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
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
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
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
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
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
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.