FEATURING Amundi // Deutsche Bank Fund Services // FRM // Hedgemark // Lyxor Asset Management // Sciens Alternative Investments

GOVERNANCEProviding robust and transparent infrastructure

REGULATIONHow legislative changes are impacting providers

GROWTHContinuing interest from institutional investors

MANAGED ACCOUNT PLATFORMS 2014

WEEKHFMS P E C I A L R E P O R T

A different way of thinking, a different way of investing – we are innovating to perform.

welcome@man.com www.man.com

We don’t do conventional thinking. We don’t subscribe to conventional wisdom. You don’t become one of the world’s leading

alternative investment managers by following the herd. You get there by deploying dynamic, innovative investment strategies.

And you get these by employing quick, agile thinkers. In other words, people who think outside the box.

Conventionalthinking has its limitations

Alternative investments can involve significant risks and the value of an investment may go down as well as up. UK/13/0401-P

H F M W E E K . CO M 3

ver the past few years, mounting regulatory pressures and the increasingly high standards of investors have driven demand for more transparent investment vehicles

with enhanced protection against operational risk. The answer for many managers and investors has come in the form of managed accounts.

Institutional investors have been attracted to the space as a result of the amount of control that managed accounts offer, as well as their robust infrastructure and high levels of liquidity. For managers, the idea of using a managed account is nothing new, but the options and expertise available have never been as plentiful. Interest in

FoHF, hybrid and separate managed accounts – each with their own benefits – has grown dramatically as a result.

In line with the rest of the hedge fund industry, managed accounts are also feeling the impact of new regulation such as the AIFMD and Fatca. However, due to the nature of these structures, the goals of regulatory scrutiny – transparency, liquidity and control – have only served to strengthen their appeal.

Keeping this continued demand in mind, we bring you the 2014 HFMWeek Managed Accounts Report, providing insight and comment from industry experts on the opportunities offered by an increasingly important structure.

Alexis BurrisReport editor

OM A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

21

REPORT EDITOR Alexis Burris T: +44 (0) 20 7832 6656 a.burris@pageantmedia.com REPORT EDITOR Karolina Kaminska T: +44 (0) 20 7832 6654 k.kaminska@pageantmedia.com HFMWEEK HEAD OF CONTENT Tony Griffiths T: +44 (0) 20 7832 6622 t.griffiths@pageantmedia.com HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Rachel Kurzfield, Eleanor Stanley, Luke Tuchscherer CEO Charlie Kerr GROUP COMMERCIAL MANAGER Lucy Churchill T: +44 (0) 20 7832 6615 l.churchill@hfmweek.com SENIOR PUBLISHING ACCOUNT MANAGER Tara Nolan +44 (0) 20 7832 6612, t.nolan@hfmweek.com PUBLISHING ACCOUNT MANAGER Rebecca Wheeler, +44(0) 20 7832 6613 r.wheeler@hfmweek.com CONTENT SALES Tel: +44 (0) 20 7832 6511 sales@hfmweek.com CIRCULATION MANAGER Fay Muddle T: +44 (0) 20 7832 6524 f.muddle@pageantmedia.com

HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group © 2014 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher

Published by Pageant Media Ltd LONDONThird Floor, Thavies Inn House, 3-4 Holborn Circus, London, EC1N 2HAT +44 (0) 20 7832 6500 NEW YORK 1441 Broadway, Suite 3024, New York , NY 10018 T +1 (212) 268 4919

FUND SERVICES

WHY PUBLIC PENSION PLANS ARE EMBRACING MANAGED ACCOUNTSJoshua Kestler of HedgeMark explains why an increasing number of institutional investors are looking to managed account platforms

FUND SERVICES

CONTINUED POPULARITYKristin Castellanos of Deutsche Bank Fund Services speaks to HFMWeek about the growing managed account space

ASSET MANAGEMENT

NEW GENERATION MANAGED ACCOUNTS: UNLEASHING PERFORMANCEFrançois Bocqueraz and Antoine Canard of Amundi talk to HFMWeek about the evolution of separate managed accounts

FUND MANAGEMENT

THE AIFMD: A NEW WORLD ORDER FOR HEDGE FUND INVESTINGChristophe Baurand of Lyxor Asset Management discusses the impact of the AIFMD on the hedge fund industry and what it means for managed accounts fund services

RISK MANAGEMENT

UNDERSTANDING THE POTENTIAL OF MANAGED ACCOUNTSMichelle McCloskey and Stephen McGoohan of FRM discuss the advantages of managed accounts

CORPORATE GOVERNANCE

AT ARM’S LENGTHTim Wilkinson of Sciens Alternative Investments discusses why more investors are looking to managed accounts and what it means to have strong corporate governance in this space

14

17

4

6

8

11

4 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

While there has been both confusion and frustration with the implementa-tion of the AIFMD, Lyxor Asset Man-agement believes the Directive holds new opportunities for hedge fund in-vesting and managed accounts alike.

HFMWeek (HFM): What sort of impact will the AIFMD have on the hedge fund industry?Christophe Baurand (CB): Our view of the Directive is positive. Having a dedicated regulatory framework for alternative funds which focuses on investor protection is a very good thing for the hedge fund industry in general.

Th e AIFMD will open up many opportunities for the fund industry, making Europe an att ractive jurisdiction for both investors and fund man-agers. Th e European industry will see many hedge funds and funds of hedge funds coming onshore from their off shore origins. Not only does this provide the AIFM with a greater investor base i.e. those that could not access off shore hedge fund solutions for regulatory or internal risk control reasons, but it means fund managers are able to market their products to profes-sional clients. Most importantly, it also means those funds that are authorised in accordance with the Directive would have implemented the highest regulatory standards for meeting reporting, process and disclosure requirements.

By meeting requirements and being AIFMD compli-ant, investors will have the opportunity to access all hedge fund strategies in onshore format. Th e regulation should also reduce concerns of opaqueness of certain funds as the Directive ensures there is a standard for reporting and pro-viding information to investors. Ultimately this regulated framework will bring greater protection and security for investors while providing access to the full range of hedge fund strategies and solutions.

HFM: Do you expect to see investors in off shore funds moving their capital to AIFMD equivalents?

CB: While the AIFMD has been in place since 22 July 2013, there will be a lag until we see a large number of funds available in onshore format. One of the reasons is the transitional period that has been off ered for AIFMs and of course the time it takes to be fully compliant for others. For these reasons the migration from existing off -shore funds to onshore funds will take time but the expec-tation is that in future, once there is an equivalent onshore vehicle ready for investment, the investor base should move in that direction.

Th e biggest diff erence is that investors, institutions in particular who have previously avoided off shore hedge fund investments, are likely to revisit them as a reputable option now that the AIFMD is coming in.

HFM: What are the implications for Lyxor, and particularly its position as a leading hedge fund managed account and fund of funds provider?CB: On a general level, what is good for hedge funds will be good for managed accounts and funds of hedge funds. Th e Directive will make hedge fund solutions more acceptable to a wider range of Eu-ropean investors.

We do not see competition between the AIFM universe and managed accounts. Th e AIFMD does not address all risks inher-

ent to hedge fund investing and in this respect, managed accounts as delivered by Lyxor bring additional levels of governance, control and segregation, valuation and risk management which investors will continue to need. As ever, we will continue to select high quality managers, and this added layer of value should be as highly regarded as in the past.

Lyxor’s approach to multi-manager investing has always been aligned with the spirit of the AIFMD with an empha-sis on strict risk guidelines, independent risk management and administration and a culture of transparency and comprehensive reporting. Th rough the AIFMD, investors will have the option to access this expertise in a regulated, onshore format.

ON A GENERAL LEVEL, WHAT IS GOOD FOR HEDGE FUNDS WILL BE GOOD FOR MANAGED ACCOUNTS AND FUNDS OF HEDGE FUNDS

”

CHRISTOPHE BAURAND OF LYXOR ASSET MANAGEMENT DISCUSSES THE IMPACT OF THE AIFMD ON THE HEDGE FUND INDUSTRY AND WHAT IT MEANS FOR MANAGED ACCOUNTS

THE AIFMD: A NEW WORLD ORDER FOR HEDGE FUND

INVESTING

Christophe Baurandhas been the head of alternative investments at Lyxor since July 2012. He is also the global head of business development. Baurand joined Lyxor in 2006 as head of marketing and sales for alternative investments, and prior to this had been working within the Société Générale Corporate and Investment Banking division for 13 years.

F U N D M A N A G E M E N T

H F M W E E K . CO M 5

HFM: The Directive sets higher standards for manag-ers, for example in reporting and submitting to more intensive regulation. Will this make it more likely that some leading managers will reconsider managed ac-counts as a distribution option?CB: For European-based managers, this is likely. But a dis-tinction needs to be made here between European man-agers and their Asian and US peers. For managers who already advise managed accounts, like those that have a relationship with Lyxor, the additional AIFMD reporting will not seem that burdensome. A Lyxor managed account requires a much higher level of ongoing requirements than the AIFMD. We ask a lot from our manag-ers in terms of data flow and commitment. We demand a lot from them, because we owe this to our investors.

For many non-European hedge funds, they can choose to partner with an AIFMD-com-pliant management company like Lyxor, which can help them to raise capital without having to dedicate resources to the sometimes costly pro-cess of obtaining compliance with the Direc-tive. If Lyxor selects a non-EU manager to be a trading adviser to Lyxor funds, this is much less time-consuming and cheaper than a full-blood-ed AIFM registration process for the adviser. Lyxor will address the European marketing while the fund manager benefits from new capi-tal raising opportunities. This is a particularly attractive option for all managers, but certainly so for smaller (early stage for instance) or mid-sized managers in particular who have not gone down the European passporting route before.

HFM: While the AIFMD might be partly a regulatory response to the 2008 liquidity problems, does it not also come at a time of greater awareness by institu-tional investors of the opportunities offered by hedge fund investments?CB: Institutional investors are certainly more aware of the risks they are taking across financial instruments and funds whether traditional or alternative funds. An example could be an allocation to a range of funds of say 40% but this may represent 85% of the risk. This has led institutions to re-examine their risk budgets and balance sheets.

Overall there is an opportunity for hedge fund invest-ments to move from being satellite investments to being part of the core asset pool. You may be more likely to see regulated long/short equity strategies becoming part of the core equity holding rather than treated as a separate alloca-tion. The same goes for fixed income. We saw the beginning of this with Ucits III and absolute return funds, but now we expect hedge fund strategies to become more mainstream. Other strategies, like CTAs and global macro, will still fulfil a satellite role as volatility dampeners and shock absorbers.

HFM: What uncertainties still remain about the imple-mentation of the AIFMD?CB: While the Directive had many unanswered ques-tions when it was first aired, 90% of it has now become clear. We are still awaiting detail from local regulators, for example on how, in the case of managed accounts, to delegate portfolio management to external entities. We have been having some very encouraging discus-sions with regulators, and we are confident that the final implementation will provide guidelines that are both clear and accommodating.

HFM: Finally, how do you expect the AIFMD to af-fect hedge fund distribution in Europe?CB: The Directive will facilitate distribution, provid-ing more business opportunities for Lyxor and our hedge fund managers. It will make hedge fund strate-gies more attractive to mainstream investors and will reinforce the appeal of Lyxor’s advanced approach to investing in alternatives. We expect investors to have more appetite for alternative investments post-AIFMD. It is still too early to accurately gauge de-

mand for hedge fund solutions on a country by country basis, as many EU members have yet to clarify their own rules. However, there is also great potential beyond Eu-rope. Consider an investor in Asia: soon they will have the option to either invest in a non-regulated offshore fund, or the same strategy, with the same performance and the same fees, but in a regulated AIFM format. They are far more likely to opt for that additional layer of regulatory oversight the AIFM regime will offer. The AIFMD should clearly be the main regulatory standard for the European hedge fund industry; it also has the potential to become a global regulatory standard.

INSTITUTIONAL INVESTORS ARE CERTAINLY MORE AWARE

OF THE RISKS THEY ARE TAKING ACROSS FINANCIAL INSTRUMENTS AND FUNDS WHETHER TRADITIONAL OR

ALTERNATIVE FUNDS

”

6 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

FRM invests using all hedge fund vehicle types – traditional commingled funds (CMFs); single investor funds (SIFs) and managed accounts (MACs). Given the advantages we have found with MACs and the evolution in our processes and capabilities in this area,

this has grown to be the primary hedge fund investment vehicle we use. As a result, we now run one of the largest buy-side managed account platforms, with approximately $8.3bn in nearly 70 MACs .

Given our experience investing in all hedge fund vehicle types, we feel we are in a good position to explain why we see MACs as the optimal choice. Based on our experience, we believe institutional investors will also increase their usage of MACs as their advantages are bett er understood.

In this article, we will review the benefi ts and perceived challenges, and explain why we view them as the optimal investment vehicle and how we use them.

POTENTIAL BENEFITS OF MACS:1. Control We see control as a key issue for hedge fund investors and as the primary reason for utilising a MAC. A number of problems may arise as a result of the control that managers have over CMFs, including liquid-ity restrictions or mismatch, risk management defi ciencies, reduced transparency and increased risk of operational failures.

Th e MAC structure addresses all of the above by putt ing the control of the fund structure in investors’ hands. Th e investor can dictate the fund legal structure and jurisdic-tion; select all service providers; control all decisions around liquid-ity; obtain full daily position level transparency; and ensure a strong operating structure is in place, in-cluding independent valuation of assets and control of cash management.

Additionally, the MAC allows the investor to agree risk limits with the manager for the MAC’s trading. With the transparency off ered by the MAC, the investor can moni-tor the MAC versus the limits, and address any breaches.

2. Transparency We have seen institutional investors cite a lack of transpar-ency as one of their biggest concerns in hedge fund invest-ing . In our view, the standard reporting provided by hedge fund managers on their CMFs does not always provide in-vestors with the information needed to optimally manage risks and make informed decisions.

As the MAC investor controls the fund structure, they can control the transparency they receive, including daily position level data. We have found that transparency at this level provides three distinct benefi ts:

• Enhanced research: access to the trading records of each MAC places the investor on “equal footing” with the manager in conversations about the port-folio, and eliminates time wasted trying to gather information about exposures, trades and positions.

• Enhanced risk management: the MAC transparency allows the investor to monitor the portfolio against the pre-agreed risk limits contractually set. Th is pro-tects against mandate drift and excessive risk taking.

• Fraud mitigation: position level transparency pro-vides the ability to verify and value the assets in each account independently from the investment manager.

3. Portfolio constructionInstitutional investors seldom in-vest in one hedge fund. Rather, they invest in a portfolio of hedge funds to try to mitigate risk in an eff ort to achieve more consistent returns. Further, investors have an interest in hedge fund portfo-lios which bring performance and exposures to diversify their overall holdings.

MACs provide investors with tools which can be used in an at-tempt to increase the performance and value of their hedge fund in-

vestments. We cite three examples below:• Managing exposure to asset classes: MAC transpar-

ency allows investors to consider their hedge fund holdings as a collection of risk factors. Accurate aggregation of exposures allows for a more holistic

WE SEE CONTROL AS A KEY ISSUE FOR HEDGE FUND INVESTORS AND AS THE PRIMARY REASON FOR

UTILISING A MAC

”

MICHELLE MCCLOSKEY AND STEPHEN MCGOOHAN OF FRM DISCUSS THE ADVANTAGES OF MANAGED ACCOUNTS

UNDERSTANDING THE POTENTIAL OF MANAGED

ACCOUNTS

Michelle McCloskeyis senior managing director at FRM, based in New York, and a member of the Man Executive Committee.

Stephen McGoohanis head of managed accounts at FRM.

R I S K M A N A G E M E N T

H F M W E E K . CO M 7

view of hedge fund portfolio risk, and also allows for hedge fund exposures to be consolidated into an analysis of overall holdings.

• Adjusting target volatility: MACs allow the investor to target volatility through adjusting leverage.

• Increasing concentration: some investors may fear overly diversified hedge fund portfolios, believing them to dilute returns. At the same time, investors have an incentive to diversify hedge fund invest-ments for fear of idiosyncratic hedge fund risk (i.e. “blow ups”). As MACs can reduce this idiosyncratic risk, they can allow investors to concentrate their hedge fund holdings and seek higher returns.

PERCEIVED CHALLENGES INVESTING IN MACS1. Selection bias With MACs, an often cited concern is that the structure reduces the pool of managers that can be accessed, either because the manager declines to accept a MAC, or be-cause the strategy may be too complex to be replicated in a MAC. This is referred to as “negative selection bias”.

In our history of investing through MACs, we have found this bias to be less prevalent than reported, especial-ly since 2008. We have been able to secure MACs across the spectrum of strategies, ranging from emerging manag-ers to established “brand names”.

FRM brings sizeable investments (typically over $100m); experience in establishing MACs that enable the manager to fully implement their strategy, including more complex strategies; experience in MAC set-up which makes it an easier process for the manager; and an “open architec-ture” approach with established service providers which al-lows the manager to use their existing counterparties.

While negative selection bias is what is usually dis-cussed, what is not as commonly understood is “positive selection bias” with MACs. FRM, and institutional inves-tors generally, may find managers whose investment skills are attractive but whose infrastructure is immature or not institutional quality. As the MAC allows the investor to overcome this impediment through establishing an insti-tutional quality infrastructure, it may increase the pool of potential investments. In addition, the ability to customise the investment strategy of a MAC also makes available ad-ditional managers who may bring compelling investment skills but whose CMFs are not acceptable to an investor due to their volatility level or specific holdings.

2. CostAnother concern about MACs is increased cost vs. a man-ager’s CMF. The cost can come in the form of higher fees and expenses (explicit costs), or through lower returns versus the manager’s CMF (implicit costs).

With explicit costs, our open architecture approach and independence allows us to reduce MAC costs. As FRM is able to aggregate client assets and come in as a large inves-tor, it is typically able to achieve reduced fees from hedge funds managers. With Man’s size (over $50bn in assets) the firm negotiates service provider fees that may not be available to individual hedge funds.

Note that every discount FRM negotiates is passed di-rectly to end investors.

Regarding implicit cost, we believe that when perfor-

mance slippage occurs in MACs, it is often a result of the MAC providers imposing liquidity terms that cause the manager to remove elements of their strategy (for ex-ample, a manager with quarterly liquidity is asked to run a MAC with weekly liquidity). Or, the MAC may not be large enough to allow the manager to easily split trades and fully replicate the strategy.

FRM structures its MACs with liquidity required by the strategy to maximise returns, and of sufficiently large size to replicate the strategy.

FRM’S APPROACH TO MACSFRM began using MACs as an investor in 1998. That mindset continues to drive our approach today: we seek to use MACs as the optimal structure for pursuing perfor-mance, managing risks, and achieving transparency. With MACs, we rely heavily on our independence (we have no affiliations with service providers) and our open architec-ture (we have flexibility in how we establish MACs).

This approach has allowed us to drive down MAC costs, minimise slippage, and replicate strategies for a wide range of high conviction managers.

Currently there are three primary ways investors can ac-cess the platform:

• Customised portfolio construction: investors can utilise FRM’s portfolio construction and manage-ment services to build customised portfolios of hedge funds either entirely or partially using MACs.

• Direct access: investors can invest directly into individual FRM MACs, with our high conviction managers.

• Dedicated MACs: large investors may seek to estab-lish MACs for managers they select, utilising FRM’s MAC resources and experience typically for on-boarding, risk monitoring, analytics and operational oversight.

An important component of FRM’s MAC offering is Clarus, an online investment management tool FRM de-veloped to translate daily position level data into informa-tion clients can efficiently use to understand and monitor their MACs, as well as incorporate their MAC exposures into their overall portfolio.

In short, our approach is designed to maximise the benefits of MACs in multiple ways through establishing and running MACs in what we consider to be their pur-est form.

FRM STRUCTURES ITS MACS WITH LIQUIDITY REQUIRED BY THE STRATEGY

TO MAXIMISE RETURNS, AND OF SUFFICIENTLY LARGE SIZE TO REPLICATE

THE STRATEGY

”

8 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

HFMWeek (HFM): What are the driving forces be-hind increasing investor interest in the managed ac-count model?Tim Wilkinson (TW): Th e increasing investor interest in the managed account model stems in large part from the adverse experience of many investors that were directly in-vested in hedge funds at the time of the 2008 global fi nan-cial crisis (GFC). A combination of poor procedures and lack of controls combined with greed (and adding up to the absence of a proper governance framework) within several hedge fund structures left a lot of investors exposed to sig-nifi cant risks and large losses – many of which had simply not been envisaged nor outlined at the time of investing. A painful lesson was learned, the price of which to the in-dustry has been investors demanding a much bett er gov-ernance model plus a far greater degree of risk control and transparency. A robustly constructed and impartially run managed account platform can deliver these requirements, as well as serving to align the interests of investor with pro-vider. It also enables the investor to conduct one-time due diligence on the platform provider in order to more safely access a multitude of diff erent investment strategies. Th e provider should be equipped and experienced in scruti-nising and, where required, selecting alternative invest-ment managers as well as conducting full investment and operational due diligence. Th is should be augmented with relevant background checks and on-site visits before any trading adviser is accepted onto the platform.

HFM: Which factors underpin a strong and eff ective governance model?TW: We believe eff ective legal ownership of the underly-ing assets combined with true independence and a fully impartial operating model to be the key criteria. Th e op-timal platform will be independent of any bank or other large fi nancial institution. Prime broker services should be deployed and selected agnostically and independent pric-ing sources such as Bloomberg should be used wherever possible. Likewise sub-administrators providing custody and valuation services must be fully independent from the platform provider. Th ese ‘arm’s length’ counterparty ar-rangements at all levels are an essential pre-requisite of any eff ective corporate governance structure and signifi cantly mitigate the risk of potential confl icts of interest. Th ey also result in each provider being appointed purely on merit. By virtue of having these checks and balances already built into its platform prior to the GFC, Sciens was able to avoid the need to gate any of its investors as a result of the ensu-ing liquidity crisis.

Th e external administrator must always have independ-ent control over the formal asset valuation process and all data should be independently sourced wherever pos-sible for this to be a fully eff ective process. In eff ect, the managed account provider must ‘own’ each counterparty relationship, with the investment manager permitt ed to conduct ‘trading adviser’ services only, and this under a revocable power of att orney. If any signifi cant breach of

TIM WILKINSON OF SCIENS ALTERNATIVE INVESTMENTS DISCUSSES WHY MORE INVESTORS ARE LOOKING TO MANAGED ACCOUNTS AND WHAT IT MEANS TO HAVE STRONG CORPORATE GOVERNANCE IN THIS SPACE

AT ARM’S LENGTH

Tim Wilkinson is president at Sciens Alternative Investments. Wilkinson is responsible for the firm’s global business development incorporating all client-facing responsibilities. Previously, he was MD at Russell Investments, responsible for Emea-wide distribution. Prior to this, he spent 15 years with Citigroup Global Markets, from 2001 onwards as global head of Citi Transition Management, a business he established for Citi in 1997.

C O R P O R AT E G O V E R N A N C E

H F M W E E K . CO M 9

THE DUE DILIGENCE AND THE QUALITATIVE NATURE

OF THE MANAGED ACCOUNT SELECTION PROCESS IS

ESSENTIAL TO ENSURING THE PROPER PROTECTION

AND CONTROLS

”

mandate occurs, the managed account provider must have the experience and the power to intervene.

A properly constructed managed account structure also ensures proper segregation of assets, and full sepa-ration of key operational functions and fiduciary con-trols from the trading adviser. This is, after all, the true raison d’être of a managed account and it is this which provides the investor with the requisite protection and control. A truly independent model will also combine flexibility with counterparty neutrality when establish-ing the cell. All counterparty risk, including aggregate prime broker, is then actively monitored and controlled – with the provider having the ability to dynamically al-ter counterparty exposure whenever appropriate. This was an area of risk that many simply failed to address in 2008, and which remains a significant risk within some structures even today.

The accuracy of program implementation by each manager according to its mandate should also be monitored on a daily basis by the plat-form’s risk management team; this using fully up-to-date and position-level data feeds com-bined with the deployment of specific limits and constraints to ensure style drift cannot occur un-noticed.

HFM: Are investors’ concerns about liquidity valid?TW: The liquidity or otherwise of a particular investment or asset class must always be central to the original investment decision. Less liquid inevitably means more risk, both systematic and idiosyncratic. One of the most appealing aspects of a properly run platform from an investor per-spective has been the focus on ensuring the best possible liquidity terms the underlying strategy can tolerate. Managed accounts have thereby played an important role in improving liquidity terms including ‘encouraging’ improvements in the liquidity of the underlying benchmark programme. This must never be taken beyond the point where it undermines the potential or projected returns of the strategy, however. Some strategies are able to target higher returns, in part because of the illiquid nature of the targeted investments. Managed accounts should not be seen as only being suited to highly liquid strategies, therefore, since robust governance and effective risk con-trol and transparency has a value in its own right – and investing via a platform into monthly and even quarterly dealing strategies will still deliver these benefits to the end investor.

One additional benefit of managed accounts is the po-tential improvement in the quality of liquidity on offer. As seen during the recent global financial crisis, when mar-kets were stressed hedge fund liquidity was almost para-lysed, with up to a third of all managers imposing gates or other such liquidity restrictions. In a robust managed account structure, the funds are held by an independent custodian/prime broker, with the managed account plat-form provider having both the ability to monitor those counterparties and also the authority to ensure investors can liquidate according to the agreed terms.

HFM: Why is it increasingly important to provide full transparency and how can this be achieved?TW: Increased transparency equals better risk control. More and more investors are therefore demanding a fuller understanding of where and how their capital is invested at any given point in time. The swathe of increased regula-tion resulting from GFC is designed in part to further re-inforce this trend. Increased transparency can also greatly improve an allocator’s decision making capabilities; while allowing the investor to better understand the individual and the aggregate exposures of the overall portfolio.

A properly run platform should provide investors with daily NAV updates based upon by-position data and with detailed performance, exposure and stress analyt-ics should also available at both the individual manager level, and at the aggregate exposure level. Well-designed platforms will make available to their investors dynamic

online risk/return analytical tools so as to fur-nish with a much deeper understanding of the sources of alpha, and also to enable monitoring of the actual risk being taken by each individual trading adviser. Investors are expecting portfolio look-through that enables them to perform de-tailed analysis based upon underlying positions and this has proved to be of particular interest and use to investors obliged to comply with new regulations such as Solvency II.

For its part Sciens has continued to invest further in its proprietary risk engine S.M.A.R.T. (Sciens Managed Account Risk Technologies) in order to ensure that it continues to robustly fulfil the ever-increasing needs and requirements of Sci-ens’ investors.

HFM: What challenges will the managed ac-count space face in the next 12 months?TW: Following the events of late 2013 when one of the most prominent platform providers closed its doors to business, the reaction of investors

tended to be somewhat binary. There were those which were left with the feeling that managed accounts were simply not everything they were held out to be; and those which (more correctly) recognised that the due diligence and the qualitative nature of the managed account selec-tion process is essential to ensuring the proper protection and controls which the would-be user is seeking. This is the key challenge for both investors and managed account providers alike. Investors need to ensure they have a duly robust platform selection process and platform providers in turn need to be able to demonstrate that the legal con-struct, the structure and the day-to-day modus operandi is capable of delivering everything that an investor is looking for in a managed account partner.

An additional challenge lies in keeping pace with the rapidly evolving official regulatory regime. For example, being able to offer a structure that allows hedge fund man-agers to offer fully AIFMD-compliant strategies via a plat-form, and which in turn enables investors to benefit from the in-built protection intended by this array of new rules. This example highlights the ‘parallel’ challenge to the in-dustry of meeting the demands and requirements of ever-increasing regulation.

ABOUT LUMALUMA provides hedge fund investors standardized access to a broad range of hedge fund managers, across multiple strategies. LUMA offers value-added services to both investors and managers, including operational controls, risk management, distribution and turn-key fund solutions.

JANUARY 2014

Arnaud MassenetArnaud.Massenet@lumasolutions.com | 5 Savile Row, London, W1S 3PD, United Kingdom | T: +44 207 494 5115

FOR MANAGERSComplete fund set-up, including legal documentation,

Review of daily administrator position reconciliation

Monitoring of regulatory and investment guidelines

Management of service provider relationships

Access to global fund distribution capabilities through various third-party entities

FOR INVESTORSSingle set of documentation and operational procedures to access multiple managers

Risk reporting through a web based secure portal

Manager independent cash and asset controls, as well as investor friendly governance

Position level and style drift monitoring

independent pricing

Multi-jurisdiction capabilities, including both Cayman and Luxembourg, private and public, vehicles

These sample reports are for illustrative purposes and should not be relied upon. The opinions on this page have been selected by LUMA. No guarantee is given as to the accuracy, completeness and reasonableness of such opinions. All opinions and views expressed constitute judgements as of the date of this presentation and may change any time.

Style Drift Monitoring - Net Equity

Historical Analysis - Portfolio Allocation

Detailed Performance Analysis

Copyright © 2013 LUMA. All rights reserved

Copyright © 2013 LUMA. All rights reserved

Daily Performance Reporting

Copyright © 2013 LUMA. All rights reserved

Weekly Risk Review

WEEKLY RISK SUMMARY

AUM ($mm) Equity – 10% (% of NAV)

Interest Rate +100 bps (% of NAV) Spread +10% (% of NAV)

Equity Vega (bps) Interest Rate Vega (bps)

Long Leverage (% of NAV) Short Leverage (% of NAV)

Top 10 Long Exposure (% of NAV) Top 10 Short Exposure (% of NAV)

Values at Risk (%)

Manager 1

2010- -02 39.4

0.1% -0.3%

0.0 2,444.7% -2,453.1%

-1,674.0%

3.3%

2010-07-26

0.1% -0.2%

0.0

-3,277.6%

-2,345.4%

5.6%

Hist. Average 15.4

0.1% -0.2%

0.0 4,083.2% -4,003.7%

3,219.6% -2,711.1%

4.1%

Manager 2

2010- -02

-0.9% 0.0%

15.2 253.1%

-335.3% 173.5%

-274.4% 9.1%

2010-07-26 59.1

-0.7% -1.0%

- 266.1%

-

203.6% -366.7%

10.7%

Hist. Average 38.3

-0.8% -0.7%

5.4 178.4%

-238.3% 147.7%

-216.6% 11.2%

Manager 3

2010- -02

-5.4% -1.0%

-0.4% 0.0

0.9 150.5%

-42.6%

-41.0%

14.4%

2010-07-26 6.1

-7.6% -1.0%

-0.4% 0.0

166.9%

-40.0% 76.0%

-36.7%

Hist. Average 99.5 -4.9%

-0.6% -0.4%

0.4 -0.2

158.4% -36.1%

72.3% -31.2%

15.7%

Manager 4

2010- -02

2.7%

113.3%

-113.3%

-95.7%

7.2%

2010-07-26 44.7

2.4%

110.1%

-110.2% 70.1%

-93.0% 6.1%

Hist. Average 30.4 1.0%

96.2%

-98.3% 69.0%

-81.4% 9.2%

Manager 5

2010- -02

1.0% -3.2%

-

-0.1

114.2% -27.1%

-27.1%

3.2%

2010-07-26 107.4

1.2% -2.6%

-2.4% 4.0

-0.2 115.9%

-14.3% 42.9%

-14.3% 5.1%

Hist. Average 70.5 2.2%

-1.9% -2.5%

3.3 -0.7

84.2% -15.9%

38.3% -15.9%

3.2%

Manager 6

2010- -02 120.6

0.1% -2.6%

12.2 97.2%

-90.9%

-90.9%

2010-07-26 120.4

-0.1% -2.7%

12.4

% -90.9%

.6% -90.9%

Hist. Average 127.9

-1.8% -1.9%

12.7

92.6% -80.7%

50.7% -80.7%

6.4%

Manager 7

2010- -02 26.3

-2.3%

1.0

50.6%

-39.0% 30.7%

-29.5% 3.3%

2010-07-26 26.4

-3.0%

0.9

51.6%

-36.6% 33.1%

-27.4% 4.2%

Hist. Average 35.3 -2.1%

0.9

61.3%

-49.5% 38.8%

-34.7% 4.4%

Manager 8

2010- -02

-2.2% 0.1%

0.1

-

2,267.1% -2,555.3%

6.0%

2010-07-26 63.9

-

-

0.6 3,563.6% -3,676.7%

2,942.4% -3,206.3%

7.5%

Hist. Average 95.7

-0.4% 0.3%

1.2 3,584.4% -3,651.6%

2,678.9% -2,822.3% 22.7%

DAILY PERFORMANCE ESTIMATES

Managed Account

Main Strategy

Date Daily

MTD QTD

YTD ITD

AUM ($mm) Inception Date

Manager 1

2011-01-14 0.06%

0.11% 0.11%

0.11% 1.47%

2010-04-01

Manager 2

2011-01-14 -0.01% 0.64%

0.64% 0.64%

11.59%

2010-01-01

Manager 3

Merger Arbitrage

2011-01-14 0.03%

22.10%

2009-06-01

Manager 4

Closed-

2011-01-14 -0.27%

0.43% 0.43%

0.43% 15.23%

59.3 2009- -01

Manager 5

Asset-

2011-01-14 -0.05%

1.15% 1.15%

1.15%

133.1

2010-01-01

Manager 6

Asset-

2011-01-14

0.03% 0.34%

0.34% 0.34%

37.66% 132.6

2009- -01

Manager 7

2011-01-14 -0.13%

6.24%

2010-01-01

Manager

2011-01-14 -0.06%

-0.27% -0.27%

-0.27% -0.15%

41.9 2010-10-01

TOTAL: 620.0

Sharpe Ratio 1,3,4

1.35

-0.04

0.00

0.49

-0.5

0.0

0.5

1.0

1.5

Annu

aliz

ed S

harp

e

Distribution of Monthly

Returns 1

,3,6

0

2

4

6

1012

14

<5

-5 to

-4.7

5

-4.7

5 to

-4.5

-4.5

to -4

.25

-4.2

5 to

-4

-4 to

-3.7

5

-3.7

5 to

-3.

5

-3.5

to -3

.25

-3.2

5 to

-3

-3 to

-2.7

5

-2.7

5 to

-2.5

-2.5

to -2

.25

-2.2

5 to

-2

-2 to

-1.7

5

-1.7

5 to

-1.5

-1.5

to -1

.25

-1.2

5 to

-1

-1 to

-0.7

5

-0.7

5 to

-0.5

-0.5

to -0

.25

-0.2

5 to

0

0 to

0.2

5

0.25

to 0

.5

0.5

to 0

.75

0.75

to 1

1 to

1.2

5

1.25

to 1

.5

1.5

to 1

.75

1.75

to 2

2 to

2.2

5

2.25

to 2

.5

2.5

to 2

.75

2.75

to 3

3 to

3.2

5

3.25

to 3

.5

3.5

to 3

.75

3.75

to 4

4 to

4.2

5

4.25

to 4

.5

4.5

to 4

.75

4.75

to 5 >5

Mon

thly

Per

iods

Return Range (%)1,3,4,6

Outperformance 1,3,565%

65%65%

0%

20%

40%

60%

100%

% o

f Mon

ths

Up Market

73% 64%

71%

0%

20%

40%

60%

100%

% o

f Mon

ths

Down Market

72%

62%

56%

61%

0%

20%

40%

60%

% o

f Mon

ths

SSHP –

For Additional Information

Copyright © 2013 LUMA. All rights reserved

H F M W E E K . CO M 11

F U N D S E R V I C E SM A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

Over the last several years, public pension plans have embarked on a strategic and evolution-ary shift in the way that they access the hedge fund asset class. As public plans have become more comfortable with the asset class and more educated as investors, many plans have

increasingly begun to invest directly in hedge funds. Some plans have developed sophisticated in-house al-

ternative investment teams to source hedge fund managers while others rely on advisers, fund of funds managers or consultants, but the ultimate investments are increasingly being made directly into hedge funds. Th e shift to a direct hedge fund investing model along with the general increase in alternative asset allocations have sharpened the focus of plan CIOs and boards of directors on obtaining increased control, customisation, transparency, and independent oversight for their hedge fund investments. Th is article highlights how managed accounts can help plans achieve these objectives.

SEGREGATION OF ASSETS, SEPARATION OF DUTIES AND ASSET CONTROLDedicated managed accounts can be a particularly eff ective investment structure for public plans. Dedicated managed accounts are typically single investor funds established for the exclusive use of an institutional investor, such as a public plan. A managed account platform provider, like Hedge-Mark, may be hired by the plan to provide certain critical aspects of the operational infrastructure, middle offi ce services, managed account expertise and hedge fund risk monitoring and analytics to support the plan’s managed account platform.

Th e dedicated managed account structure segregates a plan’s assets from other investors, removing co-investor liquidity risk and provides the plan with direct control over its assets. Managed accounts allow for the separa-tion of operational and investment functions, thereby mitigating or eliminating certain risks of fraud as the hedge fund manager only has trading authority but not the ability to move cash or securities.

Further, since the assets are ultimately owned and controlled by the plan in a dedicated managed account structure, the hedge fund manager will have no ability to gate, suspend or side pocket the assets.

CUSTOMISATIONDedicated managed account structures are designed to provide each public plan with the fl exibility to tailor a structure to meet its specifi c needs and objectives. A managed account platform provider such as HedgeMark will work with the plan and its advisers to structure a cus-tom and eff ective solution for the plan. Th e plan has the ability to customise all aspects of their dedicated man-aged account platform including the fund structure, gov-ernance model, hedge fund managers, service providers, counterparties, fee structures and investment guidelines.

Th e plan can oft en create customised investment strategies and structures to meet its particular needs and requirements (e.g. specifi c investment guidelines, restrictions or mandates and custom fee structures). For relevant strategies, a dedicated managed account can be structured to use notional funding as a means to achiev-ing greater cash effi ciency for the plan.

Th e customisation and fl exibility aff orded to plans through dedicated managed account structures create an extensive set of possibilities in terms of tailoring specifi c solutions to achieve the goals of the plan. Th ere are highly specialised tax issues that must be considered by both US state plans as well as by non-US government sponsored plans when developing these custom structures.

FEE NEGOTIATION AND EXPENSE TRANSPARENCY AND CONTROLTh e dedicated managed account structure provides the investor with an opportunity to negotiate a discounted and/or custom fee arrangement with each hedge fund manager. A dedicated managed account is a separate ve-hicle and can oft en have key diff erences from the com-

OVER THE LAST SEVERAL YEARS, PUBLIC PENSION PLANS HAVE EMBARKED ON A STRATEGIC AND EVOLUTIONARY SHIFT IN THE WAY THEY ACCESS THE HEDGE FUND ASSET CLASS ”

JOSHUA KESTLER OF HEDGEMARK EXPLAINS WHY AN INCREASING NUMBER OF INSTITUTIONAL INVESTORS ARE LOOKING TO MANAGED ACCOUNT PLATFORMS

WHY PUBLIC PENSION PLANS ARE EMBRACING MANAGED

ACCOUNTS

Joshua Kestler,chief operating officer, joined HedgeMark in 2012. He previously spent eight years at Deutsche Bank where he was responsible for managed account operations in the US for the alternatives hedge fund managed account platform and was chief administrative officer for DB Advisors Hedge Fund Group. He also previously worked as an associate in the Investment Management Group of the law firm, Schulte Roth & Zabel LLP.

1 2 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4 F U N D S E R V I C E S

mingled benchmark fund (e.g. reduced operational bur-den on the manager, differences in investment strategy and guidelines, etc.).

The use of a dedicated managed account structure combined with a significantly sized investment by the in-vestor can and often does facilitate the ability to achieve a fee discount from the hedge fund manager.

Dedicated managed accounts also allow the plan to create custom fee structures with the hedge fund man-ager such as flat management fees, incentive fee hurdles, multi-year incentive fees and incentive fee claw-backs. These fee structures can work to better align the inter-ests of the manager with those of the plan. The dedicated managed account structure also permits the public plan to approve or select each of the fund’s service providers (fund administrator, auditors, etc.) and to negotiate spe-cific fee arrangements with such service providers.

The dedicated managed account structure can pro-vide the plan with complete expense transparency and the ability to control specific operating expenses that are charged to the funds.

INDEPENDENT VALUATION AND SERVICE PROVIDER OVERSIGHTOne of the core benefits of a managed account is the separation of duties maintained between the hedge fund manager and the platform provider. The hedge fund man-ager retains trading authority while the fund administra-tor and managed account platform provider are responsi-ble for most day-to-day operational functions.

Operational tasks, such as valuation, accounting and cash and margin movements are performed indepen-dently of the hedge fund manager by a combination of the fund administrator and managed account platform provider. The platform provider is responsible for the day-to-day oversight of service providers (including the fund administrator) and provides various independent checks, middle office services and monitoring and re-porting functions (e.g. NAV review and reconciliations, monitoring of investment guidelines, cash and margin movements, risk and performance reporting, etc.).

An example of the importance of separating the in-vestment and operational functions is the determina-tion of net asset value. In a dedicated managed account structure, the fund administrator would independently determine the net asset value of each fund using third party pricing sources and the implementation of the pric-

ing policy would be overseen by the managed account platform provider. By using a managed account, a plan can ensure that the valuation of its assets is performed independently of the hedge fund manager whose perfor-mance compensation is linked to such valuation.

GUIDELINE MONITORING AND RISK REPORTINGA dedicated managed account structure provides the public plan with the ability to directly negotiate custom, written investment guidelines with each hedge fund man-ager to, among other things, help to ensure that the port-folio is managed in accordance with the objectives and expectations of the plan and to help prevent style drift and extreme concentrations.

In addition to guideline monitoring, the managed ac-count structure generally allows the managed account platform provider to deliver the plan and/or its adviser with daily performance and risk transparency, often with underlying positions.

The frequency and granularity of this actionable data should allow the investor and/or its adviser to better and more efficiently manage their hedge fund portfolios. We believe that a public plan should select a managed ac-count provider with technology capable of providing the plan with high quality, daily (T+1) risk and performance data. Reporting capabilities should include performance attribution, stress testing, scenario modelling, and value at risk (VaR) capabilities. Managed accounts also em-power plans to monitor exposure to their counterparties, thereby allowing plans to mitigate or eliminate exposure to counterparty if a credit deterioration event occurs.

In comparison to the general opacity of most com-mingled hedge funds (which may provide some delayed monthly risk reporting, if at all), the power of daily per-formance and risk transparency cannot be underesti-mated in terms of both portfolio management and risk management for a public plan and/or its adviser.

CONCLUSIONAs summarised above, there are extensive and material benefits for public plans to adopt the use of dedicated managed accounts as their preferred structure for mak-ing hedge fund investments. The customised nature of dedicated managed accounts along with the control and transparency afforded by such structures result in a su-perior hedge fund investment model for public plans as they continue to increase allocations to hedge funds.

The use of dedicated managed accounts can provide significant comfort to plan CIOs and boards of direc-tors that they are meeting their fiduciary duties to plan beneficiaries by mitigating many of the investment and operational risks associated with hedge fund investing while increasing allocation to the asset class in an effort to achieve better risk-adjusted returns. Several public plans have either adopted the dedicated managed ac-count structure or have announced an intention to do so.

We believe that this trend will continue and, in fact, accelerate in the coming months and years as plans look to take more control over their hedge fund investments and to further align these investments with the managed account model that plans have used for their traditional investments for many years.

THE POWER OF DAILY PERFORMANCE AND RISK TRANSPARENCY CANNOT BE UNDERESTIMATED IN TERMS OF BOTH PORTFOLIO MANAGEMENT AND RISK MANAGEMENT FOR A PUBLIC PLAN AND/OR ITS ADVISER

”

1 4 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

The managed account space has generated increasing interest in the last few years. We catch up with Kristin Castellanos of Deutsche Bank to fi nd out more about the continued popularity of these fund struc-tures.

HFMWeek (HFM): What has been the impact of changing regulations on the managed account space? Kristin Castellanos (KC): What we are fi nding across the alternative investment industry as a whole is that there is a global convergence of regulation concepts throughout the world. Regulation that was impacting the United States in the form of Fatca will now be in-troduced in a similar form in the UK. Th is trend is set to expand across the globe to include many of the other leading global markets, such as China. Regulation that has started in one jurisdiction is expanding across the globe in eve-ry respect in terms of tax compli-ance, depositary and custody, and also in terms of risk monitoring and risk reporting to local juris-dictions, like Form PF or AIFMD Annex IV.

HFM: What managed account types have you seen the most in-terest in over the past year? KC: Separately managed accounts for hedge strategies have gener-ated considerable interest over the past few years and although we continue to see interest in this space, we are also seeing more and more interest in the fund of hedge fund (FoHF) managed account space as well. We are fi nding fewer new fund of fund launches and fund of fund structures set up for institutional investors. Th e managed accounts FoHFs are not fund of funds as such, but provide a multi-strategy, multi-managed ac-count for institutional investors that want an experienced FoHF manager to manage their assets, but not in the con-struct of FoHF structure.

HFM: What are the benefi ts of a FoHF managed ac-count?

KC: Although liquidity and transparency have histori-cally been the key drivers for managed account inves-tors, FoHF managed accounts are also att ractive from the point of view that investors may play either a more active role in the investment management process or can guide investment parameters to ensure that they are not over-exposed to certain asset classes. Institutional investors may also benefi t from the close relationship that a FoHF manager has with the investee funds in terms of capacity and MFN terms.

HFM: What is a hybrid managed account? Has there been increased interest in sett ing up these types of managed accounts?KC: A hybrid managed account is a managed account in-cluding both liquid and illiquid asset classes. Th e interest in hybrid managed accounts has been parallel to the inter-

est we have seen in hybrid funds. As managers are generating al-pha from increasingly broader sources, we are fi nding that many managers are looking to combine both liquid and illiquid securities in a single portfolio and may in-clude liquid securities, bank debt, fund shares, private equity and real estate investments.

As a substantial part of the portfolio tends to be illiquid, most of the hybrid funds we have seen recently are in closed ended structures, but whether closed or open-ended or managed ac-counts, hybrid funds pose cer-tain challenges that need to be addressed from an operational and administrative point of view. Most systems have been designed for the high frequency, liquid

trading characteristics of hedge funds or the illiquid nature of private equity funds but few, if any, can truly handle both.

HFM: Do you expect the interest managed accounts have generated over the last year to continue? Why or why not?KC: Th e interest in managed accounts should continue, but I think that a lot of investment managers and inves-

MOST SYSTEMS HAVE BEEN DESIGNED FOR THE HIGH FREQUENCY, LIQUID

TRADING CHARACTERISTICS OF HEDGE FUNDS OR THE

ILLIQUID NATURE OF PRIVATE EQUITY FUNDS BUT FEW CAN TRULY HANDLE BOTH

”

KRISTIN CASTELLANOS OF DEUTSCHE BANK FUND SERVICES SPEAKS TO HFMWEEK ABOUT THE GROWING MANAGED ACCOUNT SPACE

CONTINUED POPULARITY

Kristin Castellanos is head of product management for Deutsche Bank Fund Services where she is responsible for defining, building and delivering solutions for the alternative investment industry. Prior to joining Deutsche Bank in 2009, she spent over ten years working for alternative investment firms in New York.

H F M W E E K . CO M 15

F U N D S E R V I C E S

tors alike are simultaneously contemplating other issues that are impacting this space such as changes in regula-tory framework, responses to local jurisdictions and new kinds of fund structures. Although we anticipate a strong demand for managed accounts, attention also needs to be paid to these other factors that are impacting, or are set to impact, the alternative funds world. We’ll still see growth but it may be slowed slightly as managers address the in-frastructure changes or service relationships required to comply with the new regulatory world we are living in.

HFM: What are the benefits of Deutsche Bank Alter-natives managed account platform? KC: The key benefit of our managed account platform is its flexibility. Because we have invested very heavily in a technology platform that has a high degree of straight through processing of data, we are able to support the needs of even the most complex funds and managed ac-counts. All of our services are delivered on Autobahn, Deutsche Bank’s award-winning client portal, which of-fers single sign on access to the broad spectrum of prod-ucts that we offer to the alternative investment industry. Through Autobahn, we are able to offer bespoke report-ing solutions on a customised dashboard and also expose the electronic resources of Deutsche Bank to our clients in an extremely user-friendly format.

Another benefit of our platform is our efficient pro-cessing and reporting of data. As transparency is a key

driver of managed accounts, the ability to view data on a T+1 or even T+0 basis is of extreme importance. The Deutsche Bank follow-the-model allows us to process data efficiently to support the next day reporting that re-ally makes managed accounts valuable.

Also not specifically related to managed accounts, one of the key benefits of using Deutsche Bank is hav-ing an administrator which is affiliated with one of Eu-rope’s largest and strongest banks. This is increasingly important in our environment of regulatory change; as managers look to leverage service providers to keep their management expense ratios down, having a consolidated solution offers many advantages. We believe Deutsche Bank will emerge as a net winner in the years ahead as these advantages become more and more compelling.

HFM: What trends do you expect to see in the man-aged accounts space over the next few years? KC: As the barrier of entry for hedge funds is higher than it has been in the past, a trend that is likely to emerge over the next few years is managers who, instead of setting up shop on their own, will reach out to other larger invest-ment firms to leverage the operational, compliance and regulatory infrastructure. From the point of view of man-aged accounts, I would think that managed account plat-forms are probably going to become the place of choice for managers and investors alike because they can lever-age this infrastructure and heavier economies of scale.

HedgeMark Dedicated Managed Account Solutions

Customization Governance Control Transparency

Got Transparency?

H F M W E E K . CO M 17

A S S E T M A N A G E M E N TM A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4

With assets under management at all-time highs – hovering around $2,500bn – the supply side of the hedge fund industry has experienced two major trends: greater institution-alisation and concentration of new

assets with fewer, larger managers. In parallel, disinterme-diation on the demand side has brought new challenges to end investors. At a time when they assume greater fi duci-ary responsibility, they must continue to build quality in-vestment capacity to deliver on their plans for future asset growth. At Amundi, we believe the latest generation of separate managed accounts (SMA) provide investors with full potential for performance as well as all the benefi ts of-fered by non-commingled investments.

MANAGED ACCOUNTS: BETTER UNDERSTOOD AS A BY-PRODUCT OF THEIR SPONSOR’S OPERATIONSDespite many years of evolution, the SMA concept re-mains unchanged: the end user is in the driving seat, its end objectives dictate the parameters of this versatile in-vestment tool.

In their purest form, SMAs have been a mainstay of the hedge fund industry, notably in the managed futures space. Brokerage houses have long off ered to large clients value-add segregated accounts for both traditional invest-ments and early adopters of hedge funds. Original SMAs allowed for essential requirements, such as user-specifi c investment terms, independent asset control, segregation of assets and basic reporting.

Bank-operated alternative managed account platforms (MAP) were developed in the late 1990s and early 2000s,

most originally aimed at supporting their fund deriva-tives business. Th ey were designed as a way to manage the bank’s hedging and balance sheet risks, thus they added ex-pertise in risk oversight, liquidity management and other independent valuation controls.

Th e MAP business model evolved in the mid-2000s as the existing operators saw an opportunity to morph into distributors of operationally safer alternative products. In some way, they pledged to provide an institutional back-stop to some of the operational risks present at boutique hedge fund managers. Th ey also industrialised investment and operational processes, which greatly helped with cost-effi ciency, thereby reducing investor barriers to entry.

MANAGED ACCOUNTS SOLUTIONS HAVE GONE MAINSTREAMTh e concept was successfully put to the test during the 2007-08 global fi nancial crisis. MAPs signifi cantly gained traction, new players emerged and industry experts now see global assets at about $75bn. Th e platform investor landscape evolved too, as pension investors and other large allocators, such as funds of funds and private banks, rec-ognised the value of a secure and transparent approach to hedge fund investing. Th e business is now dominated by two types of sponsors: end investors for primarily internal use and distributors (sell-side MAPs).

Concurrently, institutionalisation has materially altered the hedge fund industry with most managers – emerg-ing or established – off ering much improved services in response to higher investor expectations. Th ese develop-ments, coupled with the premise for diff erentiated returns, translated into a swift recovery in asset fl ows primarily led by direct investments from disintermediated institutional investors, including through SMAs.

Investors are acutely aware of some of the new risks of going direct; as they work on how to bett er oversee those investments, they have unsurprisingly expressed an increased interest for SMA solutions. Th is trend has also been fuelled by a number of MAP operators promoting turnkey, cost-eff ective private MAP solutions. Th is seg-ment of the business is expected to see continued growth, as illustrated by new entrants off ering infrastructure-only services.

CUSTOMISATION IS BECOMING THE NEW STANDARDInvestors however expect MAPs to be more than a mere

ABOVE AND BEYOND, SMAS ARE A POWERFUL AVENUE TO DESIGN BESPOKE PORTFOLIOS AND CUSTOM INVESTMENT STRATEGIES FOR THE EXPERT HEDGE FUND ALLOCATOR ”

FRANÇOIS BOCQUERAZ AND ANTOINE CANARD OF AMUNDI TALK TO HFMWEEK ABOUT THE EVOLUTION OF SEPARATE MANAGED ACCOUNTS

NEW GENERATION MANAGED ACCOUNTS:

UNLEASHING PERFORMANCE

François Bocqueraz is managing director, global head of hedge fund manager relations & selection, member of the executive committee.Bocqueraz supervises a team of 13 analysts, who evaluate and monitor hedge fund investments. Bocqueraz joined the company in September 2005. He has 15 years of capital markets and hedge fund experience, including 13 years in a selection & due diligence role.

1 8 H F M W E E K . CO M

M A N A G E D A C C O U N T P L A T F O R M S 2 0 1 4 A S S E T M A N A G E M E N T

commodity. Th ey are pushing for customisation capabili-ties from their service providers. Th e versatility of SMAs was also the reason that originally att racted early adopters to these investment vehicles. In a way, the industry is now back to its roots: the basics of managed accounts are all about being an eff ective toolkit to respond to the investor’s specifi c parameters and preferences.

MAP operators have rightly answered to these addi-tional requirements by off ering fully fl exible structures. Key features can be modifi ed to meet investors’ demands in terms of trading counterparties and other service pro-viders, fund structures, reporting templates and medium, risk guidelines, performance and risk measurement tools/methodologies, and pricing protocols. Basically investors can choose between a variety of building blocks according to their very own specifi cations. At Amundi, in addition to our fully standardised MAP, we have launched a private fund-of-one platform specifi cally designed for our fund of funds mandates; its core operating principle is reliance on a fully open architecture. As an illustration, this platform is connected to six diff erent administrators and seven diff er-ent custodians/depositaries.

A fl exible and solid technology and infrastructure-based approach constitutes the essential backbone of any private MAP off ering. Th is being said, we believe this is still not unlocking the full potential of what managed accounts can off er to professional investors. Above and beyond, SMAs are a powerful avenue to design bespoke portfolios and custom investment strategies for the expert hedge fund allocator.

NEW GENERATION MANAGED ACCOUNTS: KEEP THE FOCUS ON INVESTMENT OBJECTIVES AND PERFORMANCEBespoke SMA solutions are an effi cient way to respond to several investment-related challenges facing large hedge fund investors. In an investment world scarce in true alpha generators, domains, such as investment strategy and re-turn optimisation, capacity management and seed invest-ing, ALM and other longer term issues such as compensa-tion and incentives, can be fully addressed in collaboration with your MAP product development manager.

First and foremost, the underlying investment man-date of any SMA may be tailored to one’s specifi c invest-ment objective. Th is ranges from creating rather simple enhanced higher octane, variable/adjustable leverage or capital-effi cient versions of existing programmes, to de-signing completely bespoke blends of a manager’s many diff erent strategies or expertise. In addition, SMAs allow for a continuous dialogue between the investor and the

manager on investment limits and portfolio characteristics to best address market changes and evolutions of investor’s requirements and objectives. Th ey may also be utilised to take advantage of specifi c investment themes, or to struc-ture co-investment opportunities.

Th rough SMAs, carve outs of select portfolios (oft en present in commingled hedge funds) allow for increased scalability for certain hedge fund managers with no or lit-tle capacity in their fl agship funds. Th e fl exibility off ered by performing or promising carve outs are a sensible way to tap additional sources of quality alpha for those inves-tors willing and nimble enough to operate without the per-ceived security presented by the old notion of benchmark fund and pari-passu management.

SMAs are oft en used to tailor the end investor’s fee and liquidity terms. Fee-sensitive institutions may fi nd value in pushing for a bett er alignment between their chosen managers’ remuneration and their own long-term fi nancial objectives, investment horizon/commitment and invested capital at play. Potential asset liability mismatches can be elegantly optimised either by adding or subtracting com-ponents from original strategies, based on the very nature of portfolio assets, special funding terms available to the end investor and market conditions.

Amundi’s MAP professionals have acquired unique experience in designing bespoke portfolios in close co-operation with their invested managers. Our investment solutions benefi t from a decade of implementation know-how, including in the area of fully regulated fund wrappers. Th is is further evidenced by our recent authorisation as an Alternative Investment Fund Manager pursuant to the Eu-ropean Union’s AIFM Directive.

Th e new generation of managed accounts does not only bring together the benefi ts and economies of scale of MAPs. Amundi’s buyside proposal is based on the premise that investors receive real value-for-money through be-spoke portfolios tailored to unique investment objectives whilst benefi tt ing from the footprint of a reputable asset manager-operator in a fully regulated environment.

OUR INVESTMENT SOLUTIONS BENEFIT FROM A DECADE OF IMPLEMENTATION KNOW-HOW, INCLUDING IN THE AREA OF FULLY REGULATED FUND WRAPPERS

”

MANAGED ACCOUNTS 1.0 User-specific investment terms Independent asset control Segregation of assets Account statements

MAP 1.0 FUND DERIVATIVES Risk oversight Liquidity enhancement & management Independent valuation

MAP 1.1 SELL SIDE Industrialization of processes Economies of scale Standardized risk measurement & reporting Standardized investor dealing

MAP 1.2 PRIVATE SOLUTIONS Operational leverage on existing MAP Potential for customization No commingled investment risk

Reputable Value-for-Money

Bespoke Regulated

TECHNOLOGY

EXPE

RTIS

E

AMUNDI MANAGED ACCOUNT PLATFORM

FROM MANAGED ACCOUNTS 1.0 TO THE NEWGEN MAP

Antoine Canard is vice president, product development - managed account platform.Canard focuses on structuring AIFMD-compliant funds and on-boarding third-party hedge funds on the Amundi managed account platform. He has eight years of industry experience in investor and product-related roles at Amundi. Canard is a graduate of Institut d’Etudes Politiques de Paris (Sciences Po).

This advertisement has been approved and/or communicated by Deutsche Bank AG. Without limitation this advertisement does not constitute an offer or a recommendation to enter into any transaction neither does it constitute the offer of securities. The offer of any services and/or securities in any jurisdiction by Deutsche Bank AG or by its subsidiaries and/or affiliates will be made in accordance with appropriate local legislation and regulation. Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervisory Authority) and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of Deutsche Bank AG’s authorisation and regulation by the Financial Conduct Authority are available on request. Investments are subject to investment risk, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time. © Copyright Deutsche Bank 2014.

Deutsche Bank Global Transaction Banking

AIFMD is here. Deutsche Bank is ready. We provide depositary services, award-winning fund administration, globally aligned investor services, multi-currency cash management and

more than 30 markets around the world – whether you choose to use us as your prime broker or not.

As a truly universal bank, renowned for innovation,

components and capabilities they might need.

Our commitment to you is simple: we will minimise

way to comply with AIFMD.

For more information, visit db.com/gtb or email GTB.Marketing@db.com

Top Rated OverallGlobal Custodian Private Equity Fund Administration Survey 2013

European Hedge Fund Administrator of the YearFunds Europe Awards 2013

Most Innovative AdministratorHFMWeek Americas HedgeFund Services Awards 2013

(1) AIFMD: Alternative Investment Fund Managers Directive which came into force on July 22, 2013. Aims to create a comprehensive regulatory framework for hedge fund managers

that reconciles investors’ protection (mandatory segregation of administration/custodian and valuation duties from fund management, new prescriptive rules aiming to prevent

excessive risk taking, such as on remuneration), while preserving the necessary fl exibility in the “performance engines” with no prescriptive constraints imposed on investment

guidelines, type of instruments used, level of leverage. Also, the AIF passport will allow to market alternative products within the EU for professionals investors, outside of the private

placement regime. There is no capital or performance guarantee. This publication cannot be reproduced or passed onto third parties, in whole or in part, without our permission.

Published by Amundi Alternative Investments, SAS - Simplifi ed Joint Stock Company with capital of €4,000,000 - Registered offi ce: 90, boulevard Pasteur, 75730 Paris Cedex 15 -

Portfolio Management Company registered with the ‘AMF’ (French Financial Markets Authority) under no. GP 01.044. Paris Register of Companies no. 439 614 553. This publication

is intended for professional investors only. The information contained in this publication is not intended to be distributed or used by any person or entity in a country or court where

such distribution or use would be contrary to legal or regulatory provisions or which would compel Amundi Alternative Investments, SAS or its affi liated companies, to comply

with the registration obligations of the said countries. The data and information contained in this publication are supplied for information purposes only. Nothing in this publication

constitutes an offer or request by any member of the Amundi Alternative Investments group, to provide advice or an investment service or to buy or sell fi nancial instruments.

The information contained in this publication is based on sources which we consider to be reliable, but we cannot guarantee that it is accurate, comprehensive, valid or relevant.

Photo credit: Corbis. |

AIFM Licensed

Earningyour confi dence by seeking absolute returns in a controlled environment.

Alternative InvestmentsPioneering in alternative products since 1992, Amundi AI is amongst the fi rst asset managers to get the AIFM license for its entire offering (Managed Account Platform and Funds of Hedge Funds).

Now, access “the best of both worlds”: performance and control.(1)

absolute.amundi.com