and hinder.  A smaller wealth advisory firm will likely have the investment savvy to offer hedge funds as an asset class to individual investors but may not have the resources to build up that hedge fund to take to market and sell to clients.

The right fund administrator can provide an institutional-quality operational infrastructure to create their own proprietary pooled vehicles for alternative investments that can serve as a valuable portfolio optimisation tool within wrap programs.  Given their long working relationships with the alternative asset management industry, fund administrators have institutional knowledge of operational requirements that private wealth managers can draw from for the benefit of their clients.  Fund administrators, working closely with independent broker-dealers and others that provide RIAs with product support, can assist with the monitoring and reporting necessary for RIAs to discuss portfolio allocations, risk and performance with their clients, and to dynamically adjust them as necessary.  Moreover, beyond the potential to raise an RIA's profile that offering a branded wrapped pool can bring, a fund administrator can play a critical role in easing the operational burden associated with constructing differentiating product.

According to the Boston Consulting Group report Global Wealth 2021: When Clients Take the Lead, the investable wealth of what the consulting firm calls the "affluent retiree" market is worth some $90 trillion.  With the high-net-worth investor segment growing but increasingly demanding cutting-edge investment strategies, private wealth managers will be well placed to provide a product offering catering to sophisticated needs.  Doing this, while preserving capacity to continue focusing on the personalised service to which high-net-worth investors are accustomed, requires the support of a strong operational partner with institutional knowledge straddling both the needs of sophisticated investors and the inner workings of the alternative investment industry.  The Maples Group has deep experience as an international fund administrator for some of the world's foremost hedge funds and private asset funds, and works directly with institutional investors, including large sovereign funds, pension funds, foundations, and endowments. We are in a unique position to help deliver innovative solutions that are scalable to the needs of RIAs and their clients.