As a fund of funds manager investing in hedge funds for more than 10 years, Gottex Fund Management currently manages more than USD8bn in assets, invested with some 100 hedge fund managers. Like other large hedge fund investors, starting in late 2008 we faced challenges with some hedge funds whose managers decided to gate or suspend redemptions, restructure or liquidate their vehicles. These events showed the clear constraints and possible pitfalls of commingled hedge fund investments.
Until recently, most high-quality managers were reluctant to operate separate managed accounts. The world has changed in the past year, and managers have become more willing to accept capital through managed accounts for some of their large investors.
Reviewing existing managed account platforms, we found that most were built for purposes that were not in line with our and our clients’ objectives. Many bank-owned platforms were designed to develop structured product activities, notably imposing high liquidity requirements and subjecting the accounts to short-term capital movements. We also felt that other platforms’ fees were high.
By contrast, Gottex’s goal was to address the issues of fraud, pricing, investor commingling and governance. An investor in a commingled vehicle is at the mercy of decisions by the hedge fund manager and/or board and can be impacted by the behaviour of other fund investors, and we felt existing platforms did not really address those issues.
We decided to use our in-house expertise and infrastructure to develop our own managed account platform. To service properly the needs of our funds of funds, as well as those of similar investors, we formed a separate business, Gottex Solutions Services, to provide managed account services to institutional investors.
In addition to standard features such as daily NAV estimates, independent pricing, risk reporting, independent asset verification and control of all financing agreements, the platform offers two unique investor-friendly features.
Through the use of tri-party repurchase agreements, NetFunding enables managed accounts in need of cash to borrow from other accounts on the platform that have excess cash. The platform acts as the facilitator between two managed accounts, and monitors the tri-party repurchase agreements with respect to haircuts and custodian choice.
In the event of excessive redemption requests, managed accounts on traditional platforms governed by the board process could become subject to suspensions and gates, the very elements driving investors away from commingled fund investments. The RedemptionPartitioning feature ensures that if redemption levels exceed a predefined proportion of a managed account’s assets, it will be partitioned for accounting purposes between the assets and liabilities of redeeming and continuing investors.
The manager is then required to liquidate the portion of assets and liabilities corresponding to the redeeming investors, starting from the redemption notice date. The partition is triggered on the notice date, giving the manager additional time to liquidate the positions, and redemption costs will be borne by those investors only. This balances the conflicting interests of redeeming and continuing investors and eliminates the uncertainty regarding the impact of other investors’ actions within commingled vehicles.
The recent entry of several new players has brought the number of managed account platforms to nearly 20. We believe the winners will be those providers able to offer a cost-efficient, reliable service geared to addressing the needs of investors, whether asset managers or asset owners.
Gabriel Bousbib is chief executive of Gottex Solutions Services