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Hybrid fund structures―boon for investors, bane for operations?

Hedge funds are developing hybrid structures to ensure investors get the best of public and private markets. What’s essential for success with this strategy is the operations expertise to handle both.

Many hedge funds are developing hybrid structures to ensure investors have an opportunity to benefit from the best of both worlds―public as well as private markets.

According to a Goldman Sachs study published in 2021, hedge funds are increasingly participating in private deals. In the first nine months of 2021, hedge funds were involved in 770 private transactions with a total value of $153 billion. In contrast, in 2020 they participated in 753 deals with a value of $96 billion.

This is part of a wider trend that has seen hedge funds leaning towards private investments.

Operational transformation for hedge funds

While fund managers look to diversify in private assets, it’s imperative for the back office to be able to support such diversification.

A traditional hedge fund is geared to handle listed and derivative products, subscriptions, redemptions, and daily pricing, etc. A shift to a hybrid structure brings in a different aspect―of funds locked in for longer periods with drawdowns and capital calls, distribution notices, and waterfall calculations.

Adding to this, investors seek consolidated reporting from fund managers about their open-ended and closed-ended investments.

Such a shift puts pressure on CFOs and COOs to come up with a solution. They need a talented skill set and technology that can meet the needs of the fund manager and the investor. It’s a different set-up from what they may be used to.  

The big question funds face is how they can best cope with this diversification. How do they scale people and technology to handle the new requirements and investor demands?

Operations is under pressure to get ready to deal with this transformation. It has several options:

  • Hire and retain talent in the market and invest in the technology that meets its requirements.
  • Retrain existing staff and tweak existing tech to address new requirements.
  • Sign up with an experienced service provider and leverage their experience and technological competency in the space. 

The fund must determine which option works best. Key drivers for decision-making are:

  • Time to market
  • Comfort level of the management team to handle operations in unchartered territory
  • Ensuring the reporting and transparency required by investors
  • Showcasing robust operations to establish credibility for raising further capital

While many of these factors are external facing, the fund also must deal with internal matters such as additional investment in technology. A lack of experience in the space can lead to the wrong choices about tech, people, and processes.

The big question for the fund is how to find the right balance to get the machinery up and running quickly while supporting the investment manager. And how does it do this without increasing its risk profile due to limited experience dealing with such hybrid models?

A hybrid structure also brings in new challenges for CFOs and COOs around valuation, liquidity, and general partner compensation.   

Many operations experts choose to hire experienced firms that have had wide exposure in this space. These firms have already invested in the technology and people who can jump-start supporting such hybrid structures. And they can create time for the CFO/COO to consider the long-term model as they gain more experience working with such players.

Our Halo Framework identifies and describes a next-generation fund operating framework for private capital. Download it here.

How CSC can help

CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at