HF Managed Accounts: A tool for change or tilting the playing field?
Mar 30th, 2009 | Filed under: Institutional Investing, Today's Post
While global regulators debate what exactly “hedge fund regulation” means, the California Public Employees Retirement System (CalPERS) has taken matters into its own hands. According to the WSJ, CalPERS has sent a memo to its 37 hedge funds and funds of funds asking for various new terms and conditions on their investments. The Journal reports that these include preferential terms regarding fees and liquidity that would result from CalPERS investing via separately managed accounts. Reports the newspaper:
“The pension fund also seeks greater control of its investment funds, saying it would explore opening managed accounts. In that scenario, hedge funds would place Calpers’s assets in a separate bucket from other investors’ assets, so if a fund faces an exodus of investors and sought to freeze redemptions, Calpers wouldn’t be limited from withdrawing its funds.”
Managed accounts have been one of the few bright spots in the hedge fund industry recently as redemption suspensions and “gates” have led investors to examine their options. Last month, the FT wrote an article on the renewed interest in these custom one-client-only versions of hedge funds (“Hunger Growing for Managed Accounts“). Reports the FT: More…
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Your post today accurately acknowledges the significant increase in the interest in managed account platforms, which offer superior operational and investment risk control to their users. During 2008, Lyxor Asset Management also demonstrated a much less known value of the built-in liquidity features that accompanies them, and that is the ability to manage consitituent manager and style weights within the Funds of Funds that are constructed form the managed account platforms. Lyxor’s main FOF added 1200 basis points of performance in 2008 by this activity alone.
To your point that the premium charged for inidividual managers on these platforms is the cost to avoid the losses in a year like 2008 is simplistic. One can think of it as a cheap liquidity option but even more so, it represents the cost of operating such platforms with their superior due diligence, transparency, risk control in addition to liquidity. Lyxor, for example, had no issues with the Four Horsemen of Apocalypse in 2008-subprime, Bear Stearns, Lehman Bros. and Madoff.
Further to suggest that large investors are gaming small investors with managed account platforms is creating a straw man that doesn’t exist. The genie is out of the bottle and managed accounts will be the preferred way to invest for all investors in hedge funds in the very near future. Those refusing to provide them will have a withering business model.
Transparency is the best antiseptic, and managed accounts is the best solution. Proper operational and technological infrastructure is needed when having a managed account. The advantages of a managed account solution are many.
In interest of full disclosure, I lead the Research team at AlphaMetrix, but if you currently invest in alternatives, I invite you to find out more about AlphaMetrix.
Investors who go through the AlphaMetrix Platform do not face additional fees (i.e. they pay the same fees as if investing directly in the fund). The “TLC” approach (Transparency, Liquidity, Custody) combined with Risk Monitoring, Research, Due Diligence, and Technology has proven to be very effective (in 2008, of the 62 approved programs, 55 were positive, and most gave a return north of 10% (net)). The continuous risk monitoring also means that strategy drift, style drift, and concentration risk should not occur. The AlphaMetrix Platform also offers an investible index (the investible version of the AlternativeEdge Short-Term Traders Index).
AlphaMetrix has over 50 professionals, and more than half are in Research, Risk, or Technology. The Platform truly has top-tier programs that are diverse through different strategies and styles. The due diligence that we conduct before a program is approved for the AlphaMetrix Platform is truly rigorous. We do extensive qualitative and quantitative analysis, on-site visits, and a background investigation that is led by two former US Secret Service Agents.
In addition, since the minimum investments at AlphaMetrix so unlike the article suggests, smaller investors (who are appropriate and QEP) are able to enjoy this service.
If you are concerned about hedge fund transparency, risk management and liquidity, you may be interested in our dbX markets hedge fund managed account platform, which provides greater transparency and monthly liquidity, with DB performing as sole prime-broker and risk-monitor. The platform provides standardised liquidity, fees, independent pricing and oversight, with many hedge funds already participating in the platform.