In the current environment, many investors are seeking to use managed accounts in order to obtain greater transparency, flexibility and liquidity, as well as receiving increased protection against fraud by the manager, although how great a benefit transparency really conveys depends on the investor’s ability to understand the manager’s strategy.
The managed account investor must also be ready and equipped to shoulder some of the risk previously taken by the manager. Nevertheless, a switch from commingled fund vehicles to managed accounts is now increasingly an option for investors that are under pressure from their own stakeholders to demonstrate that they are doing all they can to minimise the risks not only of fraud but the illiquidity that became widespread over the past two years, leading to managers imposing gates, suspending redemptions and extending lock-up periods.
In many ways the trend toward managed accounts is taking the hedge fund industry back to its roots three or four decades ago, when investors opened accounts with investment managers to participate in the commodities and futures markets. However, pooled funds subsequently became more popular with managers seeking to reduce their administration costs. This remains an issue today – it is expensive to invest through a managed account, with all the costs of asset valuation and independent administration, unless the investment is of a considerable size, which is why managed accounts will not be a panacea for all.
Nevertheless, the additional cost can be reduced through the use of a managed account platform, the number of which is growing rapidly to meet market demand. Custom House already has extensive experience in this area, having undertaken administration of the platform created by Innocap/National Bank of Canada since 2005.
At that time the bank had 28 managed accounts on their proprietary desk for which it wanted to establish a vehicle that could by opened up to third-party investors. We designed a master-feeder fund in Malta, incorporating a master fund with a series of sub-funds that were all segregated cell companies. Each managed account was moved into one of the segregated cells, which are completely legally ring-fenced, so they cannot contaminate any other cells within the structure. This ensures that that there can be no cross-collateral liability of the kind that brought down the Amaranth Investors multistrategy fund.
Administration of the platform is facilitated by Custom House’s structure, with administration operations spanning the world’s time zones in Europe, the US and South-East Asia. We have a totally transparent and flexible system that enables us to start the day in Singapore at 8 a.m., where we do all the trade capture for every transaction done the previous day in the various accounts, which now number more than 60.
In the afternoon the Singapore office reconciles all the existing open positions with the new positions and produce a reconciled book that shifts to Dublin, where the NAVs for the master fund are carried out, and then to Chicago, which calculates the daily NAVs for the feeder fund. The feeder fund now has some 47 sub-funds itself, reflecting the increasing number of external clients that are using the platform.
Managed accounts are here to stay, certainly for institutions concerned about the potential liquidity and fraud risks when investing through a manager’s pooled fund. In the wake of the turbulence of the past two years, the extra cost is considered a price worth paying.
Dermot Butler is chairman of Custom House Global Fund Services