Tue, 26/11/2013 - 11:06
By Dermot Butler, Chairman of Custom House Global Fund Services Limited – Managed accounts are not a new phenomenon, despite some of the media hype which would lead readers to assume that they are a recent addition to investors and investor’s armoury. In fact historically most CTAs would never have opened a fund if they had not started life offering managed accounts, which they did as a way to corral Assets Under Administration (“AUM”).
But, as soon as they had sufficient AUM they then formed a fund and encouraged their smaller investors to switch. This was because it was much more efficient for the manager to manage one fund account rather than a collection of often quite small managed accounts. It has to be said that many of the smaller investors were happy to go the fund route for their own convenience.
That convenience largely reflects the fact that the fund is administered for the investor, whereas the managed account administration is usually left up to the investor. Having said that, many of the larger institutional investors (educational endowments, as well as pension and sovereign wealth funds) prefer the managed account for very specific reasons, including, inter alia, the fact that managed accounts provide the investor with certain clear advantages over investing through a fund.
For example managed accounts provide full and open transparency, with the ability for the investor to control the trading (i.e. close the account if necessary on demand). Full transparency means that a managed account offers daily dealing which is not usually available through a fund.
It is important to remember that transparency within a managed account is not always what it is cracked up to be. An investor in a managed account who has full transparency is in the position to see what is going on and, as such, takes on some of the responsibility and risk should the account blow up – why didn’t they see it coming?
This criticism would apply particularly to managers of funds of funds or managers of other third party investment vehicles such as endowments or pension plans and the problem is of course that many of the managers of the managed accounts offer complex trading programmes which require complex minds to analyse. This is not always (in fact rarely) possible with a small investor. Even the very large institutional investors may not have the expertise in house. It has to be recognised that investors in a fund of funds will expect the manager of that fund of funds to understand the investments that they have made and to be able to interpret the trading activity. They will not be forgiven easily if there is a blow up which was neither anticipated nor understood by the manager of the fund of funds.
Other advantages are that the investor can negotiate customised terms with the manager, not only with regard to reporting, fees and other administrative matters, but also the investor may want to customise the actual trading activity – say exclude Forex Trading, or increase the weighting in metals – neither of which can be done by an investor in a fund. Managed accounts usually have lower admin costs and furthermore the investor has a greater control over the bank accounts and cash movements – this has become very important post-Madoff.
The introduction of the managed account platform, which if I recall correctly, must have been at least 10 or even 15 years ago, has added a new dimension, particularly for institutional investors and indeed for many managers. A well run managed account platform will, or should, generate sales and thus has a marketing advantage, assuming the platform operator has any promotional expertise. However it can be seen that managed account platforms on the whole (with a couple of clear exceptions) are often more expensive than a stand-alone managed account and often match the cost of a fund, including internal expenses.
It goes without saying that anybody getting involved with a managed account platform should do their due diligence and days when one could say that they are safe because they are mostly run by big banks has been proven to be wishful thinking. Having said that, there is, at the time of writing, one particular quite large managed account platform having major, apparently cashflow, problems, although nobody is quite sure what they are because everything is “alleged” but, as of today, nothing is “proved”.
Another advantage of a managed account platform, particularly a private or customised managed account platform, is that the manager of that platform can carry out in-depth risk monitoring on a daily basis which you will not get if you invest in a fund and of course the investment is not pooled with any other entity or investor. Furthermore, it is possible to establish a managed account as a quasi multi-strategy fund by allocating different portions of the assets of the account to different managers.
Having said all of that, for a managed account platform to be efficient, the operators must have advanced technology and systems to match. This may be provided in-house or can be outsourced to the administrator that is selected to administer the platform. In this day and age the administration of funds and for that matter managed accounts is no longer a simple accounting process designed to produce an accurate NAV, which frankly was the primary function of the administrator ten years or so ago. Today administrators are data processors.
The NAV calculation is a given but the reports that are required both by managers and their investors, as well as regulators are now detailed and complex and in many cases customised. That is another advantage of the customised managed account platform in that the data that goes in, and is drawn down by the administrator, can then be processed and regurgitated in the form of a wide variety of reports i.e. data that can be manipulated to produce these reports.
Reports can vary from classic performance reports, with attribution, to detailed risk analysis. It is stating the obvious that as investors become more sophisticated, their investments become more sophisticated and their requirements become more sophisticated, so the reports produced by the administrator need to become more sophisticated.
It is very easy to say all that but with the plethora of regulation that has been pouring out of Europe and the United States, in particular, over the past two years, the pressure on IT departments to produce the reports that are required by the regulators as well as the managers is enormous. Most administrators have stepped up to the plate and some have announced new reporting platforms – indeed Custom House will be announcing in the very near future their own “Gateway” reporting module which will make life a lot easier for many managers and investors.
Dermot S L Butler is Chairman of Custom House Global Fund Services Limited, a member of the TMF Group, which offers 24/7, a total administration service out of fully integrated offices in Chicago, Dublin, Malta and Singapore
For further information, please visit the Custom House website: www.customhousegroup.com or contact: Dermot S L Butler, firstname.lastname@example.org.
Custom House Global Fund Services Limited is regulated by the Malta Financial Services Authority
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