Managed accounts can considerably reduce the operational risks of investing in hedge funds, according to a new study by EDHEC.
Managed accounts can considerably reduce the operational risks of investing in hedge funds, according to a new study by EDHEC.
Mitigating Hedge Funds’ Operational Risks: Benefits and limitations of managed account platforms’ by Jean-René Giraud of the EDHEC Risk and Asset Management Research Centre, shows that when accompanied by appropriate risk monitoring and adequate structuring of the relationship with the hedge fund manager, managed accounts today represent a very efficient approach to mitigating operational risks, especially when the size of the investments does not allow for a dedicated operational due diligence and risk monitoring team to be set up.
According to the study, operational risks mitigated through the use of managed accounts include:
• Misappropriation;
• Misrepresentation and incorrect pricing; and
• Trading outside of the operating mandate.
These factors represent 85 per cent of the hedge fund collapses analysed.
The study also identifies governance, specifically the absence of independent oversight, as the most important element to be considered prior to investing in hedge funds.
The outcome of the study convinced the EDHEC Risk and Asset Management Research Centre that the benefits of managed account platforms clearly outweigh their cost and limitations, provided the infrastructure allows for the implementation of a systematic approach to measuring and managing financial risks and that the design of the platform allows for most operational risk factors to be substantially mitigated.
The detailed results of this study will be presented at the EDHEC Hedge Fund Days in London on 15 February.
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