The Composite structure used by Little Harbor has its origin in 2007, the year prior to the financial crisis, when institutional investors had begun to feel the potential vulnerabilities of their fund-of-hedge-fund investments, which included growing correlations to equity markets, layered management fees, incentive fee netting risk and lack of holdings transparency. The Composite structure was developed in response to the flaws in the fund-of-funds model that were laid bare in the wake of 2008. Seeking to solve for these problems, the Composite structure offers a clear investment theme, the elimination of layered management fees, a netted incentive fee based on the return of the aggregate portfolio (not on the individual returns of the underlying strategies), holdings transparency for Little Harbor, and an additional level of risk oversight.
Little Harbor has created two such institutional Composites: the LHA MultiStrategy Composite Fund I, L.P. and the Little Harbor Global Trading Composite Fund, L.P. Each is organized with an investment and diversification proposition constructed from a limited and carefully selected cohort of complementary managers. By building a specific investment thesis with dedicated independent managers, Little Harbor Composites avoid over-diversification (which may take place in the typical fund-of-hedge-fund structure) and maintain the independent discretion of the return-drivers in a particular portfolio (unlike most multi-strategy complexes). We believe both advantages sustain the long-term viability, clarity, and verification of a Composite’s value proposition to its investors. Also, by committing to an investment thesis, we believe Composites also have a select group of managers whose profiles include a well-defined single-strategy focus (alpha edge), natural capacity constraints typically associated with such focus, long track records, demonstrated risk management, and significant principal capital invested in their own strategy.
Little Harbor Composites are positioned for both institutional and qualified individual high-net-worth investors who are seeking portal-like access to hedge fund strategies of mid-sized managers in a single investment with a single layer of management fees and performance fee-netting across the strategies. Little Harbor does not interfere with the independent investment programs of the Composite’s underlying managers and allocates assets in equal percentages between strategies in the Composite on, at least, a quarterly basis. This eliminates the central actor risk arising from market calls by an individual or committee that may adjust asset allocations on an ad-hoc basis.
Little Harbor Composites are usually organized as private master-feeder fund structures.