Hedge fund managers have not historically embraced managed account structures because they create additional complexity for fund managers. With most fund management companies now in capital-raising mode, more managers are willing to discuss managed account options.
Institutional and private investors use managed accounts as an alternative to direct hedge fund investment. This option allows investors greater control over assets and increased portfolio transparency. Accelerated investor interest is now being driven by gates or similar redemption limitations imposed by hedge funds in 2008, the logic of independent valuation, and by the lack of independent asset verification at the core of Madoff-related events.
Investors require specialist administration support with managed accounts, due to the control design elements, transparency and independence objectives and additional operational complexity. Daily, independent reconciliations, P&L and risk statements based on position-level data and independent valuations, and risk analytics are needed across all investor accounts.
The following are key factors funds and investors should consider when evaluating managed account options:
Investor considerations
• Retain control of and access to cash and assets in the investor account (vs. co-mingled in a pool with other investors in traditional hedge fund investing).
• Managed account managers (i.e. advisors) require power of attorney to deal on behalf of investor’s managed account; limits of authority need to be clearly defined.
• As the legal counterparty in a managed account, investors are responsible for negotiating the legal and administrative infrastructure:
1. IMA – investment management agreement with managed account advisor
2. Bank and prime broker agreements
3. Transaction agreements including ISDA and ISMA agreements
• Fixed costs, set-up and administration expenses typically make managed accounts expensive and not cost-efficient for smaller investors.
• The administrator should demonstrate experience with managed accounts and be SAS 70 Type ll audited.
• Performance monitoring—the analyzing and consolidated reporting of the rich data set—can be time-consuming but the investor must monitor:
1. Independent, position-level based reports & reconciliations
2. Portfolio valuations
3. Counterparty exposure risk reports
4. Portfolio risk reports
5. Performance attribution
6. Style drift
Account advisor considerations
• Investor strategy, investment guidelines or asset allocations rule can require additional reporting & monitoring, e.g. certain counterparties or transactions may not be permitted without specific investor approval.
• The variety of investor-specific guidelines across different investors wishing to pursue similar investment mandates can add complexity and inefficiency to the portfolio management process.
• Account advisors have managed account infrastructure and investor reporting responsibilities:
1. Daily, separate position reconciliation, cash break monitoring, P&L and portfolio valuation statements, risk analytics required for each and all investor accounts
2. Control or guideline adherence reports may be required
3. Weekly, daily or monthly operational reporting
• The administrator should be experienced with managed accounts and be SAS 70 Type ll audited.
Investments made through managed accounts can provide investors with greater capital control and portfolio transparency. Significant administrative expertise and system underpinning—with the scalability to adapt to account and investor client growth—is also required to support both investors and account advisors.
Ron Tannenbaum is Co-Founder and Marketing Director at GlobeOp Financial Services , which provides risk analysis tools and reporting services to fund managers and investors.
