The evolution of the hedge funds-of-funds industry — and ever-more demanding institutional clients — are pushing more managers to access hedge fund strategies via managed accounts.
In fact, hedge funds-of-funds managers are the most active prospects out there right now, providers of managed account investment platforms said.
“There's a big pickup in use of managed account platforms by hedge funds of funds now,” said Andrew S. Lapkin, CEO, HedgeMark International LLC, New York, which offers hedge fund managed account services to asset owners and money managers.
Small institutions' clamor for lower-cost hedge funds of funds is the likely propellant behind firms' decision to get out of hedge fund managers' commingled funds and into separate accounts.
Asset owners worldwide have increased their use of managed accounts for the reasons above (Pensions & Investments, July 11), but to date, the typical minimum investment — between $75 million and $100 million, with the best success coming from $200 million-plus mandates — has put them out of reach for smaller pension funds, endowments and foundations, sources said.
To fill the gap for smaller institutions that can't access managed accounts but still want lower fees, more hedge funds-of-funds managers are creating commingled funds or customized hedge fund portfolios using managed accounts, Mr. Lapkin said.
“Fees have become a huge issue for hedge funds of funds, investors and hedge funds themselves,” Mr. Lapkin said, noting that it's often impossible for hedge funds to offer a single commingled fund investor lower fees than other investors without resorting to side letters.
“Because a managed account involves a single investor, the hedge fund manager can set a fee schedule customized to the investor, such as lowering or eliminating management fees and raising the hurdle or otherwise changing the performance fee equation,” Mr. Lapkin said.