Infovest21 White Paper: Evolution of Product Structures - Managed Account Platforms, Ucits and Hedge Fund Mutual Funds

2008 was a watershed event as it reinforced investors’ requirements for increased liquidity and transparency. These characteristics are important features of managed accounts, Ucits and hedge fund mutual funds.

2008 also brought to many investors' attention the fact that their actual risk profile was different from what they thought it was.

Different investors demand different types of access. Typically, the managed account is the domain of the ultra high net worth investor and institutions because of the high managed account minimums for the top quality managers. Mutual funds appeal to the financial adviser who wants to give his retail client diversification. Some see the hedge fund mutual fund as a cost-effective way to gain access to an institutional quality offering with daily liquidity, daily pricing, transparency, a small minimum investment and a timely 1099. These advantages appeal to investors who were hurt by lock-ups and side pockets in 2008.

As the Infovest21white paper details, none of these vehicles are a panacea and challenges exist for each structure. Yet they do reflect evolutionary forces taking place in the hedge fund arena.

Alternative to funds of funds?
Hedge fund managers are increasingly using managed account platforms, Ucits and mutual fund hedge funds to gather assets and diversify their client base.

Some investors see these products as an alternative to funds of funds. “As large institutions leave funds of funds industry, many want to allocate directly to hedge funds but they may have a small staff and may not be equipped to do the stringent due diligence. They can hire a consultant for advisory services. Others, however, may choose to use managed accounts. The investor gets due diligence on the managed account platform and doesn’t have to do the operational due diligence on all the managers they want to hire,” says Martin Gagnon, co-chief executive officer of Innocap.

Some financial planners say they could also see investors moving out of funds of funds and into mutual funds because of value, simplicity of tax issues and greater liquidity.

Some funds of funds, however, disagree and have been actively developing their own managed account platforms as a way to differentiate themselves in a difficult environment. Some are providing a niche such as having smaller managers or strategy-specific managers. One platform provider says early fund of fund adopters of managed account programs will probably grow faster than traditional fund of fund firms.

Outlook


Transparency, risk aggregation, granular information
Institutions will continue to be the driving force behind these evolving products. Institutions’ requirement for transparency will be a major factor going forward.
Managed account platform providers say they are delivering aggregated information to investors more frequently and will continue to enhance what is provided. Investors may eventually be able to see their aggregated exposures on a daily basis. Emphasis is on how to use the data to make improved investment decisions which will ultimately lead to better performance over time.

Managed accounts, providing access to real-time trading, will increasingly be used by some investors as a tool to invest with newer managers.

Major platforms dominate with niche platforms filling a need
The large major managed account platforms are expected to dominate as managed accounts are operationally intensive. Some industry veterans expect to see more banks become involved as they see the platforms providing another source of revenue.

Some expect the platforms to add other sources of revenue as margins get squeezed. This could include providing advisory/risk management services or acting as third party marketers to funds on the platform etc.

A place will exist for independent managed account platforms as they are attractive to banks who don’t have their own managed account platform.

Innovative pricing
In response to fees being pressured downward, both banks and asset manager/independent platforms are looking for ways to become more innovative with their pricing and still maintain some margins. Some platforms will charge investors platform fees while platforms will charge distribution/administrative fees.

Innovative technology: Point click invest
With technology, transparency may eventually be expanded to existing hedge funds (as opposed to just managed accounts). Some platforms are looking at connecting investors and managers online. One platform is currently in the beta phase with “point click invest” where investors will be able to subscribe electronically. Roll-out is expected this summer.


Growing overlap: Managed account platforms complement Ucits and hedge fund mutual funds
Ucits and managed accounts are separate structures but they overlap and may be complementary. A managed account can be used as a basis for Ucits vehicles, index products, structured products etc.

For those who want to do a Ucits-type product, it is much easier to base that product off of a managed account where there is independent liquidity, transparency and control of actual assets. “A managed account platform in an independent vehicle that has daily transparency, daily valuations, excellent governance and risk management. Managers want to get all those elements in one place,” says Caleim Parkes of MSS Consultancy.

“Investors are realizing that managed accounts and Ucits are not a binary choice. They are part of a continuum of solutions. Ucits are one investment option in the spectrum of investment solutions. There are a number of hedge fund strategies that are not suitable for Ucits e.g. fixed income arbitrage,” adds Gabriel Bousbib of Gottex.

Some investors e.g. sovereign wealth funds in Middle East, don’t need Ucits vehicles. They are happy to invest in an offshore structure. Other investors like French insurance companies aren’t willing to invest unless it is a Ucits format.

Similarly, managed accounts and mutual funds are more likely to overlap when managed account platforms provide the manager access that mutual funds require.

Regulatory clarity required

Other managed account platform providers are a bit more hesitant on the growing overlap of these products. They feel regulatory clarity is needed before they add Ucits. “Our platform is onshore and we could easily transform it into Ucits. We have the tools to do it but we haven’t. You need to make sure all the rules comply with Ucits regulation. Some convergence exists between Ucits and the Alternative Investment Fund Managers Directive (AIFM). We need some clarity with AIFM which we will have in coming months. I hope European regulators will get together and there will be some convergence between Ucits and AIFM to offer the public a better product," comments Gagnon.

Regulatory clarification is also needed on the managed futures mutual fund side. Interest exists in the industry for the SEC and the CFTC to harmonize rules. A number of funds of funds say they’d offer mutual funds once those regulatory issues are resolved. Issues exist over the lack of transparency on fee structures in some existing managed futures mutual funds.