UMAs: Base Camp for Wealth Managers to Scale Mt. Alpha
Jan 10th, 2007 | Filed under: Retail Investing“SMAs grow up and learn to play nicely in the advisory community”
By: Janet Aschkenasy, Wealth Manager Magazine
Published: January 1, 2007
While institutional investors have been busy debating the merits of bifurcating alpha and beta, the wealth management industry has inadvertently stumbled upon an enabling technology that may someday bring alpha-centric investing to the masses. New information technologies are allowing Separately Managed Accounts (SMAs) to evolve into fully integrated Unified Managed Accounts (UMAs). In fact, IT consulting firms have suggested this is one of the top IT growth areas for the financial services sector over the next 5 years.
UMAs allow an integrated approach to portfolio construction by streamlining reporting, tax management, and account administration from across several outside asset managers. In a truly “unified” UMA, managers deliver their models only (they do not technically manage the assets). Then the advisory firm implements the models and tweaks them where required to meet the specific tax or financial planning requirements of each client. In doing so, UMAs allow advisors to effectively integrate various alphas and betas (whether they be bundled in long-only accounts or isolated in market neutral hedge funds and ETFs).
According to some, baby boomers desire a more active role in portfolio management. This creates a fertile ground for a more active approach to “managing managers”:
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[…] A quick follow-up to our posting on UMAs being an enabling technology for retail adoption of portable alpha: this article illustrates we’re not alone in our belief.   “Unified managed accounts expand on the basic function of conventional SMAs, which allow investors to own actual shares of stock, rather than shares of mutual funds that invest in those stocks, but also fold in other investment portfolios. Putting your mutual fund and ETF portfolios under a UMA structure won’t do much for your tax situation [ed: UMA proponents disagree] , but it boosts the level of coordination between these types of investments, letting you get the most out of the money management services for which you’re paying.” […]
[…] “Alpha-centric investing†refers to more than just “portable alphaâ€. As we have reported on this blog, it encapsulates new operational infrastructures (UMAs), new fee arrangements (performance fees with benchmark hurdles / fee-per-alpha), new metrics (ranking funds based on alpha instead of absolute returns), new organizational structures (small teams of alpha producers), and new advisory models (fee-based vs. commission-based). A recent investment newsletter highlights another domain that is impacted by this simple idea: regulation. […]
[…] Investing in hedge funds via managed accounts opens up possibilities similar to those touted by the UMA business such as cross-account management and reporting […]
[…] investing. Archived in Alpha Beta Separation, Portable Alpha, Hedge Funds | Trackback | del.icio.us | Top OfPage […]
[…] Since that time, active overlay has also come to refer to the process of tax management in unified managed accounts (see posting). But it never seemed to catch on as a term used to describe alpha-centric investing techniques such as 130/30 (which can be alternatively described as a beta portfolio with an active overlay). In fact, a Google search of “active overlay” returns precious few citations referring to equity overlay management (a.k.a. beta overlays or long/short overlays).  […]