By Niki Natarajan
The industry's love-hate relationship with managed accounts divides an industry that already has enough of a PR problem. And, like all that arouses passion, it makes for great contentious debate.
But, as I edited this month's Industry Analysis, based on a white paper called Separate Accounts as a Source of Hedge Fund Alpha, I realised that semantics might be getting in the way of sound investment judgment.
While my personal view may be irrelevant (largely because, like Becky Bloomwood in Confessions of a Shopaholic, I do not currently have enough saved to warrant even a savings account), investors wrangling with this debate need to know that there is a big difference between managed accounts on platforms and separately managed accounts, which don't have to be on a platform.
Separately managed accounts have been around since the dawn of hedge fund time. Among commodity trading advisers, separately managed accounts were, for many years, more commonplace than fund structures. Although, back then, any self respecting top-tier manager would only consider a separately managed account if the investment was large enough.
Historically, bank-backed managed account platforms started to proliferate when hedge fund structured products were in vogue. In those days, hedge funds that agreed to be on such platforms were often seen as B-list and largely there only to raise assets, giving rise to what many saw as a negative selection bias.
These days, in the post-Madoff era, the tables have turned and managed account platforms fill a different function, offering end investors transparency, liquidity and control. Investors are now often driving their managers to be part of a platform before they invest.
Some brand name managers that previously eschewed platforms have changed their minds in the new era, but still only for the promise of big investor dollars, which now totals more than $40 billion.
But some of the biggest managers, such as Brevan Howard, continue to be vehemently against managed or separate accounts. Operational hassle, trading costs and other administrative distractions are among the key reasons they cite against them.
Others view them as a potential violation of their core investor values. They believe strongly that all their clients should have equal rights in terms of fees and liquidity. The latter is also one of the reasons why Aurora Investment Management, this month's fund of funds profile, does not like managed or separate accounts.
Simply put, managed account platforms should perhaps be looked at like a shopping mall full of off-the-shelf products, while separate accounts are like a designer tailoring the bespoke outfit. Taking the bespoke point of view, it is easier to understand Allstate/Investcorp researches on separate accounts adding alpha. But what will leave a lot of anti-managed account players a little perplexed is the new paper by Innocap Investment Management.
Innocap's Gauthier Abrial did not set out to prove the case for managed accounts but he wanted to show that dynamic asset allocation can add alpha. The managed account platform simply offers the liquidity for dynamic asset allocation. The transparency of a platform allows the manager to know what is going on before he shuffles the portfolio.
Like the seemingly never-ending men's match at this year's Wimbledon, the debate rages on. Yet, at the end of the day, managed accounts are simply a tool. Some offer them as safety belts; others are perhaps not so honourable - using them as a way around the most favoured nation rule, making sure that they can give one client one set of terms and other clients quite another.
The key to understanding them is who really has control of the assets - as that in the end will be key to determining whether or not additional alpha can be made.