GFX GLOBAL HUB AND SPOKESM SYSTEM
The Investment Fund Application of the GFX Global Hub and SpokeSM System is the next generation solution for investment fund sponsors to efficiently operate multiple funds with the same investment objective and policies; effectively expand across borders and national market segments; create and operate sub-advisory/private label funds for their distribution partners; and employ sophisticated portfolio management techniques to adjust a portfolio’s investment strategy for a specific national market or market segment.
The GFX Global Hub and SpokeSM System is the first that permits an asset management organization to operate a single portfolio with assets from investment funds sold publicly in the U.S. (mutual funds), Europe (UCITS) and Asia. This System is used for different types of investment funds as well as banking, insurance, and other investment products.
The GFX Global Hub and SpokeSM System thus results in:
- Efficient and cost effective portfolio operations through a single investment manager, a single safekeeper, a single auditor, single gross investment performance, and a single portfolio compliance platform across fund ranges and across borders for the same investment objective,
- Effective new market entry through the critical mass and performance track record for new investment with the domicile and other components selected independently from other participating funds in accordance with the applicable legal/fiscal requirements and market conventions of their intended market segment,
- Efficient and cost effective sub-advisory/private label arrangements between the fund sponsor and its distribution partners through the creation of new participating funds sponsored by the distributor, and
- Customized investment policies through the ability to change, expand or modify the investment strategy of a portfolio for each national market or market segment.
The principals of GFX have developed and operated many innovative fund structures over the past several decades, including the hub and spoke structure. The staff of the U.S. Securities and Exchange Commission reviewed that structure and concluded that “the organization of mutual funds in hub-and-spoke arrangements is an important evolution in the mutual fund industry.”
These development efforts have continued to evolve so that currently GFX is licensing the know-how and software necessary to implement and support the Investment Fund Application of the GFX Global Hub and SpokeSM System.
GFX Global Hub and SpokeSM System
The GFX Global Hub and SpokeSM System is used by two or more investment funds, or other investment products, to invest through a single GFX Portfolio. These investment funds could be U.S., European or Asian.
The GFX Global Hub and SpokeSM System involves the separation of the portfolio components of the investment fund from the administration and distribution components. Once separated, other existing or new investment funds can likewise separate their investment components and invest through that same investment portfolio. This single investment portfolio is referred to as a GFX Portfolio and each of the investment funds investing through it are referred to as a participating Fund.
As the portfolio components are separated, so are the expenses (e.g., management fee, custodial fee) associated with them. These expenses then, in turn, form the basis for the expense ratio of the GFX Portfolio. As additional funds invest through that GFX Portfolio, that expense ratio should become lower as break-points in those fee schedules are reached. With two or more participating Funds, the transaction based expenses (e.g., trading and settlement expenses) should also become lower. As a result, the aggregate expenses of each participating Fund should be lower than they would be if that Fund continued to operate as a traditional investment fund.
As the portfolio components of an existing investment fund are separated from the other components to become a GFX Portfolio, that portfolio retains its performance track record, adjusted for expenses. Thus, in turn, a newly-created participating Fund has that same track record at the time of its organization, adjusted for expenses.
The following diagrams illustrate two parallel traditional investment funds (Fig. 1), and those same two investment participating Funds in a GFX Portfolio (Fig. 2).
Fig.1
Fig.2
GFX Portfolio
The GFX Portfolio operates as a single portfolio with a single investment manager, a single custodian, a single auditor, and a single portfolio compliance platform. Likewise, the GFX Portfolio has a single investment objective and a single set of investment policies and restrictions. The GFX Portfolio is tax transparent. The operations taking place through the GFX Portfolio comply with the laws and regulations governing each of the participating Funds (the “highest common denominator”).
As a result, portfolio management, safekeeping and compliance functions are standardized and centralized across fund ranges and across borders. The GFX Global Hub and SpokeSM System thus results in a more efficient and cost effective operation of multiple investment funds with the same investment objective.
Global Application
The GFX Global Hub and SpokeSM System can thus create a single portfolio with assets from investment funds domiciled in different global markets. As a result, and unlike parallel traditional investment funds which have separate and distinct portfolios, the investments of the participating Funds in a GFX Portfolio are held through the same single portfolio and are thus identical. They are thus normalized, i.e., each participating Fund has the identical gross investment performance as each other participating Fund investing through that same GFX Portfolio. Therefore, a Fund sponsor has the same gross investment performance across its Fund ranges for each investment objective. The net investment performance of participating Funds varies as the expenses of each participating Fund vary depending upon its size and market dynamics.
Effective New Market Entry
The GFX Global Hub and SpokeSM System permits an asset management organization to create new participating Funds customized for new markets that from creation would have critical mass (through the assets from other participating Funds being managed through that GFX Portfolio), and a performance track record (i.e., the track record of that GFX Portfolio adjusted for expenses).
Therefore, the GFX Global Hub and SpokeSM System is the most effective means for a Fund sponsor to expand across borders and across national market segments.
Customized Participating Funds
After investing through a GFX Portfolio each participating Fund can continue to have, for example, a different: (1) sponsor, (2) domicile, (3) name, (4) legal regime (e.g., investment fund, insurance, banking), (5) legal structure (e.g., SICAV, OEIC, unit trust), (6) pricing structure (e.g., total expense ratio, commissions, asset-based distribution fees), (7) valuation structure, (8) classes of shares, (9) currency of denomination, (10) distribution policy (e.g., roll-up, distributing), and (11) fiduciary (e.g., depositary bank, individual directors).
Each participating Fund customizes each of these administration and distribution components for its market, regardless of the options other participating Funds use to customize these components for their markets. Therefore, existing traditional investment funds which have been customized for a particular market do not have to modify their components in order to participate in a GFX Portfolio. Also, newly-created participating Funds can select whatever options are best suited for their intended markets and participate in a GFX Portfolio.
Each participating Fund may also change, expand or modify the investment strategy of a GFX Portfolio for its national market or market segment. A participating Fund does this by holding additional securities at the Fund level, by entering into derivative contracts at the Fund level, or by investing a portion of its assets through another GFX Portfolio.
Efficient Sub-Advisory / Private Label Arrangements
A more efficient and cost effective sub-advisory or private label arrangement can be created and operated through the GFX Global Hub and SpokeSM System since the sponsor of a participating Fund and the investment manager of the GFX Portfolio can be unaffiliated. As with a traditional sub-advisory or private label arrangement, the sponsor of a participating Fund can select its domicile, name, legal regime, legal structure, pricing structure, valuation structure, classes of shares, currency of denomination, distribution policy and fiduciary.
As a result, the participating Fund would function as a seamless part of the sponsor’s Fund range, in the same manner as would be the case with a traditional sub-advised or private label Fund.
However, unlike a traditional sub-advisory or private label arrangement, the participating Fund would commence operations with a critical mass of assets and a performance record. Likewise, the investment manager would continue to have only a single large portfolio to manage, instead of two (one of which would be quite small) as would be the case with a traditional sub-advisory or private label arrangement.
Customized Investment Strategy
The sponsor of a participating Fund can employ sophisticated portfolio management techniques to change, expand or modify the investment strategy of a portfolio for its national market or market segment.
In addition to its investments in fixed income securities through a GFX Portfolio, the sponsor of a participating Fund could use derivative instruments at the Fund level to change the duration of its investments.
As a result, a single fixed income GFX Portfolio could have one participating Fund with a long duration, another with an intermediate duration, and a third with a short/intermediate duration.
Also, in addition to its investments in equity securities through a GFX Portfolio, the sponsor of a participating Fund could use derivative instruments at the Fund level to offset the exposure of the portfolio to specific national or industry segments, or to specific issuers or other groups of issuers.
Regulatory Status
The general legal, fiscal and regulatory issues underlying the GFX Global Hub and SpokeSM System were presented to the relevant authorities in the U.S., UK, Luxembourg and Ireland. The authorities in the UK, Luxembourg and Ireland confirmed that funds organized in those jurisdictions and operating as UCITS could participate in the structure. GFX believes that the issues raised in the U.S. have also been adequately addressed. However, as with other fund structures – including traditional ones – no assurance can be given that, in the context of any specific application or filing, additional issues may not arise which would lead the applicable regulatory or fiscal authority to deny, reject or significantly modify that application or filing.
More Information
Global Fund Connections LLC (GFX) is a multi-disciplinary FinTech firm that has developed the know-how and software for this innovative GFX Global Hub and SpokeSM System. For more information concerning the GFX Global Hub and SpokeSM System, including its use by traditional investment funds and the composite of traditional funds and ETFs, or GFX’s know-how and software licensing program to implement and support it, or to be added to our mailing list, please contact us at info@GlobalFundConnections.com.
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