Category: Mutual Fund


What’s the Best Way to Manage Risk?

By Andrew Rogers, former CEO, The Gemini Companies

There are many different methods to calculate and monitor portfolio risk. However, many believe that the best approach starts with, and is generally driven by, the philosophy and requirements of the investor within the context of the investment mandate and portfolio goals. Effective risk management therefore combines a rigorous due diligence process with the establishment of investment guidelines, and leads to the definition and implementation of risk policies and procedures. From there, it then evolves to a continuous monitoring of exposures using a variety of advanced risk metrics and strategies.

Thorough due diligence is a prerequisite for any effective portfolio risk management process, and a full quantitative analysis of the track record is an important first step. In a relatively recent development, we have seen trading advisors greatly increase their data transparency and are generally happy to provide information on returns, holdings, allocations and historical margining. These data points can be used to determine information about volatility, historical drawdowns, correlations to benchmarks, return distributions, etc., and serves a dual purpose—to fact-check the manager-provided metrics as well as to provide a framework for additional research. Trading advisors can provide this information to investors to fill in any gaps about a specific investment strategy, how risk is managed internally, and the operational framework for doing so.

In this way, a strong understanding of the investment process allows investment risk to be both understood and managed on an ongoing basis. As part of their continual risk-management monitoring, investors should, at a minimum, be able to confirm that the trading advisor is adhering to their stated investment and risk guidelines. This involves monitoring the portfolio to make sure that mandates are not being broken with regard to the size of positions and the markets that are traded. While this measure is necessary for good governance, this is especially important to avoid any unforeseen concentration risk, liquidity risk, and geographical risk. Additionally, ensuring that a portfolio is properly liquid and diversified, a prerequisite for the efficacy of standard risk metrics, also generally allows investors and advisors to better manage extreme, or “tail,” risk events.

Among the most common risk analytics applied to portfolios are variants of Value-at-Risk (VaR) calculations as well as stress-testing. Interestingly, the strength of VaR is also its weakness—while effective at calculating potential losses at a given confidence interval, VaR does not forecast the magnitude of losses in periods of tail risk.

Stress-testing with both custom and historical scenarios can partially fill this gap, but they are only as strong as the scenario being presented. By their nature, no two financial crises are ever identical, with the resulting correlations between markets being difficult to predict. In those cases, the explanatory power of both Monte Carlo and discrete event stress-test models can generally be limited.

Therefore, while VaR statistics and mathematical modeling can be useful, many believe a robust approach towards risk management should include an overall-exposure-based strategy. This allows for the forecasting and management of actual losses when correlations between markets and asset classes diverge from their modeled or historical patterns.

It is for these reasons that we see many top trading advisors employ this type of proactive methodology. They combine traditional risk strategies with limits on exposures to markets and asset classes, as well as a top-down portfolio-level view of risk. When trading advisors set and adhere to comprehensive risk management policies and procedures that augment this approach, they can generally implement a sensible way to both forecast and manage losses in multi-standard deviation events—and provide a strong framework with the potential for total returns consistent with mitigating potential losses, thereby benefiting investors as well as their firms and strategies.


7341 GFS-5/1/2017



An Alternative Mutual Fund’s Most Unusual Birth: A Case Study in How Gemini Works Alongside Alternative Managers to Achieve Long-Term Goals

Today’s fund administrators are capable of doing much more for investment managers than just assisting with back-office responsibilities. As demonstrated by The Gemini Companies (Gemini), modern “fund administration 2.0” which involves working closely with managers to actively assist with launching, managing, and growing funds.

Recently, Gemini facilitated a rare transaction that enabled a manager to launch an alternative mutual fund without having to create an investment company from scratch. Instead of bringing a new fund to market, the manager saved a great deal of time and money by assuming, with Gemini’s help, the role of investment advisor for an SEC-registered mutual fund that already had an established track record (and a five-star rating from Morningstar).

A Deep-Rooted Partnership

The teams at the investment management firm and Gemini have worked closely together for more than seven years. The management firm’s president served as a partner, executive vice president, and managing director of another alternative mutual fund manager prior to establishing his own shop in 2015. During his tenure at his previous firm, the manager and his colleagues noticed that their sub-advisors’ managed futures strategies performed well during the 2008 financial crisis. They decided they wanted to launch a managed futures mutual fund that incorporated strategies from five high-quality investment managers. At the time, the pain of the financial crisis was fresh, and alternative mutual funds, also known as “liquid alts,” were rare.

“At a time when everyone was gun-shy, Gemini was the only series trust provider which was willing to do what we wanted them to do—create a trend-following program and put it in a mutual fund,” recalls the manager. “We knew that Gemini had been expanding their services to other alternative managers, and they understood the nuances and leveraging requirements of alternatives. Seven, eight, or nine years ago, that was unusual.”

Working together, the industry’s first multi-strategy managed futures mutual fund was launched within the Northern Lights Fund Trust, with additional sales, marketing, and distribution assistance provided by Gemini. Thanks to Gemini—which, among other things, introduced the manager to custodians and independent broker-dealers with which they do business—the fund grew to more than $1 billion in assets under management in just 11 months. “Then, we launched half a dozen other funds in the Northern Lights Fund Trust, and we grew alongside Gemini as they expanded their staff,” says the manager.

‘Have I Got a Fund for You’

The manager founded his own firm in 2015 and describes it as “more of an advisor than a mutual fund manager.” The firm offers financial education, investment management, retirement planning and philanthropic guidance services for wealthy families and entrepreneurs, and builds customized financial solutions to help investors achieve their goals.

In 2016, an opportunity arose for the firm to launch one of its investment models within a mutual fund. A New York-based, SEC-registered investment advisor specializing in risk-managed investing had been acquired by another investment advisor in 2013, but still managed a mutual fund in Gemini’s shared mutual fund trusts. The investment advisor’s parent company decided it no longer wished to pursue the strategy in that fund, so the advisor contacted Gemini and redeemed all the assets under management—approximately $250 million—over the course of a month.

While the assets had been liquidated, the fund itself remained intact, and so was its track record and five-star rating from Morningstar. Andrew Rogers, CEO of The Gemini Companies, contacted the manager who had recently founded his own firm and suggested that his firm apply to become investment advisor to the abandoned fund and amend the fund’s investment strategy to align with one of his firm’s models.

A Transaction that Gemini Understands Well

Prior to reaching out to the manager, Mr. Rogers and his colleagues at Gemini had already helped several other managers assume the role of investment advisor for other existing mutual funds. “A manager may have a great strategy that they want to take to market, but by taking over an existing fund, the manager gains an experienced board, a track record of operations, and the infrastructure behind the scenes that’s already in place,” says Mr. Rogers. While completing regulatory filings and obtaining shareholder approval for this type of deal require patience from managers, they can immediately take advantage of their funds’ existing selling agreements once those processes are complete, enabling them to raise assets faster and decrease expenses for shareholders.

Mr. Rogers points out that creating a fund from scratch can take four to six months in a shared fund trust or another existing trust, and six to nine months in a new trust. However, launching a fund by taking over as investment advisor to an abandoned fund can take just 30 to 90 days.

Gemini: An Engaged Partner

Having worked closely with the manager for many years, Mr. Rogers was confident that the manager and his colleagues could benefit shareholders of the abandoned fund. In addition to offering investors a more diversified alternative investment vehicle, the manager proposed reducing the fund’s management fee from 75 basis points (bps) to 65 bps, while keeping in place the fund’s existing expense ratio cap of 1%.

“When you come in as an investment advisor, you have to do SWOT (strength, weaknesses, opportunity, and threats) analysis and figure out how your strategy measures up from a cost perspective and as a fiduciary to the fund,” says the manager. “This fund went from a single alternative strategy, which was long/short equity, to being a multi-manager alternative mutual fund—with long/short equity accounting for almost 50% of its portfolio. It’s now a more diversified mutual fund with lower costs for investors.”

For the manager, the capability to utilize the abandoned fund’s Gemini-negotiated selling agreements was an attractive attribute. “It’s one thing to launch a fund and put $1 million into it, but to break even you need to have $25 million or more depending on the expense ratio,” he explains. “You need selling agreements with various custodians and a whole host of related line items checked off before you raise money.”

Crossing the Finish Line

After the fund’s board approved the contract, Gemini outsourced the printing and mailing of shareholder prospectuses for the new fund to a solicitation agent, which also supervised the voting. On December 2, 2016, the manager’s firm surpassed the 51% approval threshold among fund shareholders to become the new investment advisor and begin managing the portfolio.

The manager is grateful to Gemini for helping his firm seamlessly manage the process of bringing the new fund to market. “I know the bad things that can happen when you launch a mutual fund, which is why the opportunity to take over a fund that was already launched and had no upfront legal fees associated with it was so attractive,” he said. “I know the people at Gemini, and I know the quality of their work, so I trusted them to guide us through the process, and as expected, their help was invaluable.”

The new fund kept the abandoned fund’s Morningstar category rankings. The fund also remains in the Northern Lights Fund Trust. “For me, there’s no reason to move out of the shared trust—Gemini provides services we need, including ongoing monitoring from an advertising perspective, which is critical because we want to make sure we’re complying with the SEC’s marketing rules,” the manager said.

The manager estimates that his firm saved between $50,000 and $100,000 in startup expenses and at least 90 to 120 days over the traditional fund-launch route, and he says his firm stands to save more time and money over the long term. “The fact that the fund already had several selling agreements in place was crucial because it’s especially hard right now to get a mutual fund on a custodial platform,” notes the manager. “They’re not looking to take on new funds until they figure out how the Department of Labor’s proposed Fiduciary Rule is going to affect them, so to become an advisor to a product that’s already on those platforms is very important to our future success.”

Fund Administration 2.0

Gemini did for the manager what it has done for many other clients in the past—act as an engaged partner to help launch, manage and grow a fund. “As more managers learn about the process of taking over an existing fund, and the advantages of entering the mutual fund market this way, there may be more managers in our trusts who would be willing to do what this manager has done,” says Mr. Rogers. “If and when they are, we’ll be ready to deploy Gemini’s engaged teams to make sure everything is executed properly.”

7222 GFS-3/15/2017



Why Hedge Fund Managers are Moving to a Registered ’40 Act Mutual Fund

By Vicki Todd, Senior Vice President, Fund Accounting

Imagine yourself as a new investment manager. Being new to the investing world, you begin with limited capital and decide to start a hedge fund since they are less expensive to launch than a registered ‘40 Act mutual fund. Your hedge fund does well, but raising capital is difficult. First, you have to find high net worth individuals who are willing to put their trust and hard earned money in you, not only in the form of an investment, but in potential 2 and 20 fees as well. Furthermore, these investors are usually limited to a certain percentage of illiquid investments in their portfolios. Since the hedge fund has monthly valuations, it is considered illiquid, which limits its distribution to these high net-worth investors.

So, what should investment managers with hedge funds do? Find a partner with capital that can assist in converting your hedge fund into a mutual fund! Not only can the right partner provide capital, but they can also share knowledge and expertise with policies and procedures to help guide you along in the registration process.

Registered ‘40 Act mutual funds offer a larger distribution base with fewer barriers of entry for the average shareholder. By converting to a mutual fund, the hedge fund manager can bring over their track record from the hedge fund and begin to attract new investors. The distribution channels available for mutual funds allow them to reach a greater number of people.

A mutual fund can offer a low or even no-minimum investment, daily liquidity, and increased transparency into the funds’ investments. Those investors who have a limit on their illiquid holdings can now invest in the mutual fund because of its daily liquidity. As Jacob Pacini, Co-Founder and Chief Investment Officer for Pacini Hatfield Investments, said when he launched his hedge fund, “I couldn’t be in my own fund because the barriers were too high.” He recently partnered with Day Hagan Asset Management to make the switch from a hedge fund to mutual fund. Now more of his friends and family can participate in his investment strategy in the mutual fund!

So, why convert to a mutual fund from a hedge fund? It offers a much larger audience with more distribution options, daily liquidity, transparency, stronger regulations to protect investors, and fewer barriers to entry for the shareholders among other benefits.

Learn more about mutual fund restrictions and the ’40 Act here.

7140 GFS-2/9/2017



DOL Readiness Guide

At the time of this writing, the compliance date for several provisions of the Department of Labor’s (“DOL”) fiduciary rule is still scheduled for April 10, 2017. Barring any delays, the day is poised to usher in many changes for the mutual fund industry.

As comprehensive and engaged partners, The Gemini Companies are providing investment managers to 1940 Act Mutual Funds with general share class guidelines to consider as they review the potential impact that the new DOL fiduciary rule may have on their businesses.


The fiduciary rule is expected to expedite the industry shift from commission-based products to fee-based solutions offered through intermediaries—a swing that has been apparent since the financial crisis of 2008. In fact, a handful of distributors, including Merrill Lynch and Commonwealth Financial, have already announced plans to eliminate commission-based products.

Halting these types of products will make it easier for investment managers to market their funds to investors because fee-based products consist of generally less expensive and more transparent, share classes. Share classes that are expected to win assets include:

  • Institutional (Class I or Y): This is the preferred share class for large-asset accounts because institutional shares do not have sales charges or ongoing 12b-1 fees, and tend to have higher minimums.
  • Investor (Class N): This share class is most often offered through intermediaries, which may assess 12b-1 fees for shareholder services and do not have front- or back-end sales charges.
  • Class A: This share class includes shares that have higher front-end sales charges with ongoing 12b-1 fees, and have been utilized for asset-based accounts.  If the shares are expected to be sold within one year, Class A shares could serve as substitutes for Class C shares that have back-end load charges. Class A shares that waive their front-end sales charge may also be effective.
  • Class T:  This share class includes shares that have lower front-end sales charges with ongoing 12b-1 fees may be considered as a lower cost solution to traditional C and A shares. This is a relatively new share class structure that has garnered a lot of attention in light of the new DOL fiduciary rule.
  • Class R: These shares are generally only purchased through 401(k) and other employer-sponsored plans, and do not carry front-end or back-end charges. However, operating expenses among this share class may vary greatly among fund families.

These share classes are likely to attract future investments because they are easier to understand, more reasonably priced, and have simplified fee structures. The current share class “alphabet soup” causes much confusion among investors. The fiduciary rule is poised to streamline share classes through its push toward fee-based products. This would greatly benefit investors who would be able to choose from more products composed of the above-mentioned share classes.


Investment managers should review their existing share class lineup to determine potential impacts and if an update to their current share class lineup is in order to stay ahead of this trend. Offering products with more transparent and cost-efficient share classes may enhance managers’ credibility by giving them the opportunity to showcase their cost-conscious funds in a highly competitive market.



Investment managers who determine that an adjustment is needed to their share class lineup have two share class options to consider: Create a New Share Class or Convert an Existing Share Class.

Each of these options require a team of experts to assist with a variety of tasks which include, but are not limited to:

  • Updating Registration Statement
  • SEC filing
  • Fund Board approval
  • Revised contract execution
  • Unwinding or converting a share class, if applicable
  • Blue Sky registration
  • Intermediary communication
  • Repapering of Selling Agreements

Option 1 – Creating a New Share Class

Action Items Fund Partner Timeline
Prepare and file updated Registration Statement with the SEC Gemini Fund Services Legal Team

·         Provides brief legal overview

·         Prepares updated filing for review by advisor and counsel


·         Reviews filing and provides comments or approval to file

Fund Counsel

  • Reviews filing and provides comments or approval to file
  • Receives comments (if any) from SEC approximately 45 days after initial filing
  • Updates revised Registration Statement to reflect SEC comments


One week to prepare filing, and then 60-day SEC review of filing
Fund Board approval Gemini Fund Services Legal Team

·         Schedules matter for Board consideration during next quarterly Board meeting; an in-person meeting is required for changes to a fund’s 12b-1 plan

·         Prepares updates to fund agreements (12b-1 plan, expense limitation agreement, etc.) and coordinates contract execution after Board approval is obtained

Boards typically meet at least once every three months
Blue Sky registration


Gemini Fund Services Treasury Team

·         To add a new share class for existing funds

·         For restructure/reclassification, the team sends notification to Blue Sky vendor for amendment of reclassification

10 business days from effective date
CUSIP and ticker changes


Gemini Fund Services Fund Administration Team

·         Submits CUSIP and ticker request

Up to 7 days from Board Approval


Option 2 – Restructuring an Existing Share Class

Action Items Fund Partner Timeline
Prepare and file Prospectus supplement or revised Prospectus with the SEC Gemini Fund Services Legal Team

·         Provides brief legal overview

·         Prepares updated filing for review by manager and counsel


·         Reviews filing and provides comments or approval to file

Fund Counsel

  • Reviews filing and provides comments or approval to file


One week to prepare filing, which is effective upon submission to the SEC via EDGAR[1]
Fund Board approval Gemini Fund Services Legal Team

·         Schedules matter for Board consideration during next quarterly Board meeting; an in-person meeting is required for changes to a fund’s 12b-1 plan

·         Prepares updates to fund agreements (12b-1 plan, expense limitation agreement, etc.) and coordinates contract execution after Board approval is obtained

Boards typically meet at least once every three months
Blue Sky registration


Gemini Fund Services Treasury Team

·         To add a new share class for existing funds

·         For restructure/reclassification, the team sends notification to Blue Sky vendor for amendment of reclassification

10 business days from effective date
CUSIP and ticker changes


Gemini Fund Services Fund Administration Team

·         Submits CUSIP and ticker changes

Up to seven days for ticker changes

Up to two days for CUSIP changes

[1] Board approval may be required before a Prospectus supplement or revised Prospectus can be filed with the SEC.  Gemini’s Legal Team shall consult with fund counsel on a case-by-case basis to determine the appropriate course of action based on the proposed share class changes. 

Additional costs* to consider when starting or restructuring a fund:

·         Outside counsel fees

·         EDGAR filing fees

·         Prospectus changes

·         Printing fees

·         Intermediary distribution fees

·         Outside counsel (provides finalized brief and filing)

·         Intermediary platforms (selling agreement changes)


*Some cost may be considered a fund expense.


Action SEC Filing Board Approval Blue Sky Registration Prospectus Changes CUSIP & Ticker Changes Proxy Vote
Create No
Restructure No

7147 GFS-2/13/2017