By James Williams – As a solution for investing into hedge funds the managed account model is nothing new. As a way to access liquid hedge fund strategies with greater transparency and risk controls in place to help investors make more informed investment decisions, managed accounts play a vital role. And according to a recent AIFM industry survey, managers are becoming all too aware of this.
In the State Street 2013 Alternative Fund Manager Survey, released a couple of months ago in collaboration with Preqin and which involved speaking to 400 global alternative fund managers, 26 per cent of all alternatives managers said that they had introduced managed accounts since 2008 and that 18 per cent planned to introduce them over the next five years.
With respect to hedge fund managers, those figures were even higher.
“We covered about 186 hedge fund managers in our research. What we found was that 35 per cent had introduced managed accounts since 2008 and 22 per cent planned to introduce them over the next five years,” explains Patrick Hayes, Head of Hedge Fund Operations (Ireland), State Street.
Given that State Street administrates over USD650billion in assets it is well placed to pick up on industry trends. Aside from noting increased activity around funds-of-one, which typically involves a FoHF allocating to a managed account mandate where they and their investors are the sole investors, Hayes says that managed accounts are becoming more of a go-to option for smaller managers still heavily involved in the fund raising cycle.
“Over 80 per cent of newer managers said that one of the biggest challenges they face is fundraising. Managers need to differentiate themselves and it does seem to be that managed account activity is more prevalent in the small and mid-sized manager space,” says Hayes.
This is borne out by the fact that managed account platform providers – both bank-owned public platforms and independent platforms – are enjoying continued growth.
Dr Stavros Siokos is the CEO of Mayfair-based Sciens Alternative Investments. The platform is largely comprised of commingled assets and currently boasts around 40 fund managers representing a range of trading strategies. Recent additions to the platform include the likes of Japan-based Stats Investment Management (Ginga Service Sector fund, a long/short equity strategy focused on the technology and service sectors) and US-based Revolution Capital Management (a CTA).
“We’ve seen gross assets under management on the platform increase fourfold from USD300million to USD1.2billion since we bought the platform and our assets are up 35 per cent year-on-year. When we bought the platform we had 13 CTAs. Now, half the managers on the platform are CTAs and the other half are equity long/short, credit long/short and global macro,” confirms Siokos.
One of the key drivers for growth in the Sciens MAP, as well as other platforms like InfraHedge, Man FRM, and Deutsche Bank’s dbalternatives MAP, is customisation. With recent high-profile events such as the implosion of MF Global, investors with the deepest pockets – public pension funds, endowments etc – want total control and segregation of their assets. This push for segregation is good news for platform providers who are keen to provide the infrastructure support and run the operational side of things, whilst at the same time giving investors free reign over which service providers and managers they wish to allocate to.
“We’ve been pioneering that approach with Dutch pensions manager PGGM, whereby we designed a fully dedicated platform for them, and a bit more recently with CalSTRS (California State Teachers’ Retirement System) to build a customised strategic solution in the global macro space,” says Lionel Paquin, Head of Lyxor Managed Account Platform, which currently runs the largest independent commingled MAP with some 100-plus managers for investors to choose from.
“Managed accounts are not just a secure framework, they are a flexible investment solution in which fees can be adapted, guidelines can be enforced, cash utilisation can be optimised, leverage can be modified etc. Having a private MAP is a secure but also an investment-driven solution for institutional investors.”
FRM, the fund of funds division of Man Group, runs approximately USD8.2billion in assets on its managed accounts platform. Stephen McGoohan heads up FRM’s managed accounts business and is unambiguous in stating the “huge importance” of setting up customised solutions for clients going forward. He notes that whilst large institutions have the assets necessary to set up their own MAP, “You also need the experience and expertise that comes from a long history in establishing managed accounts and a significant technology infrastructure to process and aggregate the volume of data. As a result we are experiencing an increase in the number of large institutions coming to us to discuss partnership arrangements.
“Clearly there are a number of positives to having segregated managed accounts but the question remains: Do investors always have the necessary capital to commit to a particular manager to secure a managed account? Often this is only possible when pooled with other investors in commingled accounts.
“The minimum asset size for a managed account largely depends on the investment strategy; maybe they want liquid CTAs, equity long/short. The barriers to entry for such strategies are lower and institutions may find it easier to secure an SMA with such a manager. However, for more credit-orientated strategies they’ll need to commit more assets,” says McGoohan.
Investors who go down the customisation route also need to be mindful of the greater burden of running managed accounts from a regulatory reporting perspective. Building out their own technology infrastructure is a massive commitment. That’s why many of the customisation solutions are partnerships. A pension fund can go to the likes of InfraHedge or FRM with a shopping list of managers and hand over the operational responsibility of monitoring the mandates on a day-to-day basis.
“We already have the infrastructure in place. It’s something that I’m sure is another key concern when institutions are thinking of doing this themselves,” adds McGoohan.
Akshaya Bhargava is the CEO of InfraHedge, whose investor-centric model to running managed accounts has enjoyed huge success. Although pleased that client assets have grown and the firm’s model is “growing in acceptance” Bhargava believes that the adoption of managed accounts is still at an early stage.
“We strongly believe in the benefits like transparency and control that managed accounts provide and much of our activity during the year has been focused on preaching the gospel and dispelling the misconception that managed accounts are complex and expensive to set up and run,” comments Bhargava, who adds:
“For large institutional investors there is no doubt that segregation and customisation are key benefits. However, as the industry matures I believe there will be many variants of the core notion of customisation that will be quick to implement and will be available at a reasonable cost. I believe that this trend will only accelerate.”
Be that as it may, one potential limitation to going down the customisation route is lack of choice. For managers who offer mandates on commingled platforms it doesn’t matter how many investors are allocating. They only need to keep on top of one mandate. That’s not the case when large institutions start to get ambitious and decide on segregation. There are only so many separate mandates a manager can expect to support operationally; their resources are finite.
“Managers have to overcome compliance and operational hurdles and are choosing which accounts to keep; they’ll likely keep the biggest mandates (in dollar terms) and offload smaller mandates to reduce the operational burden,” says McGoohan.
Hayes says that ultimately it depends on the manager and their infrastructure capability to handle individual mandates: “If the strategy is trading pari passu with the offshore fund and the investor is writing a significant ticket I think it’s easier for managers to absorb these mandates. If you’re a start-up you could probably only handle one or two mandates. It’s a scale game. The bigger the ticket size the easier it is for a manager to justify building out their resources.”
Like FRM’s McGoohan, Siokos says that these customisation or ‘infrastructure’ solutions represent a huge growth area for Sciens’ managed accounts business. He confirms that Sciens is currently working on an infrastructure project. “It is becoming more popular to provide the knowhow and to build tailor-made solutions; this is a real growth area for us. We have already completed two such projects, one for an Asian institution, the other a Middle Eastern institution and have three more in the pipeline.”
Siokos says that each institution has different requirements. Some prefer to select their own managers if they have sufficient internal resources, while others will simply say ‘Here’s X million dollars, these are our targets and objectives, please advise us on how to achieve them’.
“The three projects we are working on right now are a mixture of the two,” adds Siokos.
Aside from regulation and fears over another Madoff-type incident, one of the key drivers behind increased adoption of private MAPs among institutions is the fact that it gives them the opportunity to invest in smaller and mid-sized managers they wouldn’t normally consider. “Having a private MAP gives you the flexibility to invest in these managers which invariably have the potential to deliver enhanced returns compared to large managers.
“I don’t think private MAPs will completely take over, however. For large institutions they are another product type but they could help loosen up investor capital and bring it in to the alternatives market. Overall, I see the emergence of private MAPs as a positive trend for the industry,” says Hayes.
What is undeniable is that institutions appreciate the open architecture model provided by the likes of FRM and InfraHedge. FRM, for example, has no affiliations with service providers, a point that is becoming increasingly important in McGoohan’s view: “On the investment side, the fact that we have research and risk professionals who understand the strategies that investors are looking for is also a clear positive for us. We’re finding that that is something very important to potential investors. We understand the challenges and risks that they face as we’ve been using managed accounts as an investor for 15 years.”
For both CalSTRS and PGGM, Paquin says the approach centres on partnership and building something that “exactly and fully responds to the investor’s requirements. Any future investor can come to us and say ‘I would like to use this administrator, I’d like to establish a mandate with this manager’. It’s fully open. We can implement whatever the investor wants.
“Having said that, investors can benefit from leveraging our size and negotiating power within the industry towards administrators, custodians, prime brokers and managers, which might not be the case if they choose their own.”
Bhargava advises that any institution thinking about the private MAP option should spend time at the outset thinking through their MAP requirements and how to ensure that the customisation requirements meet their investment objectives.
“We spend a lot of time with clients on this. Once there is a long-term roadmap, it becomes very easy to implement in small steps. It ensures that every step is consistent with the stated end vision.”
This is not to suggest in any way that the commingled managed account solution is about to become redundant overnight. They are in no way incompatible with the customised solutions being talked about here, and as Bhargava states, there’s no reason why customised commingled solutions can’t evolve going forward: “Groups of investors could conceivably come together and use their collective scale to create commingled structures which are entirely customised to their requirements.”