Excerpt from Infovest21 special report: Managed account platforms represent 2-4% of hedge fund industry assets

2008 was a notorious year for hedge funds/funds of funds with negative absolute performance, liquidity problems (e.g. lock-ups, gates, redemption suspensions, side pockets, forced liquidations, in-kind redemptions), style drift and manager fraud. Investors’ perception of hedge funds was impacted negatively. Investors clamored for change. Investors demanded and are demanding more control, transparency, liquidity, due diligence and in some cases, customization. Some want more relevant risk management as well as reputable and solid counterparty partners with substantial balance sheets. They want a safer way to invest with hedge funds.

Against this backdrop, managed account platforms were being set up and further developed to respond to clients who wanted a solution to the events of 2008.

Banking groups, asset management groups, funds of funds, independent stand-alone organizations and service providers are the most active groups developing platforms.

Estimates are that about 20 platforms now exist, representing about $30-50 billion. Only a handful of these are over $1 billion in assets under management. With hedge fund industry assets estimated at about $1.3 trillion, managed account platforms represent only about 2-4% of the industry total assets, at most.

Here is a sampling of some of the platforms and their estimated assets under management ($B):

Lyxor 9.5

Deutsche Bank 4.0

AlphaMetrix 2.3

Lighthouse
Investment Ptnrs 2.0

HFR Asset Mgt 2.0

Innocap 1.8

Credit Agricole
Structured Asset
Management 1.6
Source: various industry sources

Many expect this amount to grow. Some investors say they won’t invest in hedge funds that don’t address transparency, liquidity and control issues. Furthermore, some major large funds of funds with assets over $1 billion have publicly said they are or plan to transfer a good amount of their assets into managed accounts. Since the start of 2009, various platforms have observed extremely high growth and asset flows.

The managed account platforms generally feature transparency, liquidity and control to varying degrees. Some such Lyxor are known for its emphasis on liquidity while others highlight consolidated transparency and control.

The client base is evolving fast. “Eighteen months ago, the pre-dominant investors in managed accounts were European-based funds of funds and various structured products. Going forward, we expect the investor base in managed accounts to expand to include US based funds of funds but more importantly institutional investors (pension funds, foundations etc) as the benefits of managed accounts are highlighted along with turn-key solutions” says Deutsche Bank’s Martin Fothergill.

“Many investors are now at a tipping point as they are committed to hedge funds and strategies. They are asking the most efficient way to invest with hedge funds while having the most comfort but still allowing the manager the most flexibility to trade. Managed accounts for many strategies is a viable answer,” adds Michael Kane of Credit Agricole Structured Asset Management.

Most hedge fund specialists concur that managed accounts will be an increasingly large part of the hedge fund industry. A good number of specialists project that managed account platforms will represent 15-20% of total hedge fund universe assets over the next three to five years.