Managed accounts provide investors with control over their hedge fund investments through segregated accounts structured by the investor but managed by the fund manager. This offers transparency, control over assets to prevent gating or side-pocketing, and ensures compliance with the investor's risk limits. Managed accounts also allow for effective counterparty risk management and consistent valuation methodology across the portfolio. For investors, options for managed accounts include proprietary customized accounts, investing through a fund of managed accounts using third party accounts on a single platform, or using multiple platforms.

3. Managed accounts
Part 1:
Mapping the available routes into hedge fund investing
Part 2:
Identify the optimal solution for you
Richard Tomlinson
Managing Director
Tomlinson Investment Consulting

4. About our company
We specialise in advising on the Our 5 key client groups are:
evaluation and delivery of non- – Investors and end asset owners
traditional solutions for hedge fund – Product providers including funds
investing, primarily: of hedge funds and fund derivative
– Managed accounts desks
– UCITS III funds – Asset consultants
– Structured products – Service suppliers
– Fund managers
We advise our clients in
3 primary areas: We do not:
– Business and investment structure – Advise on asset allocation, manager
analysis and planning selection or manager due diligence
– Product and investment structure
design, construction and
management
– Marketing and distribution
3 © Tomlinson IC Ltd. 2010

5. Mapping the routes into
hedge fund investing
Where do managed accounts fit?

6. Industry context
Meeting investor needs is at the heart of Medium term outlook for hedge fund
any portfolio or investment product industry is strong if investor needs can
be met
Investor needs evolved significantly after
the crisis of 2008 Traditional solution – use extensive
due diligence to compensate for
Madoff, Lehman, gating and credit market
complexity, unregulated fund structures
issues led to an increased desire for liquid,
and lack of industry-standard governance
transparent, controlled and well governed
and control processes
investments
Emerging solutions:
A new regime:
– Investor led: managed accounts to ensure
– Pre crisis: maximise return stream with all structures and processes meet investor
investment structure and governance requirements
negotiable
– Manager led: UCITS III hedge funds to
– Post crisis: high requirements for provide investments that comply with a
investment structure and governance with regulated and common set of governance
return stream negotiable and control processes
5 © Tomlinson IC Ltd. 2010

7. Hedge fund investing: why so much due diligence?
Investing in hedge funds is quite different How do you create an equivalent framework
to mutual funds for hedge fund investing?
– No clear unifying regulatory framework – Create the legal and operational platform
– No clear industry-standard governance yourself – proprietary managed accounts
and control processes – Invest through a trusted 3rd party legal
– High complexity of instruments and and operational structure – managed
portfolios account platforms
– Invest through a fund that runs managed
Implication: much higher levels of specific,
accounts – fund of managed accounts
operational and legal risk
– Regulated, hedge fund style products such as
Traditional solution is extensive due UCITS III hedge funds
diligence covering far more than – Structured products to pass some
investment issues risk factors, specifically tail risks, onto
Amaranth, Madoff and others have other parties
questioned the effectiveness of the
traditional DD process
In mutual funds, investors tend to have
confidence that all non-investment issues
are well understood and regulated leading
to greatly reduced due diligence
6 © Tomlinson IC Ltd. 2010

8. Hedge fund access options
Traditional access routes Alternative access routes
Direct to UCITS Proprietary Fund of Managed Structured
hedge funds FoHF Hedge Funds managed managed account products
accounts accounts platform
Direct responsibility Outsourcing of due The UCITS Create your own Invest through Invest through By investing
for undertaking diligence and asset regulations investment and a fund of a trusted 3rd through a
due diligence and security to the FoHF provide a common asset security funds that party who has structured
ensuring asset framework for structure that has created created an product it is
security (or based on investment you enforce on the managed appropriate possible to
the advice of a 3rd structure and allocations accounts to investment pass on some
party consultant) asset security that ensure asset and asset risk factors,
investors can look security security specifically tail
to and managers structure risks, onto a
will need to 3rd party
adhere to
7 © Tomlinson IC Ltd. 2010

9. The investor led solution: managed accounts
What is a managed account? What benefits does this offer an investor?
A segregated investment account structured Investment and governance structure
and controlled by the investor but managed created in line with investor needs
by the fund manager Overall control of all assets so no gating or
The investor (or their agent) looks after most side-pocketing
non-investment activity Almost zero probability of fraud
A managed account is not: Portfolio transparency and control to
A bespoke fund of funds portfolio ensure compliance with risk limits, allow
performance to be monitored and highlight
Your own fund structured and managed by
any style drift
the fund manager
Effective counterparty risk management
through selection of service suppliers
and partners
Potential capital efficiency through partial
funding or cross-margining
Consistent asset valuation methodology
applied across the portfolio
8 © Tomlinson IC Ltd. 2010

10. Managed account options for investors
3rd party co-mingled
Proprietary FoMA accounts on platform
FoMA with
Rent a standard FoMA using 3rd
Customised own managed Single platform Multi-platform
solution party accounts
accounts
Pros Pros Pros Pros Pros
• Most flexible of all • Given sufficient • A direct substitute for a traditional FoHF • Relatively simple • Relatively simple
options scale and partner • Simplest of all options with full outsource for the investor for the investor
• Can determine capabilities should to the FoHF manager • Single platform • Increased
liquidity and be able to support • Picks up many of the benefits of managed to conduct due investment universe
dealing frequency most strategies accounts but the investor does not have any diligence on relative to single
• Given sufficient • Likely reduced increased complexity and maintain platform option
scale can up front costs vs • If the FoMA is using own managed relationship with • Low set-up costs
accommodate customised accounts some reduction in co-mingling • Low set-up costs
Cons
almost all types • No co-mingling risk
Cons • Likely high
of hedge fund risk • Low set-up costs
• Likely high operating costs
investment
Cons Cons operating costs • Investment
• No co-mingling
• Less flexible than • Lack of flexibility relative to other options • Investment universe limited to
risk
customised solution • Possible double layering of charges universe limited managers on the
Cons • Possibly higher to managers on platforms chosen
• Time and ongoing costs platform • Co-mingling risk
expertise required • Less control than • Co-mingling risk • Lack of access to
for bespoke customised • Lack of access to illiquid strategies
solution illiquid strategies
• Higher upfront
costs
9 © Tomlinson IC Ltd. 2010

11. How to identify the optimal solution
Which managed account solution if any?
© Tomlinson IC Ltd. 2010

12. A framework for hedge fund investing
At a conceptual level, it is reasonably easy to identify the various options
for investing in hedge funds
In practice, it is difficult to select the best solution for your specific needs
We believe the process should always start at the portfolio level
A clear understanding of your overall requirements is needed to kick-off the
process. This should start at the level of the overall hedge fund portfolio and
Capture requirements encompass all current and future (expected) requirements. These can then be
prioritised and quantified.
The requirements can then be mapped against the numerous generic
Map against generic approaches to investing in hedge funds. This will clearly identify which
solutions options are likely to best meet requirements.
Once the possible generic solutions have been identified the next stage
Evaluate specific is to explore specific options within each solution. This will entail taking
options the generic approach (eg. co-mingled 3rd party managed account platform)
and drilling down to the next level of detail (eg. platform selection)
Once a conceptual solution has been agreed it will then need to be
Develop and implement developed into a detailed design and implemented.
At this stage cost and complexity can vary greatly.
11 © Tomlinson IC Ltd. 2010

13. Capture requirements
Overall requirements
Investment Business Governance
(N/A for asset owners)
Includes Includes Includes
Strategy coverage Business model Governance regime
Liquidity profile Target clients Compliance regime
Portfolio size Distribution channel Control processes
Average manager allocation size Target product design Reporting needs
Smallest manager allocation Fee structure Regulatory requirements and
Risk profile Fee quantum restrictions
Time horizon Wrapping requirements Independence and separation of
function requirements
Account seeding method and source Preferred jurisdictions
Overall risk management policy
Target manager profiles and managed Tax requirements
account willingness/suitability Client dealing lot sizes
Key task is to capture the requirements and quantify when possible
12 © Tomlinson IC Ltd. 2010

14. Generic solutions – first screen
UCITS hedge funds UCITS hedge funds
3rd party co-mingled 3rd party co-mingled
platforms platforms
Proprietary managed
accounts
High liquidity investment
strategies
No managed account Proprietary managed
or UCITS solution accounts
Only real option is
traditional hedge fund
route
Low liquidity investment
strategies
Small investment scale and Large investment scale and
individual manager allocation individual manager allocation
less than $40 million greater than $40 million
Traditional hedge fund investment solutions obviously
work in every quadrant
13 © Tomlinson IC Ltd. 2010

15. Generic solutions – investment flexibility sweet spots
Proprietary managed
accounts
Increasing
investment scale
and individual
manager allocation Co-mingled managed
UCITS hedge funds
account platforms
Increasing investment flexibility across strategy, instrument
coverage, liquidity, leverage and other factors
14 © Tomlinson IC Ltd. 2010

16. Evaluate specific options – managed accounts
Option Key decisions Some key factors to evaluate
• Manager coverage
• Specific account structure
3rd party co-mingled managed • Single or multi-platform • Jurisdiction
account platforms • Which platform(s)? • Tax
• Fees
• Monitoring regime
• Platform security
• All factors as above
Fund of managed accounts • Which FoMA? • Manager selection process
• Risk management processes
• Capabilities and experience
• Flexibility of infrastructure
Proprietary – rent a solution • Which partner? • Fees
• Scale and scope of service offer
• Jurisdictional limitations
• What overall architecture • Platform design
and approach? • Tax, regulation and jurisdiction
Proprietary – custom solution
• Which service suppliers? • Investment universe and requirements
• How much flexibility? • Service suppliers
15 © Tomlinson IC Ltd. 2010

17. Develop and implement
Option Create Establish Evaluate On-boarding Testing of Allocate Ongoing
investment investment and appoint managers infrastructure capital monitoring &
framework vehicles service management
suppliers
3rd party
co-mingled
managed
account
Y N N N N Y Y
platforms
Fund of
managed
accounts N N N N N Y N
Proprietary
Y Y N Y N Y Y
– rent a
solution
Proprietary
– custom
solution Y Y Y Y Y Y Y
16 © Tomlinson IC Ltd. 2010

18. Proprietary or co-mingled accounts?
Positives for proprietary Positives for co-mingled
No co-mingling or adjacency risk Dramatically reduced scale required
Some managers may not agree to a common Possible sharing of manager relationships
access account on a platform but may with investors for greater access
consider a direct relationship with an
If accounts get very large there may be some
investor or FoHF for a proprietary account
cost and trading efficiencies that can be
Can usually accommodate the widest picked up
range of investment strategies and
instruments due to lack of need to protect
adjacent investors
Opens up possibilities for partial funding
and other collateral management efficiencies
17 © Tomlinson IC Ltd. 2010

19. Contacts
Richard Tomlinson
Managing Director,
Tomlinson Investment Consulting
T: +44 (0)20 7424 5835
E: richard@tomlinson-ic.com
W: www.tomlinson-ic.com
This document is issued by Tomlinson IC Ltd. trading as Tomlinson Investment Consulting,
registered in England and Wales with company number 6885737.
Nothing in this document constitutes financial advice. Tomlinson IC Ltd. is not a financial advisor
but offers management consulting services to professional financial organisations. The management
consulting services offered cover matters of strategy, process, management, infrastructure and other
related issues and therefore do not fall under the remit of regulation by the FSA