Interview with Nathanael Benzaken – Lyxor’s Managed Account Platform, with over 100 funds and approximately USD11billion in AUM, has long been a leading light for investors wanting to allocate into commingled managed accounts.
And whilst this remains the easiest “gateway” into hedge fund investing for small and medium-sized institutions, there are signs that the demand for more sophisticated customised solutions is underway according to Nathanael Benzaken, deputy head of the alternative investment business line at Lyxor.
“Customisation is gaining favour with the investment community as portfolios can be designed within a specific context,” says Benzaken. Whether investors choose to build bespoke portfolios is a function of their allocated size: pension funds with USD100million or more to allocate per manager are more likely to approach a platform like Lyxor for a tailor made solution than one with USD20million or less, where the commingled platform is a perfect fit.
“Small to mid-sized investors, rather than have fixed costs (the service provider costs are often floored) which might have a drag on performance in a bespoke portfolio, are more inclined to choose our commingled platform, which very much complies with their institutional needs, i.e. segregation of assets, independent risk management, enhanced transparency.
“However, the demand for bespoke solutions – which is a separate part of the business we started in 2009 – is accelerating,” confirms Benzaken, who adds: “We see pension funds pushing up their allocation into hedge funds from two to three per cent of their total portfolio to seven or eight per cent of their portfolio, and even higher in some instances. Rather than us being responsible for manager selection, large institutional investors want to have the control over selection and portfolio construction. We provide everything else.
“An investor with, say, USD2billion, might choose to rent our infrastructure to implement a dedicated solution and benefit from the associated ‘structural alpha’: i.e. full transparency, negotiated business terms with the managers, market counterparties and service providers, optimised cash utilisation etc. They might choose a portfolio of 20 managers and say to us ‘Lyxor, please build these managed accounts for me’.”
Also emerging, as a kind of intermediate solution straddling commingled accounts at one end of the spectrum and dedicated accounts at the other, are hybrid structures, confirms Benzaken: “This might involve a client having a core hedge fund allocation in a dedicated portfolio, and one or two tactical allocations by utilising our commingled platform.
“Ultimately, we want to be as flexible as possible for the client. In dedicated portfolios you have more flexibility to negotiate business terms, including fees and fee formula. That’s why the hybrid solution is there on the table for clients; it depends how much they value tactical allocations.”
Benzaken confirms that Lyxor has created such a hybrid solution for large clients already, the idea being that if they are satisfied, performance-wise, then at a later point in time they might allocate more capital and invest in a fully dedicated portfolio.
Looking ahead, Benzaken thinks there are two catalysts that will drive growth in customised portfolios: average performance returning to historical trend levels, and regulation: “Managers haven’t lost their ability to generate alpha, rather it’s because the markets have been driven by fear for an unusually long period of time. I also think that as hedge funds move onshore under the AIFM Directive in 2013 we’ll start to see increased allocations.”