Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
29/06/2011
Comment: Stephen Oxley
Managed accounts for hedge funds have been in the news frequently since 2008. The growth in their use has been significant in the past two years, but it would be wrong to think that they appeared only as a response to the crisis.
The frequently bandied term ‘managed account’ covers a wide range of investment vehicles. They have in common the idea of the segregation of one investor or a group of investors’ assets. This has been around for decades in the world of long-only asset management, where there is a much clearer distinction between commingled (retail) clients and segregated (institutional) clients. Institutions generally prefer having their own vehicle; it signifies their importance, provides enhanced governance and also offers the possibility of tailoring the investment portfolio.
Hedge funds have their roots in the commingled world, whether through limited partnerships or via offshore investment funds. Hedge fund managers have historically preferred the freedom and operational simplicity of managing one pool of assets, and their high-net-worth clients did not object as long as they were treated equally and the manager had skin in the game. Institutional investors were late to the hedge fund table, and in many cases they accepted the ‘one fund for all’ concept rather than asking for a fund of one.
Historically, the pressure to segregate came from the banks that started creating guaranteed and structured products in the 90s, which required the guarantor to have control of underlying assets. Larger investors, including funds of funds – who through their size were able to insist on their own vehicle – also asked for, and often got, managed accounts in the earlier years. But many hedge fund managers were resistant to the idea and would only take them on for a significant or seeding investment.
Now things have changed. Managers have become more flexible, investors more insistent and systems, prime brokers and agreements more accommodating. Investors have three basic ways of making their investment: through a commingled vehicle of some sort, via a managed account platform or in a specific fund of one. Of course, there are various forms of commingling and segregating, but managed accounts continue to primarily come in the two basic forms – funds of one or platforms. The platforms themselves are now clearly split into two sub-groups: public, which are open to all (qualified) investors and usually commingle a group of investors in a single managed account with the manager; and private, which serve the needs of a single investor or its clients.
The three largest public managed account platforms, according to HFMWeek’s analysis (HFMWeek issue 219, March 2011) were all started to support the structured product business of their sponsors. Since the financial crisis and the winding down of many capital guaranteed offerings, the platforms have repositioned themselves as service providers to hedge fund investors. And the platforms, both private and public, are growing, along with the use of funds of one.
The hedge fund world appears finally to be catching up with standards in long-only asset management as institutions demand better terms, governance, transparency and control.
Finally, there is another significant benefit of the fund of one or the private platform, and that is customisation of the investment mandate. Multi-manager investors can improve the expected
return of their portfolio by tailoring the individual constituents to focus risk and skill optimally. Thus managed accounts can facilitate investment strategy improvements as the portfolio’s
overall risk and return are enhanced, while at the same time satisfying the legitimate concerns many larger investors have about governance, control, transparency and access to assets.
Stephen Oxley is MD at Paamco Europe. He is responsible for managing Paamco’s global client relationships and is a member of the firm’s investment oversight
committee.
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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