A Comparison of the European UCITS Alternative Market and the U.S. 40 Act Market and Recommendations for Future Opportunities

The '40 Act Alternative Fund market has been growing extraordinarily fast over the past several years, opening up an entirely new revenue/fee stream for alternative asset managers. The Capstone team consulted with Guggenheim Partners (GP) on market-entry strategy into the alternatives market.

Key factors in launching such a strategy include (1) differentiation from existing products, (2) a strong distribution network, (3) liquidity of the underlying product, and (4) having a strong track record. Based on a number of case studies conducted throughout the industry, the Capstone team's key recommendations to GP are to develop a multi-manager product for the alternatives market targeting a net expense ratio between 1.75%-2.45% in order to drive demand. As a new product will not be able to compete on track record, targeting a slightly lower fee structure than its competitors is advisable.

In the medium term, after building a track record, the Capstone team believed that GP should distribute its product via a large-scale platform, such as Fidelity or Schwab. Finally, in the long-term, the team advised that GP partner with a distributor to target the huge retail market and directly reach retail investors and IRAs.