Managed account platforms are entering a second stage of development. The focus has moved away from liquidity and onto the value added by having a sound operational and risk management support structure.
This is driven by an expanding investor base to include very large institutional investors whose investment horizon is long, requiring less frequent liquidity but more a robust infrastructure. As a consequence of this broadening investor base, managers have fast realised the importance of having a platform offering. It is now seen and accepted as a way to gain maximum possible exposure and a useful secondary asset base.
“The focus on liquidity that was so evident in 2008 has now shifted. Then managed accounts were seen as a safer option due to their liquidity. But since then offshore funds have improved their liquidity and investors have more choice if liquidity is their main concern,” says Soobong Han, product manager for the managed platform at BNP Paribas.
Some of the more established managed account platforms were set up initially to support a bank’s own structured product offering. The main purpose behind their creation was to manage the bank’s own risks and exposures as well as to offer a range of products to clients.
This practice eventually dovetailed with the perception that hedge funds needed a structured platform to support them in order to attract a different set of investors and for those who wanted more control around their investment, including risk management as well as liquidity.
With the financial crisis in 2008, many investors were unable to redeem their investments in hedge funds.
What followed was a near-obsessive concern over liquidity with investors and managers alike placing increased importance on liquidity terms. According to Martin Fothergill, global head of managed accounts at Deutsche Bank X-markets, some hedge funds with large illiquid holdings, for example private equity and real estate, took the decision to trade a more liquid strategy. Although being suitable for a platform was not the aim, it was certainly a byproduct of the trend. At the same time many managers who had previously refused to look twice at the idea of managed accounts became more open to the concept as a way to build an asset base heavily damaged by the crisis as well as way to attract new investors.
Ken Phillips, CEO at Hedgemark, thinks however the emphasis on liquidity by both sides is misplaced. “The notion that hedge funds do not allow for good governance and thus need a platform is a relatively new notion,” he says. “I think it is more the case that some investors don’t have the in-depth understanding of the various legal structures that support hedge funds and the nuances between them and so seek to make a value proposition based around liquidity.”
Phillips says the actual value of a platform is to provide risk and operational management and adopt an honest approach to liquidity by not forcing a strategy that is inherently unsuited to frequent liquidity onto a platform that boasts weekly liquidity, for example.
“Deliverables, the integrity of the platform, the power of the platform to attract managers and quality distribution networks, critical mass and operational integrity are far more important than offering uniform liquidity,” he says.
These deliverables are taking on more importance as the investor base of platforms changes to include increasingly large institutional investors. Such investors tend to have longer investment horizons and are inherently less concerned with liquidity terms and more concerned with operational risk management. This contrasts with shorter-term investors such as high net worth individuals who tend to trade more frequently. These less sticky investors into hedge funds are more likely to continue direct investment into hedge funds while institutional investors are more concerned with the long-term benefits of the platform’s structure and governance.
“Liquidity is certainly less important for institutional investors,” comments Stefan Roes, founder of AF Advisors. “It is not a goal within its own right and in fact pressure on a manager to maintain liquidity can really hurt performance. Liquidity definitely rates much lower than the actual risk and operational management and controls that a good platform can offer.”
Moving into 2012 it is clear hedge fund managers are more willing to entertain managed accounts and are embracing platform structures while investors, looking for more solid risk controls as well as direct control over their investments which they believe cannot be expressed through a commingled fund, are also turning to platforms.
A robust platform structure adds considerable comfort on the risk front. It also gives a uniform and consistent approach that makes access to hedge funds through the platform inherently attractive to investors when compared with direct investment. This allows investors to diversify their investments into hedge fund strategies within a relatively secure environment.
Until recently some managers were reluctant to operate managed accounts, let alone be part of a platform. Some regarded the risk and compliance hoops as irksome and questioned the validity of an approach that might require them to adapt their strategy to provide more frequent liquidity.
“Funds want to know that it is worth their while to go down the platform route and that by doing so they get access to good-quality capital and investors. Being on the ‘wrong’ platform also incurs reputational risk for a manager – for example if their strategy is inherently unsuited a platform with high liquidity levels that they cannot hope to emulate without significantly changing the strategy,” comments Hedgemark’s Phillips.
With the tightening of investment flows, even the more established managers are actively seeking platforms. They have seen demand is sustainable. Cheyne Capital is one example of this. According to BNP Paribas’ Han, it has seen quality managers like Cheyne embrace managed accounts and added several to its own platform over the past few years.
“Hedge fund managers saw a big reason to change post-crisis,” adds Deutsche Bank X-markets’ Fothergill. “Many really suffered from having an investor base that was too concentrated and that they risked suffering from en masse redemptions. Clearly one of the key advantages of a platform is not only picking up the AUM but also picking up a more diverse investor base,” he says.
But choosing the right platform is still a dilemma for many managers as well as investors. For managers the most popular platforms are those that are flexible on liquidity and do not offer just daily or weekly liquidity. Managers also are keen to join platforms offering access to good-quality investors. Those with the biggest distribution reach and most robust operational infrastructures are able to offer economies of scale and hence a better fee structure.
For investors many of the same attributes apply. Platforms need to demonstrate sound corporate governance and operational risk management with sufficient infrastructure. The ability to produce comprehensive and useable risk reports for investors is seen as a solid selling point as well as the ability to aggregate data automatically.
But investors need to be aware that the platform model does not solve all the problems and is not a guarantee of performance by a fund or specific strategy. Care needs to be taken to make the right choice of platform provider, with the best fit for managers and investors alike, according to Frank Dargent, head of business development at Amundi Alternative Investments.
“Before choosing a platform the comfort levels need to be there as regards risk management and the operational set-up. The platform ideally needs to be part of a big general industry player; the investment part of that firm having holdings on the platform is generally a good sign of confidence. In general it is all about the philosophy upon which the platform is built and whether the platform holds the right blend and mix of colours,” says Dargent.
As the platform model becomes more popular the next question is whether the variety and diversity of platforms on offer will also increase. “Around 2008 there were lots of new platforms that had just been launched most of which have since disappeared. The big players with the reputation and the critical mass will continue to succeed as long as they are able to offer the same terms and conditions to internal and external investors and thus avoid any conflicts of interest,” comments Han at BNP Paribas.
Size in the platform world does matter in terms of critical mass as well as the ability to provide the technology and infrastructure needed to monitor and service managers on the platform as well as investors. Some platforms also look to their parent company (usually an investment bank) for additional support and the economies of scale and global reach that entails.
“Global reach and a broad business model mean that we are able to apply an economy of scale and this has a real effect on our pricing model, adding value at the investor end. We can always look to negotiate discounts and seek to drive costs down while maintaining cutting-edge operational and infrastructure excellence,” comments Man Group’s McGoohan.
He also expects competition for managers as well as additional assets under management to be concentrated in a limited number of significant players. “Because of the inherent protective nature of this model, investors and managers alike will always look to the large, more experienced houses that can provide better levels of comfort,” McGoohan says.
Deutsche Bank’s Fothergill agrees. He does not expect a proliferation of management account platform offerings even if investor and manager demand is on an upward trajectory. “The barrier to entry for new platforms is high and the infrastructure required to operate is formidable. This combined with the fact that platforms are offering stability means that investors and hedge fund manager alike are going to go for an established offering with proven track record,” he says.