Hedge Funds & the move to Managed Account Platforms - Global Perspectives White Paper - December 2012


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"The move to Managed Account Platforms" - The brand new Global Perspectives White Paper

A growing trend in the Hedge Fund & Asset Management industry over the last few years has been the rise of Managed Account Platforms as a new investment structure.

We will look at why this part of the Hedge Fund industry is growing rapidly and also examines the challenges that exist for Managers and Platforms working within this type of structure.

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Or email: - shane@globalperspective.co.uk

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Hedge Funds & the move to Managed Account Platforms - Global Perspectives White Paper - December 2012

  1. 1. A Global Perspectives White Paper The move to Managed Account Platforms By Shane Brett, Managing Director Global Perspectives www.globalperspective.co.uk th Date 6 December 2012
  2. 2. Contents IntroductionIntroduction 2 A growing trend in the Hedge Fund & AssetOpportunities 3 Management industry over the last fewChallenges 3 years has been the rise of Managed Account Platforms as a new investmentConclusion 5 structure. This industry segment has existed for some time and has to date been dominated by one established giant – Lyxor. This is starting to change as increased competition enters the sector from fast growing competitors like UBS’s Liquid Alpha Platform. These Managed Account Platforms sign up traditional and Hedge Fund Managers who then market their funds to institutional investors worldwide. The catch for Managers is that the Platforms impose much tighter investment controls around trading, investment allocation and risk management. We will look at why this part of the Hedge Fund industry is growing rapidly and also examines the challenges that exist for Managers and Platforms working within this type of structure.
  3. 3. Opportunities Instead they pay this fee to gain an extra level of comfort. After the Madoff debacleManaged Accounts are capitalizing who can blame them.on a major trend in the Hedge Fund Institutional Investors are insisting on a highindustry - the push towards degree of flexibility, transparency andincreased checks and controls. The liquidity. The extra reporting and controlson-going regulatory avalanche provided by these Platforms addressesacross the whole industry has these concerns. Investors can easilyobviously contributed towards this, redeem their assets (on an often dailybut in fact the main driver has been basis) and are better protected from fraud orInvestors themselves. manager error (due to the Platform’sInvestors want to see their internal additional layer of operationalinvestment managed carefully and in checks).a fully controlled environment. Theywant to ensure Fund Managers arenot taking unnecessary risks or Challengesengaging in dangerous tradingactivity. This can be especially There are a number of important factors toimportant for investors into consider for Hedge Fund Managersalternative funds or those exhibiting considering joining a Managed Accounta similar investment objective (for Platform. In many ways some of theseexample “Newcits” in Europe). issues may limit the growth of this structureIt is even more important for in the years ahead.Institutional Investors. As they The first obvious challenge for manyalready represent a very large and managers is that they do not like being keptgrowing segment of the whole on such a short leash. We have seenindustry, it is likely that the trend examples of managers’ keen to sign up to atoward Managed Account Platforms Managed Account structure but who havewill continue. In many cases balked when they realize the scale onInvestors can actually access the controls that will be placed upon them.underlying funds themselves withouthaving to pay the Platform fee.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  4. 4. Managers recognize that these Managers who breach their agreedPlatforms are a potential new investment guidelines will have torevenue stream, in a market that has compensate the fund. This means they willbeen tight on new investor have to directly write a cheque from theirallocation. Of course the investment own company resources to make good thelimits will vary from Platform to shareholders of the mutual or hedge fund.Platform but they will likely place firm This represents a potential challenge forlimitations on the managers’ ability Platform Managers. It will be up to them toto use leverage, gain exposure to chase the Fund Managers for compensationspecific derivatives or illiquid and this will likely involve tense negotiationssecurities and engage in OTC to determine the exact monetary size of theCounterparty Trading. breach.In many ways joining a Managed Fund Managers will be expected to sign offAccounts Platform is akin to running and assume liability for their valuations.a regulated Mutual or UCITS fund. It Hedge Fund Managers will validate theircertainly won’t be for every Fund NAV’s from their Administrator asmanager. normal but the big difference here is that the liability for having the NAV right will lie notMany managers (particularly US just with the Administrator as before – it willHedge Fund Managers) will not have also lie with the Fund Manager as well.Pre-Trade Compliance checks inplace to ensure trading activity does This is because on a Managed Accountsnot breach their investment levels Platform the Manager will review the NAVprior to placing the trades in a the sent to them by the Administrator (as willmarket. This would be a big change the Platforms operational team) and sign itfor some Managers. Before joining a off. The NAV may be calculated perfectlyPlatform they will have to make a correctly by the Administrator but if the Fundsizable IT investment and also Manager signs off a Fund NAV whichchange many of their internal breaches their agreed Platform risk andoperations to anticipate the effects of compliance limits, then they are writing atheir investment activity cheque. It’s that simple.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  5. 5. Finally existing managers will have investment. This trend is where Managedtheir own internal Pricing Policy Account Platforms can prosper.which they will have used for their These Platforms provide an extra level ofinvestments. This will likely have controls on the Fund. They can also providebeen agreed with their increased reporting and flexible liquidity.Administrators over a period of time They can effectively supervise the Fundand cover the acceptable price Managers actions and investments closely,sources for a full range of standard in a way not possible in a traditional Fundand exotic financial instruments. It Manager - Administrator relationship.will also have been reviewed andapproved by the Fund’s Board. While this structure won’t be for every Manager, the access to new capitalIn a Platform structure the Fund allocation as well as the on-going demandManager will be expected to throw from investors should mean a bright futuretheir Pricing Policy in the bin, for Managed Account Platforms.Instead they must adopt thePlatform’s Pricing Policy in full.Understandably this can be asignificant change for many Order the brand new book-Managers and the nature of thePlatform structure means there is “The Future of Hedge Funds”little room for negotiation – if you By Shane Brettwant to join the Platform you have to The last 2 decades have transformed thesign up to its Pricing Policy. Hedge Fund industry from a niche investment segment to a massive global industry.Conclusion In this excellent and wide-ranging study of the Hedge Fund industry, Shane Brett examines the main issues and trendsGiven the recent economic currently taking place, and analyses howenvironment and a new emphasis on they will affect the future of the industry.due diligence prior to allocation, it is This includes-natural that investors are looking for • Changing investor demands across theincreased controls on their industry,allocations over the life of theGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  6. 6. • New regulatory requirements - Shane Brett is an expert in Hedge Funds,including FATCA, AIFMD & the Asset Management and the wider globalJOBS Act, economy.• Future operational trends - He is the founder of Global Perspectives,including Operational Due Diligence the Asset Management & Hedge Fund& Managed Account Platforms, Consultancy.• Emerging Service Provideropportunities – including HedgeFund Administrators,• Hedge Fund investment strategy- including new emerginginvestment opportunities,• Best practice change Sign up for all our monthlymanagement – how to manageHedge Fund industry change. White Papers at-The “Future of Hedge Funds” also http://www.globalperspective.co.uk/#!white-examines the current and future papersglobal economic environment andwhat this will mean for Hedge Or email: - shane@globalperspective.co.ukFunds in the years ahead.Available from Amazon inpaperback here-www.amazon.com/Future-Hedge-Funds-Trends-industry/dp/1481130226/And for Kindle here-www.amazon.com/The-Future-Hedge-Funds-ebook/dp/B00AHACY8YGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843