Fri, 26/03/2010 - 06:00
Aleks Kins, chief executive of managed account platform provider AlphaMetrix, says the uncovering of the Bernard Madoff was a key event for the business, because the scandal pointed to the importance of independence, due diligence and checks and balances, and helped AlphaMetrix to take on some USD1bn in customer assets over the following months.
HW: What is the background to your business?
AK: AlphaMetrix is the largest independent managed account platform for alternatives. We describe ourselves as being a next-generation platform, which means not only that we structure and operate managed accounts, but we are independent and provide extensive due diligence, real-time transparency and 24-hour risk management every trading day.
Independence is critical, as most other managed account platforms are owned by larger organisations that may have conflicts of interest with the investors and managers on their platforms.
When we opened our doors in May 2005, our focus was on commodity trading advisors in the futures and forex space, as they traded in the most liquid markets and were much more open to managed account structures than other hedge fund strategies. With the liquidity crisis and frauds of 2008, the environment has changed, so we are now also expanding aggressively into other non-futures liquid alpha hedge funds, such as long/short equity.
Today, AlphaMetrix offers managed accounts for more than 60 vetted liquid alpha hedge funds and has a fast-growing database of thousands more.
HW: Who are your key service providers?
AK: Checks and balances are critical for managed account platforms, and we have worked hard to create an environment in which our customers’ interests are the highest priority of everyone involved. We partner with a variety of top-tier service providers for legal, financial and operational support, most notably Sidley & Austin, Deloitte & Touche and Spectrum Global Fund Administration.
We also believe that independence and neutrality are incredibly important, so our customers are free to choose from any one of a number of prime brokers and custodians that we feel offer the most financial strength. Ultimately, we are all about building an operational solution that eliminates all the tedious effort necessary to make managed accounts work – for both the fund and the investor.
HW: Have there been any recent important events or developments for the platform?
AK: I’ll answer that in two parts – external and internal events. Externally, Bernie Madoff was definitely a key event. The Madoff scandal pointed to the importance of independence, due diligence and checks and balances. In the months after Madoff, our managed account platform took on approximately USD1bn in customer assets, because there’s literally no way a Madoff-style fraud could work with the way we structure our solutions, not to mention checks and balances such as our internal due diligence team, financial investigations group and reliance on third-party administrators and auditors.
As for key events over which we have control, one month before the Madoff scandal broke, we established AlphaMetrix Financial Investigations, run by David Fisher, the former no. 2 in charge of the Midwest office of the US Secret Service.
We launched AlphaMetrix Financial Investigations because we saw a critical need to go beyond the typical database search and provide our clients with a thorough investigation of all funds and principals involved with our platform. Having professionals like David, who brings decades of law enforcement and financial fraud investigations expertise, makes for much more meaningful results.
Another milestone for us is our partnering with several leading wealth management groups to offer a white-labelled version of our platform to their customers. This is a very exciting move, as our safeguards in the areas of transparency, liquidity and custody should make hedge fund investing more compatible with a broader range of investors.
Finally, we are aggressively moving into new liquid alpha strategies, such as long/short equity. We were always planning this move, but we’ve accelerating the process due to heightened investor demand and hedge fund acceptance of managed accounts.
HW: How do you select managers for the platform?
AK: The name AlphaMetrix really says it all about our approach to selecting which trading programmes we invite to join our managed account platform – that is, we apply proprietary metrics to gauge a manager’s ability to generate persistent alpha. On a quantitative level, managers must be in the top half of their statistical peer group and have a strong track record in both good and bad investing environments.
Because quantitative measurements only show the risks investors are willing to pay for, it is equally important that we also measure, and hopefully eliminate, those risks for which investors are not compensated. We have two groups dedicated to this role, AlphaMetrix Alternative Investment Advisors and AlphaMetrix Financial Investigations.
Together they help us generate a deep understanding of traders’ strategies, whether managers have consistent and repeatable processes, whether they can explain how and where they get their edge, what steps they have taken to ensure operational strength and trading system stability, and whether the trader and organisation operate at a high level of integrity. If these qualitative metrics don’t meet our standards, no quantitative metrics can be enough to get them on our platform.
HW: How has your platform performed?
AK: AlphaMetrix measures performance in terms of assets under management and the stability and reliability of our technology. As of January, we had more than USD2bn in assets on the platform, including about USD1bn added since the Madoff scandal. In terms of our technology, the stability and reliability of our system have been very strong as well.
HW: How many managers and clients use the platform?
AK: There are more than 60 vetted managers on the AlphaMetrix managed account platform, and we serve more than 800 investors, a mix of institutions and qualified individuals. In addition, we provide monthly data on more than 2,000 additional liquid alpha hedge fund programmes.
HW: What makes a manager or strategy special enough for you to select them?
AK: For managed futures and hedge funds to be invited onto the AlphaMetrix platform, they need to demonstrate what we call ‘true alpha’ over time and outperform the majority of their statistical peer group. The challenge in doing this sort of benchmarking is that many liquid alpha strategies don’t really have relevant benchmarks. That’s where our research group sets us apart.
Further, we want to avoid correlation clusters, so we look at multiple hedge fund trading strategies and diversify accordingly. For example, managed futures tends to have a lot of trend followers, so we try to identify quality managers in a variety of different strategies, such as macroeconomic and commodity alpha strategies.
HW: What are the criteria for managers with which your clients invest?
AK: We evaluate a wide variety of performance-based and operational criteria. The AlphaMetrix research group, lead by Dr Ranjan Bhaduri, first evaluates managers with a very detailed quantitative and qualitative research process. Then managers and their key employees are thoroughly examined by AlphaMetrix Financial Investigations.
On an operational level, funds must of course agree to offer access via a managed account structure and to third-party custody with one of a handful of global banks we have screened for financial strength, allow performance and portfolio activity to be tracked with near-real time transparency and provide at least monthly redemptions. With so many investors urging hedge funds to offer managed accounts, most funds are now willing to meet these operational criteria.
HW: What events do you expect to see in your sector in the year ahead?
AK: With alternatives, we have clearly hit a tipping point when it comes to investor demand for greater control and oversight of their capital. This means the move to managed accounts and transparency will continue to accelerate. Over the next year, the traditional methods of reporting activity and performance via e-mail, newsletters and monthly updates will recede into memory, replaced by real-time monitoring, greater liquidity and enhanced due diligence.
HW: What differentiates you from other managed account platforms?
AK: Our biggest differentiator is our complete independence, which allows us to avoid conflicts of interest, be innovative, invest in technology, and focus entirely on our managed account platform. We have no brokerage, proprietary trading, funds of funds or any other operations that can cause conflicts.
In addition, we believe we have the industry’s most intensive manager screening process. We look at not only a their performance, but also dig deep into their operational controls, trading systems, financial history, personal and professional backgrounds and more.
Through the screening process, we seek to offer a very diverse range of managers for our managed account platform, allowing our investors, as well as funds of funds, to build their own portfolios of uncorrelated trading programmes. Finally, we provide real-time transparency with our proprietary technology.
HW: What is your attitude toward risk in the current environment?
AK: One’s attitude toward risk should be consistent regardless of the market environment. To achieve market returns, one must take market risks. However, many investors take on risks for which they are not compensated. Thus, our own risk management group aims to mitigate these risks as much as possible, in various different ways.
First, we try to limit concentrations within particular strategies or sectors and continually stress-test portfolios for reasonable exposures, leverage, etc. Next, we establish firm trading parameters, so that managers on our platform know that if they exceed them, we can promptly liquidate all of our customer holdings with them.
The third area we aim to mitigate is what I would call operational risks, those business risks that have nothing to do with the market. Operational risks include technology, security, fraudulent activity, quality of personnel, reliability of service providers and removal of conflicts of interest.
HW: How would you assess investors’ expectations?
AK: Investors have grown wiser and realise they can no longer blindly invest in hedge funds or wire money to a manager and just assume they can get it back some day. They have had a wake-up call and are now rightfully demanding that funds – or fund platforms – provide them with transparency, systemic risk controls, checks and balances and more frequent liquidity options.
While this changing investor-driven dynamic is no doubt a trend, it is certainly not a fad. Investors simply want to know what’s going on with their manager and investments.
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