More from Managed Accounts USA in New York
Mar 15th, 2007 | Filed under: Hedge Fund Industry TrendsAlpha Male hangs out with managed account types in Lower Manhattan again today at Managed Accounts USA.
Jack Schwager, best-selling author and executive with Fortune Group, a fund of funds manager, just redeemed all his underlying hedge funds. But business is better than ever, he says.
Instead of investing in hedge funds by buying units directly in the LPs, he has directed all of his managers to establish accounts on a managed accounts platform. Now he essentially owns the same funds, but with the transparency, liquidity and valuation of which most funds of funds can only dream.
A lack of transparency is the root cause for all blow-ups and frauds in the hedge fund industry, he says.
Every problem, I don’t care what it is – whether it’s a fraud, blowup or whatever, is caused by one thing: a lack of transparency.
To add insult to injury, Schwager contends that this lack of transparency is compounded by litany of other problems with traditional hedge fund investments (lack of liquidity, lockups, redemption penalties, slow return of capital, audit holdbacks, gates, side pockets).
He claims to have solved all of these issues by moving from direct investments to managed accounts. In addition, he says he now has access to a host of smaller funds on the platform that were either too small or had inadequate infrastructure to allow a direct investment by Fortune.
Like long-only investors, Fortune is now able to construct alpha/beta core/satellite portfolios. But instead of owning the passive market (beta) and a hedge fund (alpha), he can – in effect – own a passive hedge fund index and overlay upon it Fortune’s own active fund picks.
Schwager says the number of hedge funds on managed account platforms will dramatically increase over the next five years. To back up this prediction, he lays out the following evolutionary path:
- Some investable indexes will begin to offer their portfolios via managed accounts.
- A few funds of funds will begin offering dynamically managed portfolios via managed account. More funds of funds will follow suit.
- Institutions will begin to see similarly performing portfolios via managed account that offer full transparency and better terms. Large investors will migrate to managed accounts.
- Managers see investment bleeding to those who provide managed accounts. More managers will join managed accounts platforms.
Heard on the floor…
An anonymous institutional investor on position-level transparency: I’m sick and tired of managers not wanting to reveal their secret position in, like, Cisco. Please!
Freeman & Co’s Eric Webber on Funds of Funds M&A: As far as potential acquirers are concerned, the funds of funds industry is becoming divided into the ‘haves’ and ‘have nots’. The ‘have nots’ tend to be the fund of funds managers with a 25-year career on Wall Street and a great rolodex who acts as a classic ’stock picker’ of managers. The ‘haves’ tend to be those funds of funds that take a far more systematic approach. You may not agree with that characterization, but that’s the way the potential buyers see it.
IGS Advisory’s John Gooden (Day Two Conference Chair) on the conference logo (pictured above): “What’s with the car? This industry will grow 20% over the next year. We’ll need a better car – that one’s awful!”
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I think Jack is on crack. I am going to post on this topic over at Information Arbitrage this week (www.informationarbitrage.com). If Jack is talking about commodities funds, ok (as this segment industry pretty much grew up on managed accounts), but I’d like to see hot non-commodities funds fall into line pursuant to his platform objectives. Supply and demand would argue that he is wrong in the current environment, where demand for top managers far exceeds supply, ergo, they can tell those who demand managed accounts to take a long walk off a short pier. Should the supply/demand imbalance flip, then I’d agree that investors have the power to demand such things that are viewed as undesirable by managers. But until that happens, he is setting himself up for a massive game of adverse selection, IMHO.
I believe Jack is very correct , and this transparency will stop alot of the expensive nonsenense, and games going on wihin Funds. It ma even reduce the Trading so reduce internal costs , as there is much Trading for thre sake of generating. As for not being suitable for stocks, well soem managers maybe worreid since it will expose them to what research they are truly listening to- and what Chinese wall does not exist?