By Stefan Keller – The hedge fund industry has just set a new record with more than USD2trn in assets under management, a recovery from the turbulence of 2008-09 that has been accompanied by a shift toward investment through managed accounts. Although this sector has become more competitive over the past couple of years with the entry of new providers into the market, Lyxor Asset Management continues to build on its strength of a platform provider, with 13 years of experience, more than 100 managed accounts and assets under management exceeding USD11bn as of April, including inflows of some USD1bn in the first quarter of 2011.
One of the key reasons institutional investors have turned to managed accounts is that they cannot afford headline risk, such as the gates, side-pocketing and other redemption restrictions imposed by many hedge funds managers at the height of the crisis – a problem that did not exist for clients of the Lyxor Managed Account Platform. In addition, institutions are seeking better risk management and uniform reporting. They need access to greater transparency because hedge fund investment has to be viewed as just one part of an overall allocation.
For example, at Lyxor we often receive queries about investors’ exposure to the so-called PIGS countries, Portugal, Ireland, Greece and Spain, to which we can deliver a precise response because we can view as many as 40,000 positions held by all the accounts on the platform. This helps investors such as pension funds to examine their exposure to these countries across their entire portfolio and assess their overall risk.
The hedge fund industry has changed considerably since its previous peak, with fewer managers in the marketplace amid a move toward consolidation and institutionalisation. Managers have had to reinvent themselves to restore confidence among investors whose demands in terms of reporting and risk management have grown considerably, to some extent taking precedence over pure performance concerns, as well as facing increased external regulation.
Managers’ willingness to listen more to the concerns of their investors is an important factor in their desire to work with managed account platforms. They have much to gain from doing so because of the proven risk-return performance of alternative investments over the past decade or so has brought home to institutions the importance of allocating more capital to hedge fund strategies.
This trend is being boosted by the overall improvement in the investment environment, as economic uncertainty has declined, despite the impact of unexpected risks such as political unrest in the Middle East and North Africa and natural disasters in the Asia-Pacific region. However, opportunities for skilled hedge fund managers continue to abound, as reflected in the positive performance of most strategies over the first quarter of this year.
The forthcoming EU Alternative Investment Fund Managers Directive represents good news for Lyxor’s managed account platform approach because most of the future regulatory obligations, in areas such as liquidity management, stress testing and other aspects of risk management, reflect the firm’s existing business model.
At the same time, some long-term institutional clients such as pension funds prefer to set up their own dedicated managed account platform rather than embrace a commingled investment approach. Lyxor also offers this service to investors who nevertheless want to benefit from the firm’s experience and expertise, high level of fraud protection and enhanced risk management framework.
Stefan Keller is head of managed account platform research and external relations at Lyxor Asset Management
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