Converting a Fund

You might be considering converting an unregistered vehicle, such as a separately managed account, private fund or hedge fund, to a registered fund. If so, you’ll face a series of strategic considerations.

Embedded gains and performance history: Should you take them with you?

If your fund holds embedded gains, you probably would prefer to make a tax-free conversion. Converting your fund without realizing clients’ capital gains involves shifting client assets directly into the converted fund, rather than selling their assets and using the proceeds to buy new securities. Likewise, you may want to apply the original fund’s performance history to the converted fund.

Both processes involve stringent sets of regulatory requirements that your fund may or may not meet. An experienced provider can help you understand the criteria, evaluate whether your fund meets them and decide whether undertaking the process is worth the time and expense it will take. The provider also can explain the benefits and limitations of each option. For example, converting performance allows you to market the predecessor fund’s returns; however it does not mean Morningstar will consider the predecessor fund’s performance in its ratings.

Everything’s public

Converting to a mutual fund or similar vehicle may involve considerably more transparency than you are accustomed to. You will be required to send shareholders an annual report explaining why the fund performed as it did, and disclose portfolio holdings and performance on a quarterly basis. You also will be required to disclose the fees on your products.

All this disclosure may require you to manage the market’s perception of your fund—which may involve explaining especially important trades or rationalizing fee structures. Again, a fund services provider with experience helping advisers convert both registered and unregistered funds can assist in understanding the ways the change might affect your business.

← Back to Learning Center