The Guernsey-registered ITI Funds has set up five platforms – three in Luxembourg and two in the Cayman Islands – that dramatically reduce the cost of entry to the fund management business.
The platforms offer a variety of solutions that allow a potential fund manager to do anything from a high quality UCITS- regulated fund, the European gold standard of well-regulated funds that trade stocks and bonds – to the lightly regulated cryptocurrency exchange funds.
A fintech innovation, these platforms allow would-be managers to quickly and cheaply get into business. ITI Funds has dramatically lowered the cost of entry so where you used to need at least $30mn of assets under management (AUM) to run a fund, now you can do it for as little as $2mn. That could democratise the asset management business and turn the pyramid on its head.
ITI Funds keeps a foot in two worlds as it works both with investors and portfolio managers, matching their interests of both groups. It provides managers with a range of services: fund set up, fundraising, legal advisory, operational support, outsourcing investor relations. But the main difference from other companies providing services to funds, is help setting up new funds; ITI Funds does not just take anyone on as client: a portfolio manager has to pass an audit and confirm strategy performance before they become a client and the new becomes an eligible product, which ITI Funds can offer to its investors.
bne IntelliNews editor-in-chief Ben Aris talks to the CEO of ITI Finds Gleb Yakovlev about his business and the services that the company offers. Listen to the podcast of the full interview here.
bne: Can you give me a brief overview of what you do?
GY: ITI Funds offers a collection of niche funds but we also provide services and back office to start ups and young companies.
Our business is putting together investors and portfolio managers in a broader sense. Not someone who is already well established, but people or companies that need some kind of wrapper or infrastructure.
bne: Do you mostly cater to Emerging Europe managers or anyone?
GY: Anyone but EM in general and EM Europe in particular is a target market. Recently we signed up an eastern European asset manager, who is a leader on his market and we set up a Luxembourg Undertakings for Collective Investment in Transferable Securities (UCITS) certified ETF on their domestic market using our infrastructure.
Obviously we are less interesting for pure western funds, but we are for European and UK based hedge fund mangers and crypto managers that want to run an algo trading strategy. For them setting up in London is even more expensive than for an eastern European asset management company so we attract clients from all over.
bne: Do you focus on crypto and new economy or more traditional funds?
GY: We have five platforms that can set up funds. Three of them are in Luxembourg and two of them are on the Caymans Islands.
We are in the middle of creating a sixth platform on Guernsey in the Channel Islands. Most probably this will overtake the Cayman Islands as substance requirements in general dislike the offshore jurisdictions and is making people less interested in Cayman vehicles and more in European vehicles.
In Caymans one of the platforms is a crypto dedicated platform. We open accounts on crypto exchanges. We set up accounts with prime brokers who trade crypto. We set up with administrators who have experience with these funds. We work with legal people that understand how crypto works. We work with marketing guys who understand how crypto works.
Normal people who are trading traditional assets don't usually like to mix their infrastructure or system with crypto so that is why we decided to make two platforms.
On our platform you can start a funds starting from $2-3mn, which is impossible in most other cases. You can make an algo fund, a high frequency funds (HFT) – any type of fund. Mostly people who are interested in our services are algo or HFT guys.
bne: So you give access to small funds by lowering the cost of entry?
GY: Exactly that. And our revenue model is quite simple. We do not earn on setting up a fund. For us it is not a business. We are not an administrator. We are not making these funds for a living. We make funds as a service. We earn revenue from two major sources.
First when we introduce capital into newly created vehicle we charge clients subscription fees and we also take a small cut of management and performance fee from the fund because we helped them to set up.
In fact we share the success with the portfolio manager. If there is no success then they do not pay simply, as they have no revenue stream to pay us from. We think it is quite fair.
The second line of revenue we have is revenue sharing. Our sister company ITI Capital is a sell side broker that has offices in London in the Natwest building, in Guernsey and in Moscow. Any hedge fund manager that wants to exploit the opportunities of trading using our infrastructure, we would first offer them to go through one of our brokers in London or Guernsey or Moscow and we have a cut from the fees from the brokers.
bne: So its still early days?
GY: It is not early days, but we don't want to offer this to people we can’t earn enough revenues on to support our business. We share the success with the fund manager.
In Luxembourg we have three platforms. First is exchange-traded funds (ETFs) that are UCITS standard and the highest standard you can get that are regulated by the local regulator. On this platform we have two funds that operate in Ireland, London and Moscow. We have the third fund with an eastern European asset manger company and we are close to a deal with a Chinese asset manager.
The second platform is a RAIF under the Alternative Investment Fund Managers Directive (AIFMD) regulations, which covers all non-bankable assets like real estate, loans (performing and non performing) intellectual property, derivatives, and on top of that you can also do usual stuff like buy equity and bonds.
The beauty of lighter regulated RAIF is unlike the other fund types like SIF where you have to preapprove each subfund with the regulator, you can set up a fund in just by decision of the directors. That saves 3-6 months in the set up process.
The break-even point in the AIFMD is about €8-10mn which is more than Caymans but it is still less than it costs to set up a regular fund. If you were going to do your own fund in Luxembourg then you need assets under management (AUM) four times higher than our breakeven point; you’d need at least €30mn or more to start a new fund.
The third platform is completely unregulated and there are some limitations like we can’t make a fund that is bigger than €100mn, but this is the fastest and easiest way to set up a Luxembourg- based fund. On that we have created a crypto ETP, exchange trade product, that will track a crypto index we have created in collaboration with MVIS.
bne: You are setting up a platform for people to get into the fund business with a much lower bar. Instead of €30mn you only need €2mn which is democratising the fund business. You make it possible for a much wider range of people to get into this business.
GY: That is the point. We see ourselves as a niche player. We offer small and interesting portfolio managers opportunity to start up. We give them a chance to show themselves. And for investors they have a chance to buy into these juicy stories rather than buy big funds that everyone already knows.
When we go to the process of setting up a fund on our platform we don’t want to go into setting up a fund that will not be a success . First we do the math, we understand the strategy, if it is viable. We interview the portfolio manager, we understand if he is serious and how it all works, if it was a systematic return or just a one of exercise. And then after we get enough confidence into these guys we ask them to put some real cash with the broker for about half of a year so we can see the strategy operating on a real account . We ask them to trade using managed accounts just to prove their performance and for us it is the only way to see if earnings are systematic. If in real life manager shows that one month strategy was up 20% and the other month it was -30% it doesn’t really fly for us. It’s something like he was just lucky that month. Only then we go to the next step of setting up a fund. 80% of smart guys just get smashed by the open market. They don’t survive this half a year exercise.
So it’s like an evolution. You put people into the wild. And those who survive grow stronger.
Yes, exactly. Just because we don’t want to spent time and money on setting up a fund for somebody who will not perform.