Mutual Fund Services

Gemini partners with independent advisors to provide comprehensive solutions for open-end mutual funds and closed-end interval funds. We service these products through your own standalone trust or through one of our shared (series) trusts.

Gemini’s service offerings are custom-designed to be an extension of your back office. We help you execute your mutual fund model by offering you fully customizable, cost-effective core services while seamlessly integrating with your workflow and processes as though we are a continuation of your team, not a separate entity.

Why Start a Mutual Fund?

As an advisor, starting a mutual fund offers you many advantages, including:

  • New distribution opportunities to market to the retail public, other advisors, and broker-dealers
  • A potential dramatic increase in operational efficiencies
  • Reduced transaction costs

In addition, mutual funds are an appealing option for investors, as they offer:

Transparency and oversight

Mutual funds have clearly-defined investment objectives and strategies, with set investment parameters. The mutual fund administrator and the US Securities and Exchange Commission (SEC) closely monitors each registered mutual fund to ensure its compliance with its stated investment strategy. Investments and fees are reported quarterly, semi-annually, and annually to shareholders and regulators, which provides a public record.

Diversification

Mutual fund investors gain diversification and asset allocation – which may reduce overall portfolio risk – without the large amount of cash needed to create an individual portfolio.

Economies of scale

Mutual funds’ buying and selling power may result in a reduction in transaction costs for investors.

Liquidity

Mutual funds transact on a daily basis after the close of the stock market, making them a liquid asset.

Professional management

Mutual funds offer investors access to professional investment management.

Tax and purchasing simplicity

Investors can purchase a mutual fund from a financial advisor or through online brokerage platforms, and a 1099 tax filing provides ease and consistency for investors.

Important Information About Launching a Mutual Fund

Investment strategies that work in a ‘40 Act vehicle

The flexibility available often surprises advisors. While there are some limitations, many strategies work within the ‘40 Act structure. These include traditional equity and fixed income investments, tactical asset allocation, managed futures, distressed debt, global distressed, long/short equity, market neutral, arbitrage, absolute return, real estate, quantitative, and strategic asset funds.

Registration timeframe

It can take up to four months to register a mutual fund. Much of this time is dedicated to the SEC review process.

Minimum assets under management

While there is no minimum size for a mutual fund, a certain minimum amount of assets under management is recommended to cover administration costs, unless the manager is willing to cover these until the asset raise is achieved. Mutual funds typically break even around $15-20 million, which includes, but is not limited to, the costs of administration, transfer agent, shareholder reporting, board oversight, and compliance. This breakeven amount may increase due to sales and marketing costs for the fund, which can vary widely.

Costs for creation and ongoing operation

The cost to launch a mutual fund varies based on whether the fund is created inside a series or standalone trust. Typically, setup and organizational costs range from $45,000 to $100,000 (not including additional platform fees) depending on the complexity and the structure of the fund. At a minimum, annual mutual fund operating expenses (not including sales & marketing expenses) are approximately $175,000 to $200,000. These fees cover fund administration, annual audit, shareholder reporting and support, transfer agent, corporate governance, and compliance.

Through a waiver of their management fee and/or reimbursement by the advisor, the advisor is responsible for all fund expenses until the assets in the fund hit the breakeven amount. Breakeven is achieved when the advisor no longer subsidizes fund expenses beyond a total waiver of the advisory fee.

Management or advisory fee options

Management/advisory fees depend on the type of strategy and should be in line with those of their peer group. Managers of mutual funds with fees higher than similar funds may have difficulty raising assets, especially if the fund is promoted through financial intermediaries and RIA distribution channels.

Performance porting for marketing purposes

Generally, porting performance is an area that requires analysis for any specific strategy or fund. Some hedge fund performance can be ported if:

  • The hedge fund has multiple investors
  • The ’40 Act fund utilizes the same investment strategy as the originating hedge fund

Generally, the original hedge fund must close and convert to a mutual fund in order to port performance. However, a manager may wish to start a mutual fund that mirrors the existing unregistered fund. In both cases, the manager can disclose the performance of the unregistered vehicle or separately managed accounts (SMA) in the mutual fund’s prospectus if the new fund follows similar investment strategies, provided that certain other conditions are met.

Cannibalization of investors from existing hedge strategy

Hedge fund managers are often concerned that their investors may switch into the less-expensive mutual fund. Hedge funds can mitigate this risk by applying institutional strategies, leverage, and exposure to their alternative investment option, thus keeping their more sophisticated investors aligned with the goals of the hedge fund.

Mutual fund board and compliance

Gemini provides a comprehensive suite of specialized services, which includes access to series trust solutions that provide an experienced board of trustees, compliance oversight, and fund legal counsel. The mutual fund benefits from the economies of scale available through the use of these shared resources.

Distribution

In today’s market, distribution generally occurs through a platform or financial intermediary channel. Most mutual funds charge a 12b-1 fee, typically through an A-share class, to help with the compensation of the distributor. Gemini’s distributor sister company has more than 3,000 selling agreements* with various intermediary platforms, and is a member of FINRA. Mutual fund managers seeking to mass market their fund may want to consider hiring proprietary sales personnel or a third-party marketing firm.

Mutual fund restrictions
  • Diversification. 50% of a mutual fund’s assets must be invested in diversified assets, meaning 50% of assets must be in holdings of 5% or less. A mutual fund can also satisfy this diversification requirement by investing in other registered investment companies, such as mutual funds or ETFs. Cash and cash products are always considered a diversified investment.
  • Leverage. Mutual funds cannot exceed 33% leverage. This rule refers to leverage used by the fund itself and not to any underlying funds. The underlying investments can use leverage, and levered ETFs can be a useful part of a portfolio.
  • Derivatives. Mutual fund investments in derivatives are allowed with some restrictions, although tactical allocation to certain ETFs can provide a pass through.
  • Shorting. Mutual funds can sell short, though it requires a tri-party collateral account with the bank and broker with assets segregated to cover the positions. An alternative approach could be a tactical allocation to certain ETFs that sell short themselves.
  • Commodities. While there is no direct limit on commodity investments, a mutual fund must receive 90% of its income through passive investments. Commodities are considered non-passive. However, investments in commodity ETFs can be treated as equity (pass-through) but they may be tax inefficient. This differing tax treatment depends on how the ETF is structured. Most ETFs disclose the expected tax treatment, and advisors should consult with their administrator’s tax department. Most Exchange Traded Notes (ETNs) are 1933 Act structures and can be treated as passive income for tax purposes, though advisors should consult with their administrator’s tax department on such additions to a portfolio.
  • Daily redemptions. Mutual funds have daily net asset value (NAV) calculations and daily redemptions. Because of the possibility of daily redemption, most mutual funds keep a certain amount of cash available at all times.
  • Illiquid assets. Mutual funds must provide daily liquidity, so illiquid assets are limited to 15%. Closed-end funds can have 100% illiquid assets and are traded on the exchange under their own ticker. Another option is a closed-end interval fund, which can accept daily inflows, but withdrawals are restricted typically to quarter-ends. Closed-end funds require their own trust and distribution agreements.
  • Investments. There are percentage restrictions on investments into other mutual funds and hedge funds.

Mutual Fund Trusts

All mutual funds must register with the SEC in a shared (series) trust or in a standalone trust format.

Shared/Series Trust

This type of trust is composed of independent funds, all managed by separate investment advisors. This means your fund would be registered in a trust with other funds, but you are still fully in control of managing your fund as an independent advisor. Your fund would share some costs with other funds in the trust, easing the financial burden for costs incurred while running a fund.

Specifically, series trusts offer many advantages that may not be achievable through a standalone trust, including:

  • Access to trust level selling agreements, if applicable.
  • Increased operational efficiencies, as funds in the trust share directors/trustees, chief compliance officers, and officers as required by the SEC.
  • Reduced operating costs, as a group of advisors shares expenses such as those for auditors, fund counsel, insurance, legal, trustees, blue sky, and more.
  • The ability to attract qualified board members who possess the expertise to provide proper board compliance and oversight.
  • Freedom for the advisor to focus on portfolio and relationship management.

Gemini offers access to multiple series trusts, giving you several options to meet your needs.

Standalone Trusts

Your mutual fund is the only fund in a standalone trust. Your firm is responsible for all costs for your fund; however, Gemini will apply our extensive experience and access our multitude of partnerships to help you form your own board of trustees and align all other services the trust needs.

Trust Conversions

As your fund matures or your business plan changes, you may find that you need a different approach to your trust services. You may need a more or less specialized or consultative approach than you’re getting through your fund’s current arrangement. Thus, a move to a different type of trust may be prudent. Gemini can help. We specialize in helping you improve the business model for your existing registered fund through conversions from:

  • Standalone trust to standalone trust
  • Series trust to series trust
  • Series trust to standalone trust
  • Standalone trust to series trust

Learn more about the differences in timelines and costs between a series and standalone trust.

Learn More

*as of 3/31/2018
7653-GFS-4/25/2018
2064-NLD-4/27/2018