VIDEO | Hybrid funds are gaining traction as a key solution to bridge the gap between private markets and retail investors, but significant challenges remain. At the PostTrade 360° Nordic 2024 conference, experts discussed the rising interest in hybrid funds and the difficulties surrounding liquidity, regulation, and operational complexities. While frameworks like LTIF 2.0 offer a path forward, adoption has been slow, and many fund managers are still navigating how to provide access to retail investors while balancing performance and liquidity.

Hybrid funds, which combine traditional public market assets with less liquid private market investments, are increasingly viewed as a solution to offer retail investors access to private markets. However, challenges remain, particularly in managing liquidity. “Insurance companies or others want to see daily liquidity, but that’s difficult to achieve with a large portion of illiquid assets,” explained Kerstin Lindgren, director of Client Coverage Nordics at CACEIS. She added that net asset values (NAV) for illiquid assets are often calculated semi-annually or quarterly, which complicates exits for investors in open-ended hybrid funds.

Watch the session video here!

When logged in, pick up your free access pass for this Nordic conference if you haven’t. Then browse back to this page, and the video will show up in this box.
(Don’t have an account here yet? Register here. This is separate from the event platforms where you may have been signed up as a delegate.)
Login

Operational complexities also present significant barriers as hybrid funds seek to expand access to retail investors. Ian Harcourt, senior country officer for the Nordic Region at Crédit Agricole CIB, pointed out the growing strain on processes like KYC (Know Your Customer) and account opening, which are traditionally more complex in the alternative fund industry. “As these two industries meet, workable solutions will need to be found,” he noted.

A key issue is bridge financing, which has historically been straightforward when working with a small pool of institutional investors. But as hybrid funds aim to attract high-net-worth individuals and family offices, the financing process becomes more complicated. “Financial institutions often apply a haircut even for high-net-worth individuals when calculating bridge financing,” Harcourt explained, warning that this could become a hurdle for hybrid funds looking to secure financing.

Growing interest, but slow adoption

Despite the operational and liquidity challenges, hybrid funds are slowly gaining traction. According to a survey conducted by Crédit Agricole CIB and Funds Europe, nearly half of the asset managers surveyed manage between one and five hybrid funds. Lindgren emphasised that each fund manager must strike the right balance between performance and liquidity. “It’s about delivering better performance while maintaining the right liquidity for your investor segment,” she said.

The European Long-Term Investment Fund (LTIF) 2.0 regulation has also been seen as a potential framework for boosting hybrid fund adoption. However, the uptake has been slower than anticipated. “LTIF 2.0 is there, and people are using it, even if they are not getting the full benefit yet,” Harcourt acknowledged.

The road ahead for retail investors

While the goal of democratising access to private markets is clear, full retail access remains a distant target. Currently, many hybrid funds focus on high-net-worth individuals and family offices rather than the broader retail investor base. “Retail distribution is still complex,” Lindgren noted, pointing to the operational and regulatory hurdles that make broad retail access difficult for many fund managers.

Looking to the future, Lindgren highlighted the importance of collaboration between asset managers, service providers, and fintech companies to overcome these challenges. “Digitalisation is key, but it’s more complex in the private market space,” she said. Lindgren agreed, suggesting that partnerships with fintech firms could drive the necessary innovation to solve the technical hurdles hybrid funds face.

Hybrid funds are operational and gradually gaining ground, but the path to fully opening private markets to retail investors remains a work in progress. As Harcourt concluded, “It’s a trend that’s developing, and with the right framework, we may soon see more significant progress.”

Speakers:
Kerstin Lindgren, director of Client Coverage Nordics, CACEIS
Ian Harcourt, senior country officer for the Nordic Region, Crédit Agricole CIB

Hosted by CACEIS

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Our coverage relating to the event is indexed here.
• By the way … are we connected on LinkedIn already? Follow us here.