Some of the industry’s leading managed account platform providers continue to evolve their solution-based models to meet the custom desires of institutional investors. Platforms have come a long way in the last decade. Whereas originally, they were built as product-focused distribution models to put managers in the shop window, many of today’s platforms have pivoted to offer bespoke, solutions businesses to address the myriad demands of investors, large and small.
Public commingled platforms, such as those operated by Lyxor Asset Management, remain highly viable, with Lyxor in particular evolving the platform beyond its Jersey roots to cater increasingly to European investors with the Lyxor Alternative UCITS platform. But it is the private platform solution that is attracting the serious asset inflows.
“Our Jersey platform, which invests in offshore funds, has approximately USD2.5 billion of AUM,” comments Moez Bousarsar, Co-Head of Hedge Fund Selection, Lyxor Asset Management. “Our UCITS platform has been building well since 2013 and now has 13 single hedge fund strategies. Year-to-date, we’ve added almost USD1 billion of new investor inflows; we were at USD2.9 billion at the end of 2017, and we are now at USD4.1 billion. We are growing at 40 per cent, which is higher compared to what we see in the industry.
“We also have two dedicated managed account platforms and combined these two platforms account for USD11 billion in AUM. We are running these for two large US institutions, one of which is long-standing, the other we added earlier this year.”
This is just a small snapshot inside one of many platform providers who have invested substantially in technology and infrastructure to make the managed account proposition far more compelling.
Jean-Francois Crousillat is Managing Director, Franklin Templeton Alternative Investments. Last year, he confirms that they increased their relationship with a state pension plan by customising a portfolio using managed accounts. “On an aggregate basis that relationship increased assets by close to USD1 billion,” says Crousillat. “We also won a mandate this year with a mid-sized consultant, ACG, where we onboarded a couple of their managers into managed accounts and created a new legal structure for investment and operational efficiencies. They now leverage our 40 plus investment, research and risk team, as well as our technology. We have that flexibility.”
K2 Advisors, the fund-of-hedge-fund manager that Franklin Templeton acquired in 2012, adapted its business model by launching a variety of solutions-based opportunities for its institutional clients all the way back in 2002. The group has outsourced the development of their MAP and as Wilson “Bill” Santos, Senior Managing Director, Franklin Templeton Alternative Investments explains: “Our goal is to stay focused on our core competency of investment management and advisory services. We did not want to make the operational commitment to building our own MAP.
“We are not a platform for the sake of it. We’ve moved into managed accounts as a building block for the overall advisory business we provide to our clients. When we think about managers on the platform, we have a very high conviction in them. We are using them in a solution-based advisory business for our clients. This is not ‘pick a manager off a menu and invest in them’ approach.”
This has helped Franklin Templeton Alternative Investments to grow its managed account platform business by 24 per cent over the last year as investors increasingly understand how these structures can be used as part of an overall portfolio strategy.
One key driver behind private platform growth is that it gives institutions far greater confidence investing in emerging manager talent, as they do not have to worry about the operational risks.
Bousarsar says that while an emerging manager will unlikely have institutional standards, in terms of ODD, “the partnership with Lyxor means the manager can put a proper programme in place using our institutional infrastructure. Then the manager is able to tick all the boxes when it comes to the investor ODD process.”
One other advantage of using a private platform to access emerging managers is that investors are able to consolidate the number of counterparties an emerging manager uses. Moreover, this gives managers the opportunity to work with top tier prime brokers that otherwise might not be possible without the backing of a serious institution.
“It therefore helps investors to control counterparty risk and allows managers to also benefit. Once they establish a relationship with that prime broker, for example, it gives these managers the chance to leverage the relationship for the benefit of their offshore fund,” explains Andrew Lapkin, CEO of HedgeMark, a BNY Mellon company.
HedgeMark’s dedicated managed account (DMA) platform recently announced that it had surpassed 100 active client DMA funds, marking a significant milestone in the firm’s growth since beginning its service in September of 2012.
As of 31 August 2018, HedgeMark now services USD16.9 billion in client platform assets. The option to outsource the set-up and day-to-day operations of DMAs to an organisation like BNY Mellon has facilitated an increase in institutional adoption of these fund structures.
“We see an acceleration in the use of managed accounts as more investors see the benefits they can get from doing so; by negotiating and lowering fees, using independent service providers, the ability to use leverage or cash efficiency to enhance returns and so on. It also expands the scope of managers that investors are willing to consider, which would include both smaller and newer emerging managers. Managed accounts are expanding the universe of managers that investors can choose,” says Lapkin.
Although platforms like HedgeMark are growing year-on-year, there remains a lot of untapped potential. Many institutional investors are still not fully up to speed on all the benefits they could be getting with a private platform model, according to Lapkin.
“There’s still a way to go in the asset owner space. This year we’ve seen more institutional investors looking at the DMA solution than in the past but there is still a group of investors who aren’t ready to change or haven’t fully understood the full benefits of having their own private platform to improve their hedge fund investment management,” says Lapkin.
He does feel that the FoHF community has been quick to embrace it, however.
“They build solutions for a living and this is something that makes sense. FoHF’s are able to utilise the control, fee savings and transparency to offer enhanced solutions to their clients. The FoHF community are not only remaining viable, they are growing their businesses by adding tremendous value to their end investors,” argues Lapkin.
At Gemini, they are using their private DMA structure to give investors a more cost-effective way to invest in hedge funds. The platform has no involvement in manager selection, that is up to the investor, but it takes care of everything else: the legal structuring, investment management agreements, LLC agreements, etc.
“We provide ongoing due diligence on the underlying investment managers and we open up custodial and PB accounts with the asset allocator. After the set-up, we then act as the operational support for the asset owner and the advisor. This includes all of the performance analytics, trade information, guideline monitoring, risk analytics, as well as providing fund reports that go back to the investment board,” says David Young, President of Gemini.
He says that by using Gemini’s DMA solution, investors can potentially save up to 100 basis points.
“Our DMA structure removes a lot of the operational requirements from the advisors, giving them the ability to reduce their management fees for the managed account. We live in a world of fee compression and it is continuing. It is that fixed cost (the management fee) that needs to be addressed,” says Young.
Asset raising for managers is still tough. Many are fully aware that fee compression exists. But if returns outside of real assets – private equity, real estate – continue to lag, Young believes managers have to do something competitive to attract new inflows.
“Being a little thoughtful around the construction of a portfolio, and the costs associated with it, is something that I think people are becoming more aware of. The number of managers we’ve interacted with for dedicated managed accounts is substantial and even the largest are accommodating these structures, for the right amount of money being allocated.
“We are hoping that by end of 2018 we will have seen assets on the DMA platform increase from USD1.1 billion to USD2.5 billion. Right now we are at around USD2 billion,” confirms Young.
Another advantage to the private platform is that it effectively becomes an extension of staff for the investor. This is a key driver behind industry growth in Santos’ view.
“In that context we want to offer a variety of solutions for our advisory business. For example, we just put together a cash-plus portfolio for a large state pension plan. A lot of pensions have moved into private equity and private debt and this requires them to accrue cash to meet capital calls. But they are getting low returns on that cash.
“We put together a low volatile, daily liquid portfolio for this client to enhance the yield on a portion of their cash portfolio. Another example is one of our large consultant clients was concerned with where we are in the late stage of the equity markets cycle. They wanted to adopt a defensive stance and take some of the beta down in their equity investment bucket. We built a low beta defensive equity solution composed of long/short equity managers,” explains Santos.
He says the next big initiative with large US investors will be to focus on an ESG investment program as we head in to 2019.
Across the private MAP landscape, platforms are continuing to evolve their value proposition and remain as committed as ever to giving institutional clients the most optimal route to investing in hedge funds as possible. On that basis alone, one should expect AUM growth to continue to climb over the next few years; especially if volatility returns to the markets.
