Getting into the mutual fund space is a bit like a game of chicken and egg: No one will give you money until you have a track record, but you can't get a track record until someone gives you money.

In the hedge fund business, some of the funds solve this problem by getting seeders: firms that will give new entrants start-up capital in exchange for an equity stake and/or a revenue share agreement. With mutual funds, though, offering preferential economics to any investors is illegal, according to the '40 Act law that governs them. All shares have to be treated equally, so seeders (usually the fund firms themselves) end up being just like other shareholders, only first.

Aisha Hunt, a lawyer with Dechert LLP, who specializes in '40 Act law and helping new funds get into the space, said she's been talking to many alternatives firms about how to structure seeding in the mutual fund world and if they can somehow wrap the agreement around another part of their business so it doesn't conflict with '40 Act law.

"It's really that complicated and you want to be very, very careful," she said. "We're looking at structuring joint ventures for clients that have a seeding component," she said.

So far, some of the entrants into alternative mutual funds have seemingly made agreements that revolve around special or exclusive relationships or commitments, rather than economics. When Blackstone Alternative Asset Management and Arden Asset Management struck their deals with Fidelity, they pledged to manage money only for Fido for a year or so and had to ask for permission before launching their second funds and taking them out to other clients.

Brad Balter, who set up a multi-manager alternative mutual fund for the Sackler family office, Summer Road, with $100 million in seed money, is also managing the fund only for the family office and plans to start his next one on their behalf as well. He told MFWire that if he were to pursue other clients, he'd have to ask the Sacklers about it first.

So if nothing else, then at least there is the "no cheating" rule for now.  

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