Managed account platforms have risen in prominence since the financial crisis as hedge fund investors look for greater transparency and governance on the back of increased regulatory oversight.
These platforms have become especially popular among large institutional investors, who have sought to have their assets ring-fenced from the assets of other investors in a hedge fund and have placed them into separately managed accounts for safety purposes. Separately management accounts also enable them to redeem their assets more quickly from a hedge fund, compared to if they were comingled with other investors assets in a fund.
Akshaya Bhargava, CEO of managed account platform provider InfraHedge, says he has seen increasing interest among these institutional investors since the platforms launch 15 months ago. The provider is live with an existing client of State Street, which is InfraHedges major shareholder or parent company.
Platform providers can enforce an independent degree of service provision and provide daily risk monitoring, transparency, control and governance via separate legal structures, says Bhargava.
While managed accounts have been a feature for the last 10 years, with the likes of Man Investment and Societe Generales Lyxor providing these tools, the number of investors going direct with their own managed accounts has become a more common feature in the last few years.
These investors were restricted in terms of the domicile of the managed account platform and the hedge fund managers selected by that platform, says Bhargava. It is these limitations that prompted InfraHedge to offer an investor-centric service, enabling large institutional investors with more than $250 million of AuM to nvest in any domicile and structure while charging them a single fee. While small to medium sized investors are constricted and are more likely to enter into a managed accounts structure with many other funds, we offer a bespoke solution for the larger institutional investors, says Bhargava.
The InfraHedge model avoids any conflicts of interest, adds Bhargava. The more traditional managed account platform models have the fund managers as well as the institutional investors interest at heart. On the one hand the relationship with the fund manager is fee driven and it wants to get as many managers on the platform as possible. On the other hand, it has to keep the distribution channels open while serving as many investors as possible.
The InfraHedge platform leaves the fund management decisions to the institutional investor and provides the infrastructure for monitoring the investments and providing transparency and corporate governance.
Furthermore, says Bhargava, the provider is able to leverage its relationship with State Street. We think the platform fits well with how the custody landscape is evolving by giving investors a choice in how they invest while providing them with functions such as reporting, analytics and governance tools. InfraHedge provides hedge fund investors with daily information and transparency based on this data from IFS a State Street subsidiary. We let the investor make the decisions while we operate the infrastructure that goes inside the managed accounts platform, says Bhargava.
If you look at the regulation coming, hedge fund investors require greater disclosure, transparency, and the managed account structure supports these demands by providing the necessary reporting. The contractual balance achieves a very clear set of accountability roles, with investors making the investment decisions and us providing the management account platform.
Ron Tannenbaum, managing director, GlobeOp says managed accounts are probably the single fastest growing sector in the companys pipeline. Post Madoff people talked about it as a solution but people have been talking about it behind the scenes for many years and weve been a beneficiary of that.
Tannenbaum has also observed that large investors in hedge funds are slowly morphing onto single managed account platforms. These are not only asset managers and insurance companies but also pension funds such as the Hermes pension scheme that have set up their own platform rather invest through fund structures. The fund of funds platform is dead, although some will survive that can give small diversification tactics, but the large investors will go alone or via more established managed accounts.
Tannenbaum observes two different type of managed accounts: the first type, where the company sees demand on a weekly basis, comprise about 200 hedge fund managers with about 1900 funds that want a managed account; the other types of clients are large ticket institutional investors using large funds such as Lighthouse, a client of GlobeOps managed account platform. The latter investors are the ones that choose their own managers, set up legal documentation and worry about their tax positions. We assist with constructing portfolio, and manage risk position after their point of entry. Every time the investor invests we receive all data relating to trades, cash positions, OTC derivatives calculations and credit exposure. We also provide profit and loss accounts of the portfolio to investors and market risk calculations first thing in the morning. Our online reporting systems provide exception-based reports and in P&L terms we look at the worst performing managers, for example, and what were the components of their losses.
The latter type of client is defining the evolution of the hedge fund investors according to Tannenbaum. Direct ownership gives you transparency and lets you value your portfolio any way you want. This can be more expensive but investors want to value their portfolio independently from a situation where they might be comingled with other funds. This would also save time – literally months- when they want to get a redemption
Indeed hedge fund redemption rates are falling and the hedge funds inflows continue to increase. GlobeOps Forward Redemption Indicator for May shows notifications of 3.31%, up from 2.00% in April. Forward redemptions as a percentage of GlobeOp assets under administration have trended significantly lower since reaching a high of 19.27% in November 2008.
Furthermore, hedge fund flows advanced 0.35% in April, according to GlobeOps Capital Movement Index, which measures subscriptions and redemptions in the hedge fund industry. GlobeOps data represents approximately 10% of the hedge fund industry, with $187 billion in AuA.
Why then have managed accounts only come to prominence now? This is down to the evolution of the industry, says Tannenbaum. The fact that we are still a very young and fractured industry with a lot of managers all over the place makes it still quite a novel thing, compared to the mutual funds industry which is very much based on the mutual funds industry. Its a natural part of the way we are growing up.
(JDC)