Wed, 18/05/2011 - 10:00
By Tyler Kim – In recent months, institutional investors have shown increased interest in the alpha-generating strategies associated with hedge funds. Capital inflows from pension plans, endowments and foundations are redefining the industry as these sophisticated investors seek to improve the way it operates. One trend is a shift toward investment through bespoke managed accounts as opposed to commingled funds.
The benefits of bespoke managed accounts programmes include better liquidity, control and position-level transparency. One often-cited barrier to launching such programmes is the operational complexity of administering them. In this article, we discuss some of these complexities and ways they can be addressed.
1. Multiple trade file formats. Rather than dealing with a single trade file as with a traditional commingled fund, a managed accounts programme must accommodate multiple trade files from different managers. Each trade file may have its own format, delivery mechanism, and protocol.
Moreover, managers may be used to dealing with administrators through sophisticated automated processes developed specifically for large multi-billion-dollar commingled funds; when engaged for a managed accounts mandate, they may expect the same processes to be replicated for a USD10m sleeve by the programme administrator. Fortunately, flexible systems and experienced systems integration teams can address such requirements efficiently and effectively.
2. Pricing consistency. Consistent treatment of securities held within different sleeves of a managed accounts programme is important. However, with multiple managers involved, each with their own conventions, this is not always straightforward to accomplish.
For example, two managers may hold the same thinly-traded 144A security, but each may use a different price source. A third-party administrator can help arbitrate and enforce consistent policies by utilising a standard, truly independent price source.
3. NAV cycle synchronisation. A managed accounts programme cannot be valued in total until all underlying sleeves have been valued. Different managers may have different timelines for finalising NAVs, creating timing issues between the reporting cycles of various managers in a managed accounts programme. An experienced administrator can help establish and implement valuation policies that strike a practical balance for all parties.
4. Performance reporting harmonisation. Despite standardisation efforts, performance reporting practices vary considerably between managers. In a traditional hedge fund, investors typically rely upon managers’ performance calculations. With managed accounts, this no longer needs to be the case.
However, detailed portfolio data could represent information overload to investors. By consulting an administrator’s business systems analysts, specified, uniform performance calculations can be incorporated into systems that synthesise data into accurate, readily accessible and easy-to-understand dashboards.
It could be daunting for institutional investors to embark on launching a managed accounts programme. Fortunately, fund administrators with the right expertise and systems can help investors to navigate these challenges more economically than they might suspect.
While platform fees may range from 30 to 85 basis points (before manager and administration fees), bespoke managed account programme administration fees will be closer to 10 bps. With the right assistance, investors can enjoy the benefits of bespoke managed accounts seamlessly and cost-effectively.
Tyler Kim is chief information officer at Maples Fund Services
Please click here to download a copy of the Hedgeweek Special Report: Hedge Fund Managed Accounts May 2011
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