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Giving investors efficient access to hedge funds

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“We are different from our competitors in the managed account space by construction. When we launched our multi-asset platform the objective was more to serve clients than to distribute managers,” states Stephane Berthet (pictured), Executive Director at Morgan Stanley and head of its FundLogic Alternatives platform.

By clients, Berthet is referring both to the hedge fund managers who wish to launch regulated vehicles such as UCITS funds by leveraging off the bank’s multi-asset FundLogic platform, and investors who are looking to gain more efficient access to hedge fund strategies.
 
From day one, Morgan Stanley’s managed account solution was clear: to deliver investor-centric bespoke solutions. Berthet notes that the mix of investors looking to use managed accounts includes large asset managers, family offices, pensions, insurance companies and banks who might have capital or regulatory issues and for those that find that the direct offshore vehicles prove too costly an investment.
 
“Aside from managers and existing hedge fund investors we are also seeing a third category: managers approaching us because they have investors who know about our structuring expertise and technology and want better access to hedge fund strategies,” says Berthet, noting that three types of requests have been coming in this year.
 
Firstly, insurance companies looking to meet Solvency II requirements. This has been one of the main drivers of investor discussion according to Berthet. Secondly, traditional long-only asset managers making their first foray into hedge funds but who want to avoid the commingled route. Thirdly, hedge fund managers wishing to launch regulated funds.
 
“We are working on a number of deals right now with large hedge fund managers who want to launch their own UCITS funds,” confirms Berthet.
 
There are between 30 and 35 managers on Morgan Stanley’s managed account open architecture platform. Where possible, these managers are used in more than one bespoke mandate. Typically speaking, a large institution will come to Morgan Stanley and take a “pick and mix” approach to building the mandate.
 
“Once we have shown the investor the current list of managers, then subject to the investor’s size of investment we will then be happy to onboard any manager(s) they have already identified.” According to Berthet, there are two drivers helping to drive growth in managed accounts.
 
“On the one hand, large pension funds with a long track record in hedge fund investing increasingly need a bespoke arrangement, be it in terms of strategy (for socially responsible investing purposes), in terms of fees, etc. Moving into a more controlled structure might be better suited than continuing to invest in Cayman funds. On the other hand, tier 2 and tier 3 investors, whose boards of directors and investment committees have historically not been keen on hedge funds, are looking to managed accounts as an effective solution for portfolio diversification.”
 
Given that investors want specific reporting when running a private managed account mandate, Berthet says that the majority still tend to favour a range of strategies: CTAs, credit, event-driven, global macro, equity long/short and market neutral. Illiquid strategies are avoided.
 
“There are two main goals when investing in a managed account. One is to provide enhanced liquidity, giving flexibility to investors should they need to exit a strategy. The other is to increase the reliability of the risk management and governance by re-allocating such responsibilities from the hedge fund manager to a third party platform provider,” concludes Berthet. 

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