New investor needs prompt innovation among managed account providers (MAG News)
The surge of demand among fund of funds managers and other institutional investors to invest in hedge funds through managed accounts is bringing a surge in new business to established platform providers and attracting a wave of new players into the market. It is also prompting innovation among providers as they seek to offer new facilities and tools to their clients, and examine ways to mitigate the extra cost of using a managed account platform.
The rebound in business as institutional capital starts to flow back into the hedge fund industry is a welcome change for managed account platform providers, which suffered last year for one of the key benefits they offer to investors – liquidity. “Being the liquidity provider to the market was painful,” says Martin Gagnon, co-chief executive of platform provider Innocap Investment Management, which is owned by National Bank of Canada and BNP Paribas.
The run on hedge fund investments – especially liquid ones where there was no danger of gating or suspension of redemptions – coupled with the industry-wide negative performance saw Innocap’s assets under management shrink from USD3.6bn to USD1.8bn, but the figure is now climbing back. What Innocap and other platforms demonstrated, however painfully, was the reliability of their liquidity promise. “We paid back USD1.2bn in six weeks last autumn, but we didn’t miss a beat – everyone got their money at T+3,” Gagnon says.
t was the same for Lyxor Asset Management, which runs the world’s biggest managed account platform. “Last year we were used as an ATM and we honoured all redemptions; we delivered on our objective to provide liquidity and security,” says managing director and head of managed accounts development Nathanaël Benzaken.
From a peak of USD13bn assets under management fell back to USD7bn but are now climbing again; Lyxor reported a USD3bn increase in assets on the platform over the first three quarters of 2009. “We are benefiting as investors are transitioning more and more from direct hedge fund investment to managed accounts,” Benzaken adds.
Another longstanding managed accounts platform, run by HFR Asset Management (like Innocap and Lyxor, it dates back to the 1990s) is also benefiting from the resurgence in investor interest. “The world’s largest hedge fund allocators are all either considering setting up their own managed account platform and building it internally or looking to use providers like HFR to scale off the infrastructure we’ve already built,” says managing director Marc Denogent. “Approximately 50 per cent of hedge fund assets are run by the largest 150 managers, and you have the same kind of concentration levels among the largest hedge fund allocators. If you’re one of the world’s largest allocators, you’re going to ask yourself: ‘All things being equal, would I rather have a vehicle where I have full control and full transparency, or something that’s opaque?’” As an alternative to the established platforms, some fund of hedge funds managers are building their own structures. “We found that in many cases these managed account platforms had been designed for purposes that were not in line with our objectives,” says Gabriel Bousbib, chief executive of Gottex Solutions Services, established by the USD8bn fund of funds manager earlier this year after it rejected the option of using an existing provider.
“A lot of these platforms have been built to help banks develop structured products business, using managed accounts to invest in hedge funds in a way that would offer much more liquidity and flexibility in moving capital in and out of those investments. That was not our goal, which was to address the issues of fraud, pricing and not least governance.”
In this environment, opportunities are rife for firms such as Managed Accounts & Governance Consultancy, which advises fund of hedge funds managers and other investors on building their own platform. In the past, says managing director Richard Day says, the cost and difficulty of building a managed account platform put off many institutions that might have considered it.
“Two years and USD10m is not a bad estimate for the various platforms we [Day and MAG Consultancy managing partners John Godden and Simon Hookway] have been involved in, for groups ranging from independent asset managers to large investment banks. One of the areas where MAG can help people is to reduce that cost and time, by saving them from having to reinvent the wheel. We know where mistakes are made, where costs can run out of control, and we’ve already made some of the difficult decisions, so working out solutions doesn’t take so long.”
The rebound in business as institutional capital starts to flow back into the hedge fund industry is a welcome change for managed account platform providers, which suffered last year for one of the key benefits they offer to investors – liquidity. “Being the liquidity provider to the market was painful,” says Martin Gagnon, co-chief executive of platform provider Innocap Investment Management, which is owned by National Bank of Canada and BNP Paribas.
The run on hedge fund investments – especially liquid ones where there was no danger of gating or suspension of redemptions – coupled with the industry-wide negative performance saw Innocap’s assets under management shrink from USD3.6bn to USD1.8bn, but the figure is now climbing back. What Innocap and other platforms demonstrated, however painfully, was the reliability of their liquidity promise. “We paid back USD1.2bn in six weeks last autumn, but we didn’t miss a beat – everyone got their money at T+3,” Gagnon says.
t was the same for Lyxor Asset Management, which runs the world’s biggest managed account platform. “Last year we were used as an ATM and we honoured all redemptions; we delivered on our objective to provide liquidity and security,” says managing director and head of managed accounts development Nathanaël Benzaken.
From a peak of USD13bn assets under management fell back to USD7bn but are now climbing again; Lyxor reported a USD3bn increase in assets on the platform over the first three quarters of 2009. “We are benefiting as investors are transitioning more and more from direct hedge fund investment to managed accounts,” Benzaken adds.
Another longstanding managed accounts platform, run by HFR Asset Management (like Innocap and Lyxor, it dates back to the 1990s) is also benefiting from the resurgence in investor interest. “The world’s largest hedge fund allocators are all either considering setting up their own managed account platform and building it internally or looking to use providers like HFR to scale off the infrastructure we’ve already built,” says managing director Marc Denogent. “Approximately 50 per cent of hedge fund assets are run by the largest 150 managers, and you have the same kind of concentration levels among the largest hedge fund allocators. If you’re one of the world’s largest allocators, you’re going to ask yourself: ‘All things being equal, would I rather have a vehicle where I have full control and full transparency, or something that’s opaque?’” As an alternative to the established platforms, some fund of hedge funds managers are building their own structures. “We found that in many cases these managed account platforms had been designed for purposes that were not in line with our objectives,” says Gabriel Bousbib, chief executive of Gottex Solutions Services, established by the USD8bn fund of funds manager earlier this year after it rejected the option of using an existing provider.
“A lot of these platforms have been built to help banks develop structured products business, using managed accounts to invest in hedge funds in a way that would offer much more liquidity and flexibility in moving capital in and out of those investments. That was not our goal, which was to address the issues of fraud, pricing and not least governance.”
In this environment, opportunities are rife for firms such as Managed Accounts & Governance Consultancy, which advises fund of hedge funds managers and other investors on building their own platform. In the past, says managing director Richard Day says, the cost and difficulty of building a managed account platform put off many institutions that might have considered it.
“Two years and USD10m is not a bad estimate for the various platforms we [Day and MAG Consultancy managing partners John Godden and Simon Hookway] have been involved in, for groups ranging from independent asset managers to large investment banks. One of the areas where MAG can help people is to reduce that cost and time, by saving them from having to reinvent the wheel. We know where mistakes are made, where costs can run out of control, and we’ve already made some of the difficult decisions, so working out solutions doesn’t take so long.”