By Stephen McGoohan, head of managed account lifecycle and transparency, FRM (Man Group) – FRM, now part of Man Group Plc, is one of Europe’s established alternative investment specialists and runs an extensive buy-side managed account platform with USD7.9billion in assets (as of 1 October 2013).
FRM treat their managed accounts as more than just operational tools; they provide benefits in the investment process. Improvements to the research, risk management and portfolio management processes are expected to result in improvements in the overall investment performance for clients; a point FRM are keen to stress is their foremost concern.
Examples of utilising the investment potential of managed accounts include the ability to tailor the use of leverage in the account to adjust the expected volatility of the underlying trading programme; carve-out specific strategies that don’t add sufficient value; or restrict financial products that do not meet investor’s liquidity requirements, such as private holdings. The ability for an investor to control these factors could expand the investible universe to include managers who would otherwise have been excluded.
This level of control over the underlying strategy combined with the transparency that managed accounts provide has the potential, in FRM’s view, to enhance the portfolio management process.
One example is by improving the ability to manage volatility at the portfolio level through stress loss monitoring and providing investors with the tools required to run more concentrated portfolios. Managing a portfolio of hedge funds is also as much about controlling exposures to asset classes and risk factors as it is about buying and selling hedge fund managers. Portfolio managers at FRM and investors in FRM’s managed accounts can view key risk and performance information by asset class both aggregated at the portfolio level and specific to individual investments. This enables FRM’s portfolio managers to manage their gross and net exposures in line with their mandates, designed for and with end investors. This, in turn, allows investors the opportunity to discuss increasingly bespoke constraints on FRM.
These bespoke constraints could be ensuring that certain exposures within the portfolio have been kept to zero for regulatory purposes, or that exposure to certain asset classes is within a set limit; often to enhance an investor’s non hedge fund portfolio. This can be done on segregated portfolios of managed accounts where FRM has full investment discretion, but increasingly clients are asking for advisory arrangements where the level of involvement by FRM is tailored for the client.
Another important method of improving performance for clients is via negotiation of lower fees. The critical aspect for platform providers to achieve this is scale; something that FRM believes it has.
As a result of active negotiation with the investment manager, if the assets in a managed account rise above a certain level it is often the case that the incremental management fees will drop. FRM’s investors are direct beneficiaries as any negotiated discounts are passed directly to them, not FRM. The same is true with service provider fees.
In summary, FRM believe that managed accounts are more than the simple operational vehicles they are often portrayed as. Because of the direct investment focus of the company, they are in no doubt that managed accounts can be a benefit to all investors; be it in commingled fund of funds, advisory mandates or fully segregated accounts.
Opinions expressed are those of the author and may not be shared by all personnel of Man. These opinions are subject to change without notice. This material is for information purposes only and does not constitute an offer or invitation to make an investment in any financial instrument or in any product to which any member of Man’s group of companies provides investment advisory or any other services. In the UK, communicated by Financial Risk Management Limited, which is authorised and regulated by the Financial Conduct Authority. In Guernsey, communicated by FRM Investment Management Limited, which is licensed and regulated by the Guernsey Financial Services Commission. In the US, communicated by FRM Investments (USA) LLC which is registered with the US Securities and Exchange Commission (SEC) as a Registered Investment Advisor and with the National Futures Association (NFA) as authorised by the US Commodities Futures Trading Commission (CFTC) as a Commodity Trading Advisor and a Commodity Pool Operator.