Wed, 18/05/2011 - 10:00
By Gabriel Bousbib – We all know by now the key benefits and drawbacks of separate managed accounts. Properly set up and operated separate managed accounts – not to be confused with a ‘fund of one’ – provide independent asset verification and valuation, a stable financing environment, the ability by both investor and the manager to control inflows and outflows, and superior governance.
The drawbacks of managed accounts are also well documented, including possible negative selection bias (since some top managers decline to offer separate accounts, even for very large investors), additional operating costs and tracking error compared with the manager’s flagship fund.
Thanks to healthy competition, operating costs for most managed accounts have been coming down. The buying power of managed account platforms and focus on total expense ratios, as at Gottex Solutions Services, has also achieved attractive pricing from administrators, auditors, custodians and financing counterparties.
However, for some platforms direct and indirect costs have remained high, producing significant tracking error between the managed account and the flagship fund. Additionally, investor-friendly liquidity terms for multi-investor managed accounts can create less predictable capital inflows and outflows, also a source of potentially significant tracking error.
Finally, multi-investor accounts revive the investor commingling issue that exists in traditional hedge funds. Gottex Solutions Services has implemented an innovative solution for its managed accounts, One-Click Partitioning, which mitigates the risk of excessive simultaneous redemptions.
Over the past 18 months investors and managers have come to appreciate that hedge fund investment does not involve a binary choice between two extremes, a single-investor managed account and a commingled vehicle with little or no transparency.
Instead, a wide range of investment choices is available to address the respective concerns of investors and managers. For example, issues such as asset pricing, governance and operational concerns can be addressed within a manager’s existing investment vehicle.
Gottex Fund Management, a large investor in more than 100 hedge funds, uses a comprehensive framework to determine whether it should deploy capital through a separate managed account or a commingled vehicle, taking into account factors such as investment and operational risk as well as expense considerations.
Risk criteria for using a managed account include strength of governance, liquidity and operational risks, transparency risk, likely tracking error, quality of existing service providers, independence of asset pricing, the mix of existing investors, and the quality and strength of financing relationships.
Expense analysis can also help determine the choice of vehicle. The cost of service providers through the managed account may be lower, and ‘most favoured nation’ clauses constraining the manager in the commingled vehicle may not apply in a managed account, while the practice of some managers charging internal expenses to their commingled vehicles may not be applicable to a managed account.
Clearly, some investors or particular investment programmes may need the total transparency provided by separate managed accounts. This may apply, for example, to capital charges optimisation, in the context of the Basle II framework, or to hedge fund investment using active macro and tail hedge overlays. In our experience, however, except in very specific circumstances flexibility over investment vehicle is critical to successful investment programmes.
Gabriel Bousbib is chief executive of Gottex Solutions Services
Please click here to download a copy of the Hedgeweek Special Report: Hedge Fund Managed Accounts May 2011
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