demand for managed accounts rises

Demand for managed accounts rises
By Suchita Nayar

Published: January 24 2010 10:26 | Last updated: January 24 2010 10:26

Concerns about the transparency and liquidity of hedge funds raised by investors experience in the credit crisis and the Madoff scandal have turned attention to the merits of managed accounts.

These ringfence assets in a segregated account, usually operated through a third-party platform, and attempt to reproduce the returns of a particular hedge fund.

Following a strong surge of new capital last year, various platforms, especially the bank-supported ones, expect their assets to rise another 30-100 per cent in 2010. Institutional investors, smaller pension schemes and insurers some of which previously invested via funds of funds are fuelling the rise.

Assets at Lyxor Asset Managements managed accounts platform, for instance, have more than doubled to $10bn (6bn, 7bn) over the past 12 months and in 2010, the manager expects at least another $5bn of fresh capital.

The potential has never been bigger and the strong asset growth is evidence that this wasnt only a brief knee-jerk reaction to events of late 2008, as some had claimed last year, says Nathanael Benzaken, unit head of development.

Similarly, Deutsche Banks managed accounts platform assets jumped to over $3.5bn from $1bn during 2009. We expect it to reach $7bn in the next 12 months, says Jonathan Hitchon, global co-head of prime brokerage. Bernard Madoffs Ponzi scheme and the industrys liquidity issues from late 2008 have set off a structural change in favour of managed account platforms and will propel this growth trend into 2010 and beyond, according to Deutsche.

While commingled funds still account for the vast majority of industry assets, many investors are looking for alternatives. One that has been widely debated since early last year is the so-called separately managed account (SMA), where an investor with a sizeable purse creates an investment structure and appoints a fund manager as its adviser. The account trades in line with the managers main fund. SMA proponents have historically been large institutions and pension funds, but post 2008 even smaller investors have weighed their merits.

On the plus side, the investors control the investments and assets, but also take on added legal, accounting and risk management burdens.

Initially, people thought a managed account is simple enough to do it themselves but soon learned that its nuts and bolts are complex, says Martin Gagnon, co-chief executive of the $2bn Montreal platform operator Innocap, which aims to grow to $10bn in three years.

Some are betting on platforms, which promise many of the same features as SMAs but are cheaper. Their minimum investment requirement is typically in the tens of thousands, versus the million plus required by SMAs and commingled funds. Platforms take wholesale capacity in myriad managers in return for both fee and liquidity breaks, which they pass through to investors in the form of a marginal fee and easy liquidity. They also keep tabs on managers investment processes and risks.

Still, offering a wide mix of strategies on these platforms has not always been easy. Not all managers have felt the need to be on a managed accounts platform, says Jeff Lopez, deputy chief executive of Crdit Agricoles Casam Advisers. But post credit crisis, managers open-mindedness toward platforms has risen as they attempt to rebuild their atrophied assets. Today, given the trend toward openness of managers, weve access to a larger number of them, Mr Lopez says. While Casam currently has around 40 managers, it is looking to ramp up back to 70 managers within 18 months as its assets are anticipated to rise 60-80 per cent this year.

AlphaMetrix, which runs a $2.1bn platform, disagrees with a prevalent view that managed accounts produce lower returns than the underlying funds. The tracking error between the return the manager produces in the fund and our account is negligible, says chief executive Aleks Kliens. That is partly because it passes along savings it generates by driving down costs at vendors. His firm, meanwhile, has begun offering an equity long/short strategy on its platform, which previously focused solely on managed futures, and expects assets to easily double in 2010.

Partly coveting this impressive growth, many niche players have assembled independent offerings. Kenneth Phillips, the chief at start-up HedgeMark is convinced that institutional investors will sign up for managed accounts rather than write cheques to commingled funds. With the introduction of much tighter fiduciary care, accountability has become a primary issue, says Mr Phillips. HedgeMark is conducting a feasibility study for a $5.2bn pension to migrate its assets to managed accounts.

Krusen Capital of New York is establishing a managed account platform that would complement its limited partnership model. Managed accounts are great for liquid strategies but for others, LPs (limited partners) are better, says founder Charles Krusen.

A few funds of funds themselves plan to transition out of commingled funds onto such platforms. Lombard Odier, for example, is using them because our investors want to virtually eliminate fraud risk, have good liquidity terms and risk transparency. However, theyre also aware that market or operational risks remain, says Cedric Kohler, head of hedge fund strategies.

Fund of funds group Lighthouse Partners, meanwhile, has set up its own platform versus relying on a third-party one. We want complete control of our assets at all times, says investment chief Sean McGould. I dont think people have fully grasped that concept yet.

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