Executing hybrid funds in search of greater diversification

What are hybrid funds and how do they work?

Hybrid funds combine fund characteristics of both open-ended and closed-end structures. They can leverage liquid strategies like trading and hedging, usually associated with traditional hedge funds, as well as illiquid strategies seen in closed-end funds.

In private capital, managers typically see liquidity four or five years after investing, which allows them to benefit from any illiquidity premium. Trading and hedging in public markets may allow for redemptions every month, providing a higher level of liquidity.

Hybrid funds can be flexible when it comes to offering liquidity for investors with a mix of strategies in a single fund structure. Even though they are closer in structure to closed-end private equity funds, they allow investors a greater measure of flexibility in liquidity options due to the mix of assets and duration periods. Based on what we’ve seen over the past several years, more firms are adopting hybrid models, suggesting they are moving into the mainstream.

Why are hybrid funds relevant for investors and managers today?

We’re seeing many of our clients seek products that offer diversification, access to multiple strategies, and more predictable income streams amid ongoing market volatility.

Among our private market clients, a growing number are exploring public market exposure to complement long-term private investments. The hybrid approach allows them to do this without moving away from their core private investment strategies.

The reverse is also true – hedge fund managers want to invest more in illiquid assets for better potential outcomes. One way to pursue this objective is to invest in pre-IPO companies with plans to IPO two to three years down the road by using side pockets to separate those investments. With a hybrid fund, hedge fund managers can invest in venture/growth assets held for at least five to six years.

Investors can get exposure to different geographies and asset classes with hybrid funds. These include publicly listed and private companies, private credit, real estate, and infrastructure, as well as derivatives and illiquid investments such as bank debt, distressed debt, and CLOs. In recent years, since private credit has become more popular, hybrid fund investors and managers have increased allocation to the asset class accordingly.

Investors and managers can also leverage a hybrid fund structure to invest thematically. For instance, those seeking an entry point into the rapidly expanding green energy space can flexibly invest in related assets in public and private markets.

What are the challenges involved in setting up a hybrid fund?

The most important challenge is to understand the client’s business and the support that they may need. To nurture a long-term relationship, it is paramount to understand a client’s business needs even as they evolve.

The second most important thing is to understand the economics behind each fund and deal, as well as liquidity events such as exits or drawdowns. Once the money comes in, it’s crucial to track the cash movements and report to the investor, taking into account negotiated terms such as management fees, reduced fees, or hurdle rates.

What are some common or compelling solutions to these challenges?

Hybrid funds typically have private market terms spelling out who gets the first cut of the returns. They also provide monthly public asset redemptions. We still see many firms using spreadsheets for key calculations, especially around allocations and fee modeling. Using technology to simplify and automate this process can add value to both investors and sponsors.

Hedge fund managers tend not to be as familiar with the rigorous valuation processes of private capital investments, or with processes like capital calls. At the same time, a private equity firm may not have the operating infrastructure needed for everyday trading.

Automation of accounting and reporting processes, as well as leveraging proprietary systems, can allow firms to view, record, and report results, ensuring consistency with the limited partnership agreement (LPA). This technology can strengthen your advantage to service clients in a way that is aligned with their business priorities and the Institutional Limited Partners Association’s (ILPA) guidelines.

Clients are increasingly requesting faster delivery and more detailed reporting, particularly around transaction-level data. These expectations are driving greater demand for real-time reporting capabilities and automation.

For hybrid funds, it is critical to enable a level of visibility and control that is only possible with advanced technology, since each fund typically involves a unique mix of assets, strategies, and currencies. Built-in processes and controls can help mitigate operational risk, which can increase with the complexity of hybrid fund structures.

How do you foresee the trend of hybrid funds playing out in 2025 and beyond?

Based on current client inquiries and market activity, we anticipate continued growth in hybrid fund launches. At the moment, we’re seeing higher-than-usual demand from hedge fund clients looking to add illiquid asset exposure to their portfolios.

We believe hybrid structures will continue to appeal to managers and investors seeking to adapt to evolving market conditions and investment opportunities.

About
Michael Li is Managing Director of SS&C GlobeOp, SS&C’s alternatives fund administration business. Based in Hong Kong, Michael is responsible for the overall business management and product offerings of the business across Asia Pacific. Michael was part of the core management team who established SS&C’s private equity fund services business in Asia in 2007, and now leads the hedge fund and private markets businesses in the region. Prior to joining SS&C, Michael spent numerous years at Deloitte and Arthur Andersen in the assurance practice focused on private equity and venture capital firms in the San Francisco Bay Area. Michael is a Certified Public Accountant in the State of California and holds a Bachelor of Science from San Francisco State University, majoring in Finance and Banking.

This article originally appeared in Alternatives in APAC 2025.

_{This is a sponsored opinion by SS&C. The views expressed are provided as of June 19, 2025, do not constitute an endorsement, recommendation, or any other advice, and are subject to change. The following content does not necessarily reflect the views of BlackRock, Preqin, or any of its affiliates. SS&C is not affiliated with Preqin. Preqin received compensation from SS&C in exchange for publishing this content.}