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June 3, 2024

Monday Morning Memo: Are Retail Investors the Right Target Group for ELTIF 2 Funds?

by Detlef Glow.

Over the last few weeks, I read a lot about the possible future success of European Long-Term Investment Funds (ELTIF) under the revised ELTIF 2 regime. In fact, it looks like the European fund industry is really appreciating the changes in the reviewed regulation since these changes give fund managers more flexibility and enable them to sell their ELTIF funds as cross-border products labelled as Alternative Investment Funds (AIF) to retail investors throughout the European Economic Area (EEA).

Yes, you read that right—ELTIF 2 products can be sold to retail investors which raises the question of whether this is really the right investor group for such products. From the perspective of the asset manager, they definitely are. This is because retail investors normally pay higher fees for their funds, which may help to close the gap in the balance sheet of many asset managers as the move toward ETFs has started to put some pressure on the margins of asset managers. With regard to this, it is to be expected that any new product which helps to at least maintain, if not increase, the profitability of asset management companies is appreciated by asset managers. On the other side, some (retail) investors may appreciate these new funds since they will enable them to add new sources of alpha and/or diversification to their portfolios.

From my point of view, it is OK when new products, such as the ELTIF 2, are sold to qualified investors who understand the risks embedded in such products and know how to handle them. All other investors should stay away from such products, as they may got hit by risks from sources which they haven’t foreseen in their due diligence process.

Talking about risks, from my point of view the illiquidity of some of the eligible underlying assets for ELTIF 2 funds is the key risks for investors. As a lot of the attempts to make illiquid assets liquid within a fund wrapper ended with a mitigation process to wind down the respective products, once they didn’t had enough liquidity to meet the cash demand from fund share redemptions. One needs to bear in mind that especially private assets may need a longer period to be liquidated at a fair value than the notice period for the redemption of fund shares allows.

 

This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of Lipper or LSEG.

 

 

 

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