Regulation boosts managed accounts uptake
Regulation could be a major driver in pushing hedge funds onto managed accounts. Experts have also said there has been a surge in interest in fund structures, which are in effect co-mingled managed accounts.
“US regulation is a huge burden on managers, particularly start-ups which have limited middle and back office capabilities. However, if those managers launch their product on a managed account platform, then that platform is responsible for all of their regulatory reporting requirements,” said a legal counsel at a fund of funds and managed account platform.
Dodd Frank necessitates managers running more than $150 million AuM submit a detailed Form PF to the SEC as part of regulators’ efforts to curb systemic risk. The document, which is more than 50 pages long, requires managers to disclose significant amounts of information including their exposures by asset class, counterparty risk, leverage, geographical concentration, risk profile, investor details, collateral details, liquidity, strategy coverage and turnover by asset class.
Meanwhile, in February 2012 the CFTC rescinded Regulation 4.13(a)(4) which had exempted managers trading certain swaps from registering with the regulator. Managers must now register with the CFTC as Commodity Pool Operators (CPOs) by December 31, 2012. They must also register as National Futures Association (NFA) members which will subject them to further disclosure requirements.
“Form PF and CFTC registration are a lot of work but managed account platforms have the resources to do this rather than leave it to an overworked chief operating officer at a hedge fund. It will ease the burdens on managers and enable them to focus on their core business,” said the counsel.
The legal counsel acknowledged this service would be beneficial to smaller managers already struggling under the weight of regulation. “If we are marketing to a smaller manager, we would emphasise that our managed account offering can do regulatory reporting for them. However, we would not make a similar pitch to a larger manager who would obviously have the in-house staff to do this work for them,” she said.
Experts also predict greater interest in fund structures. A senior executive at BNY Mellon Alternative Investment Services (AIS) said fund structures have seen a significant rise in popularity.
Fund structures are offered by some of the largest managed account platform providers, and give investors similar benefits to managed accounts such as better governance, daily independent transparency, liquidity and risk reporting.
“There has been a growth in these products over the last year. Unlike managed accounts which tailor to an individual investor, fund structures enable 100s of investors to gain access to brand name hedge funds with many of the benefits afforded to them by managed accounts,” said Mark Mannion, head of sales and relationship management for EMEA at BNY Mellon AIS.
Mannion added he expected investor interest in fund structures to continue.
However, it could be argued fund structures suffer from greater co-investor risk – if a large investor redeems from one of these vehicles, particularly if the strategy is less liquid, it could hurt other clients. One commentator described them as a “new rehash of an old formula.”
Akshaya Bhargava, CEO at InfraHedge, a managed account platform, conceded that certain comingled fund structures could suffer from a slightly increased co-investor risk. “However, it is all dependent on the strategy. If the manager is running a liquid CTA or equity product in the fund structure, a large redemption would not be an issue because assets are liquid,” he said.
The majority of investors using fund structures appear to be smaller funds of funds, family offices and high net worth individuals. “A lot of the investors utilising fund structures would have historically accessed hedge funds through funds of funds,” said Mannion.
Fund structures, like managed accounts, are more expensive than going directly to single managers. “The majority of investors in fund structures would have used funds of funds who charge about 1% management fee and 10% performance fee. Compared to the cost of funds of funds, fund structures’ costs are much more competitive. In fact these co-mingled managed accounts are less costly than setting up an alternative Ucits strategy which usually requires the creation of a synthetic instrument because of the restriction on short-selling,” he said.
Despite their generous liquidity terms, transparency and corporate governance structures, uptake in managed accounts generally has not been as strong as anticipated. The products are expensive and an operational burden for managers, while some hedge fund strategies are difficult to replicate in a managed account.
Surveys by J.P. Morgan’s Capital Introductions Group and Goldman Sachs Prime Brokerage revealed one third of investors allocated to managed accounts, while Deutsche Bank’s Alternative Investment Survey said 42% of investors used managed accounts. The majority of investors cite transparency as being the main attraction of managed accounts.