A managed account, defined by Michael Kane of Credit Agricole Structured Asset Management, consists of segregated assets within a fund or account which is managed by an external hedge fund manager and offers a legal, operational and risk infrastructure. The operational and legal aspects can be considerable. For example, CASAM has 80 people working in the managed accounts group compared with 20 people in the typical fund of funds.
It takes at least $2 billion for a managed account platform to be economically viable, if you want daily dealing net asset values, says Dermot Butler of Custom House Global Fund Services. His firm has set up managed accounts for clients structured as a Malta Master-Feeder Fund, which consists of a series of segregated sub-funds of the master fund, each one a separate SICAV established as separate segregated cells that are contractually and legally separate companies. Each cell or sub-fund is populated by one of the managers He explains that should one fund blow up losing, say 150% of the assets, as happened in Amaranth, the 50% cannot be clawed back from the other sub-funds of the fund company.
Technology is a key factor in creating a managed account platform, says Ron Suber of Merlin Securities. Suber says, “What is so complicated from my experience on a managed account platform is how to aggregate data from the managers and prime brokers and make it consistent, timely and accurate for the managed account platform and ultimate investor.”
Once you have the information - what does the platform provider do with it? How does the platform provider understand risk (for all assets or by strategy, manager and geography), exposure, leverage and concentration? How do investors decide who to allocate to? “Managed accounts do solve for the high majority of transparency, liquidity and control requirements that investors want for most strategies but it is expensive,” Suber adds.
“The point I want to reinforce is: many hedge funds are not ready to handle the trading, operational, risk and technology requirements that come with separate accounts. Many funds still do not have the multi-account, multi-prime trading, risk, performance measurement and allocation tools required to make allocations to their master feeder fund, their LP, their LLC, and now their managed accounts. In many cases, the allocation of money from a managed account has covenants to be within 40 basis points of the main fund or it violates covenants with the investors. Hedge funds should require that their prime broker provide these tools so they can manage their business and focus on alpha generating activities,” Suber concludes.
All platforms do some amount of due diligence of the underlying funds. The quality of the due diligence will depend on the experience and experience of the managed account platform provider. “At ClariTy, we will put a manager on the platform in which the Kenmar Group may not invest through its funds of funds. The level of due diligence performed is the same regardless. If we think the manager is a business risk, that manager will not be on the platform,” says Esther Goodman.
Platforms may also provide position level reporting i.e. concentration, liquidity, and risk reporting. Moreover, some platforms may also offer consolidated reporting across managers in which the client invests, as well as portfolio analysis, Goodman adds.
For the investors that remember the aftermath of the 2008 financial meltdown, hedge fund gates and illiquidity, managed accounts seem to offer some comfort. Liquidity still is dependent on the strategy and platforms can only offer liquidity that matches the liquidity of underlying positions.
Should a fund blow up, who is responsible? The platform should not be the sole source of due diligence for the investor, but it does set guidelines. Kane says, “As the investment manager hiring the hedge fund as the investment adviser, the platform sets trading guidelines and is responsible if limits are breached.”
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