An important question currently being asked among hedge fund managers and investors is whether the current shift toward use of managed accounts will make them a permanent feature of the industry landscape, perhaps one day replacing pooled funds as the default option for investment, or whether some of the impetus will slip away as memories of the liquidity problems of the past two years start to fade.
Obviously, as the largest hedge fund managed account platform in the world, Lyxor has a vested interest in the growing demand among investors, but we believe this is a sustainable trend. That doesn’t necessarily mean that managed accounts will come to outweigh direct investment in hedge funds, but we do expect their market share – which accounted for perhaps 2.5 per cent of industry assets at the outset of the crisis – to grow exponentially.
The first reason is the declared intention of a wide range of investors, including funds of funds, family offices, private banks and other financial institutions, to increase their allocations to managed accounts. Particularly significant is the role of institutional investors, who are expected to account for the majority of new assets flowing into managed accounts.
For a pension fund manager, there’s absolutely no upside to taking on the risk of being defrauded when they invest in a hedge fund. If we can demonstrate to the chief investment officer of a pension fund that they can obtain the same performance while eliminating that risk, it’s a no-brainer – and already a number of large pension funds in the US have announced plans to switch their hedge fund investments into managed accounts.
Importantly, these big institutions have been keeping their powder dry over the past months and quarters and are already sitting on large piles of cash. Because of current US interest rate policy, there is a negative carry for investing in dollar-denominated money- market funds, so institutions have an urgent need to redeploy their cash as quickly as possible.
A new element is the ability to attract leading hedge fund managers to managed account platforms. Whereas until recently it was more of a challenge to convince leading managers to accept managed accounts, now many of the industry’s best-known and highly-regarded names approach Lyxor in order to offer managed accounts to investors. An important factor in a manager’s acceptance of managed accounts is that technology now enables them to run a managed account at a marginal operational cost.
Whereas previously pension funds had two options, either to invest through a managed account platform or create their own, now they have the option of ‘renting’ a platform – that is, asking a provider to run a platform just for themselves. This means their investments are not commingled with those of other clients of the platform, while all the technology and operations are outsourced. This makes access easier for many investors.
A final driver of growth is that the enhanced transparency offered by managed accounts facilitates better management of investors’ portfolios. Funds offering quarterly liquidity at 90 days’ notice offer few options for rethinking portfolio allocation, but weekly or monthly liquidity and enhanced transparency enable investors better to manage their beta, optimise their allocation across different strategies, and manage their exposure to regions and sectors. This should result in a portfolio more fine-tuned to the investor’s top-down strategic view.
Nathanaël Benzaken is a managing director and head of managed accounts development at Lyxor Asset Management