20 May 2020

Alternative Credit - Fund Structuring

Key considerations for closed-ended and open-ended credit fund structures

Alternative Credit strategies can often hold illiquid assets. In order to align investor interests with the underlying portfolio and avoid liquidity mismatches in the fund, more restrictive fund liquidity terms are often required. The SBAI Alternative Investment Standards require disclosure of key fund structure terms and the handling of situations where normal redemption mechanics might not apply.

This memo reaffirms the standards and guidance included in the SBAI Alternative Investment Standards relating to the fund’s structure and commercial terms. It also outlines the advantages, disadvantages, and other considerations for closed-ended funds (private equity model) and open-ended funds (hedge fund model) when used for Alternative Credit Strategies.

  • Private Equity Model (Closed Ended) - Investors may give up liquidity but this negates liquidity mismatches. The memo also covers fee structures and subscription lines.
  • Hedge Fund Model (Open Ended) – Investors have more flexible liquidity but run the risk of liquidity mismatches. The memo also covers gates, side pockets, and fee structures.