Eric Nierenberg, who served as Chief Strategy Officer for MassPRIM from 2017-2022 after running MassPRIM’s $6bn hedge fund and low volatility strategies investment book, once said that “moving our hedge fund portfolio to separate accounts is the highest IRR trade we’ll ever make.”
PARTNER CONTENT
By Maxine Alexis
Advisor to Innocap
Eric Nierenberg, who served as Chief Strategy Officer for MassPRIM from 2017-2022 after running MassPRIM’s $6bn hedge fund and low volatility strategies investment book, once said that “moving our hedge fund portfolio to separate accounts is the highest IRR trade we’ll ever make.” These words might catch the attention of any CIO, but board members of pension plans, endowments and other institutional allocators should also take heed – because returns are expressed not only in the investments we make, but also in the investments we don’t. Using separate accounts, or “dedicated managed accounts” (DMAs), notably mitigates a number of the headline risks associated with hedge fund investments.
At the heart of the DMA (which is built as an investor-dedicated fund vehicle to preserve ring-fencing) is transparency and control. Greater transparency (typically, full position-level transparency) allows an investor to better understand how managers are deploying its capital each day. Is the manager taking too much risk? Are they taking enough? Are they adhering to their own stated thesis? Transparency also allows investors to respond quickly and more accurately to the concerns of their stakeholders. Are we still meeting our diversification targets on a look-through basis? Do we have any exposure to newly-sanctioned actors? Are our managers investing in crypto? Robust oversight is challenging without transparency – and often illusory.
Perhaps even more critical is the ability to take action. By allowing investors to retain or participate in constitutional governance – and thereby to drive ultimate decision-making – the DMA gives investors the power to act when they deem necessary. This might take the form of dictating which custodians and administrators are engaged to service the portfolio (to ease data flow and reduce “apples to oranges” reporting) and whose valuation protocols will be used (again, conducive to consistency as well as overall confidence). It also, of course, means having the ability to set investment guidelines that reflect the investor’s own mandate and to support its values’ initiatives, drawing upon DMA transparency to then track the success of those initiatives using methodologies that are consistent with the investor’s enterprise-level approach. Above all, however, control means that the investor keeps hold of the ripcord. Assets remain accessible to the investor, who can force liquidation or remove trading authority in the rare event that becomes necessary. Most importantly, the investor cannot be gated by the hedge fund manager. As Eric Nierenberg told me recently, “Investors are used to having to cross their fingers and hope they get their money back. Some people don’t realize that this is a real benefit. You get to flip the switch.”
At Innocap, we’ve seen a significant uptick in dedicated managed account activity over the last 12 months as fiduciaries grapple with geopolitical uncertainties ignited by the war in Ukraine, the anti-inflation war being waged by central banks, and the impact of fraud in the crypto space. Clients are increasingly looking to DMAs as a core component in their fiduciary arsenal. By offering greater transparency and control, DMAs are being relied upon by investors to gain a deeper understanding of their hedge fund portfolios while reducing risk – and that ultimately sets the stage for deeper investment into alpha.
Maxine Alexis, Advisor, Innocap – Ms Alexis served as the Head of Structuring for HedgeMark from 2014 to 2022 and currently serves as as an Advisor to Innocap.
