Boutique managed accounts platforms could suffer in light of AlphaMetrix
Institutional managed accounts platforms such as those backed by investment banks or large-scale asset managers are likely to see a surge in interest from allocators at the expense of boutique providers following the on-going events at AlphaMetrix, it has been said.
The Commodity Futures Trading Commission (CFTC) is alleging AlphaMetrix misappropriated $2.8 million in pool participants’ cash. The CFTC has accused AlphaMetrix of agreeing to rebate fees to managers in its commodity pools by reinvesting the money into the pools, only to transfer the cash into bank accounts in the name of its parent company. AlphaMetrix has denied the allegations.
The firm is in the process of liquidation, and issued a statement acknowledging 95% of pool participant funds will be returned within 15 days. A letter by Aleks Kins, CEO at AlphaMetrix, in October 2013 admitted the company was suffering from cash-flow issues, which had led to delayed fee payments to managers on its commodity pool, thereby prompting mass redemptions.
“It all goes back to the argument of boutique risk versus institutional risk. If a managed account is backed up by a large organisation, be it a bank or sizeable asset manager, then it shall have deeper pockets to cover any liabilities,” said Marc de Kloe, head of funds and alternatives at ABN Amro Private Banking in Amsterdam.
One expert, who did not want to be identified, agreed. “Managed account businesses backed by investment banks are likely to be the big gainers out of this because of the attractive balance sheets and because the banks will simply put their hands into their pockets to bail them out in the event of a crisis,” he said.
The spurious lack of balance sheet capital and stable business lines at some boutique managed accounts platforms could make investors nervous. A growing chorus of investors have said they intend to bolster their operational due diligence on managed accounts platforms, with an increased focus on the strength and sustainability of other business lines at these firms following the issues at AlphaMetrix.
“When we conduct operational due diligence on smaller firms, we would look at the entire business. We would have certainly done this sort of review on a smaller business like AlphaMetrix. It is the same for any service provider,” said a US operational due diligence expert at a fund of hedge funds.
The likely beneficiaries are likely to include Deutsche Bank’s DB Alternatives, Lyxor Asset Management (a subsidiary of Societe Generale), Goldman Sachs, UBS, InfraHedge (a subsidiary of State Street), HedgeMark (a subsidiary of BNY Mellon) and Amundi (a subsidiary of both Societe Generale and Credit Agricole)– all entities with investment bank backing. Furthermore, well-established managed accounts platforms such as Hedge Fund Research and Man Group will also probably see in-flows.
Nonetheless, some bank-backed managed accounts platforms carry their own risks in that investors are entirely exposed to the bank – after all, the bank will be prime broker and fund administrator to the hedge funds on its platform. As recent credit events have shown, highly concentrated counterparty risk should be avoided. Investors, however, appear comfortable.
“Obviously, being on the DB Alternatives and Goldman Sachs platform exposes an investor wholly to Deutsche Bank and Goldman Sachs respectively. Are they likely to go bust? It is highly unlikely but obviously it does present a counterparty risk,” said one head of operational due diligence at a fund of hedge funds in London.
Events at AlphaMetrix are unlikely to lead to diminished investor confidence in managed accounts platforms as a whole, which have historically marketed themselves as being liquid, transparent and subject to high levels of governance, nor are regulators going to intervene.
Despite allegations of wrongdoing, investor assets are likely to be returned in full as they were not held at AlphaMetrix but at custodians and futures commissions merchants (FCMSs). The managers on the AlphaMetrix commodity pool also traded in highly liquid futures contracts so the likelihood of a fire-sale of assets leading to a precipitate drop in value is minimal.
Investor interest in managed accounts platforms has been muted since the financial crisis, something even the most ardent proponents of these vehicles concede. Deutsche Bank Markets Prime Finance’s 2013 Alternative Investment Survey (AIS) said 44% of investors used managed accounts, although added this number had stayed relatively consistent since 2011.