Institutional investors are taking a hard look at hedge fund managed accounts as they further unwind hedge funds of funds into direct investments in single- and multistrategy hedge funds or move from separate accounts to gain more control of their investments.
Large pension funds like the $259.8 billion California Public Employees' Retirement System are considering a move to a managed account investment structure.
Managed account providers and industry observers report a surge in interest from corporate and public pension funds and sovereign wealth funds around the world, although the U.S. currently is the hottest market.
Hedge fund managed accounts are similar to separately managed portfolios run by traditional long-only managers. They provide:
- complete portfolio transparency, a feature typically unavailable to investors in a commingled hedge fund;
- investor control of the portfolio, including specialized versions of flagship strategies or customized solutions;
- more liberal liquidity terms — often daily or monthly — for redemption or termination than is usually offered by commingled hedge funds; and
- outsourcing of operational oversight to the managed account provider including risk management, monitoring, reporting, compliance, tax and cash management.
There are four basic structures — commingled; fund of managed accounts; dedicated; and a structured product managed account. All four are growing in popularity, especially in the U.S. and Canada, said Peter Dom, managing director of AF Advisors B.V., Rotterdam, Netherlands, a consulting firm that specializes in managed account advice and implementation.
Early adopters of hedge fund managed accounts include the €140 billion ($187.22 billion) Pensioenfonds Zorg en Welzijn, Zeist, Netherlands; C$129.5 billion (US$127.5 billion) Ontario Teachers' Pension Plan, Toronto; €55 billion Bayerische Versorgungskammer, Munich; £36 billion ($56 billion) Universities Superannuation Scheme Ltd., Liverpool, England; and the $27 billion defined benefit plan of United Parcel Service Inc., Atlanta.
The managed account structure started to get more attention from institutional investors in the aftermath of the financial crisis and the Madoff Ponzi scheme, said Joshua Kestler, chief compliance officer of HedgeMark International LLC, New York, which offers dedicated managed account services.
“Institutional investors woke up and realized that for the most part, the hedge fund-of-funds vehicle many used at that time just didn't work in 2008 and 2009. The inherent lack of transparency, governance, extreme manager concentration and control — the ability to redeem as underlying hedge funds slammed down gates — convinced many institutions to look for another form of infrastructure,” Mr. Kestler said.
Sacramento-based CalPERS, for example, is reviewing a move from hedge fund separate accounts because a third-party managed account platform would handle day-to-day operations, operational risk management reviews and would move valuation to a daily basis from monthly, Egidio “Ed” Robertiello, senior portfolio manager, absolute-return strategies, said at the Milken Institute Global Conference in Beverly Hills, Calif., in late April. CalPERS had $5.2 billion invested in hedge funds as of Dec. 31.
Investors are forcing managed account providers like HedgeMark, as well as hedge fund managers themselves, to evolve, said Mikael A. Johnson, lead partner for alternative investments in the New York office of KPMG LLP.
As institutional investors lean on hedge fund managers to offer a “fund of one” in a managed account format, they are seeking advice on the subject from service providers like auditors, lawyers and compliance experts, Mr. Johnson said.
Pressure on third-party providers for “more flexibility and the ability to include novel investment ideas on a managed account platform” is a far cry from a decade ago, when “nearly all of the managed account platforms were bank managed and you took what (hedge funds) were offered” on the platform, he said.
These days, Mr. Dom said, due to a recent rush of fierce new competition, savvy managed account platform providers have evolved to be more responsive to institutional investor demand for a wider, more diverse variety of hedge fund strategies and providing consultative advice in addition to outsourced administration.
One example of the flexibility now on offer is the ability for UPS' investment officers to select whatever hedge funds, credit opportunities, commingled funds or other non-standard hedge fund approaches they want for the internally managed hedge fund of funds. All administrative functions of the internal hedge fund portfolio are outsourced to HedgeMark (Pensions & Investments, May 27).
Another is the $167.2 billion California State Teachers' Retirement System's use of Lyxor Asset Management Inc., one of the industry's largest third-party hedge fund managed account providers, in a much more consultative role than is typical of old-style managed account vendors.
New York-based Lyxor provides CalSTRS' internal staff with manager and strategy selection support for the fund's $200 million global macro hedge fund portfolio, a three-year pilot program being run by the West Sacramento-based system's innovation and risk unit(P&I, Jan. 14).
Lyxor is enjoying “our best year ever” in the U.S. for managed account hires, up more than 100% in a year-over-year comparison, said Michael Bernstein, director and head of North American business development. Globally, Lyxor is running $11.4 billion on its managed account platform.
Like many an institutional marketer, Mr. Bernstein was closed-mouthed about potential new clients, but said Lyxor's pipeline is full.
He noted that as public pension plans increase their overall allocation to hedge funds and unwind their hedge fund-of-funds portfolios, they also are looking for administrative outsourcing support.
“Increased allocations go hand in hand with managed accounts. With bigger allocations, the risks are all the larger and the need for transparency and risk management as well as ready liquidity becomes more important,” said Mr. Bernstein.
FRM, a division of London-based hedge fund manager Man Group PLC, also has a very full pool of potential prospects for its managed account platform from the U.S., Canada, German-speaking Europe, the U.K. and Asia, said Michelle McCloskey, senior managing director.
“The managed account platform is where we anticipate the most growth for our business,” said Ms. McCloskey, who is based in FRM's New York office.
Ms. McCloskey said FRM's 15-year track record of managed account administration and scale — $8.7 billion is run from the firm's investment platform — is a competitive advantage, along with its broad spectrum of 75 hedge fund strategies on offer together with portfolio construction and manager selection capabilities.
Hedge fund consultants are fairly agnostic on the subject of managed accounts for their pension fund and sovereign wealth fund clients.
“We identify good hedge fund managers first and then identify the appropriate vehicle,” said Stephen L. Nesbitt, CEO of Cliffwater LLC, Marina del Rey, Calif.
This article originally appeared in the June 24, 2013 print issue as, "Managed accounts get serious attention".