Amit Mehta says institutions should opt for hands-on professional management
Recent scandals, such as the Madoff disaster, have burnt investors over recent years, and the recession, which has led to a strong distrust of the banking sector, are among the main drivers behind the trend of investors opting for managed accounts instead of traditional hedge funds.
The traditional investment vehicle of choice for institutions, family offices or high net worth clients to gain exposure to solid performing traders has usually been via hedge funds. Many of the top tier managers want all their investors to be fund investors with the same and generally rich terms.
Five years ago – given the flood of institutional assets going into hedge funds – it would have been considered ludicrous that greater transparency would be required.
However, the scene has changed dramatically since. The past few years of extreme intraday volatility across most asset classes, including foreign exchange, as well as the broad increased uncertainty, will be remembered throughout financial history. Investors have found their assets reduced in size, being frozen or completely disappearing in certain cases.
As a result, a new breed of savvy client, across the investor spectrum has evolved, which will start to bring change to a number of fund managers’ business models. Those that do not move with the times will lose market share.
This new breed of investor wants transparency, liquidity and control in their investments. Quarterly and annual reports do not cut it anymore. An investor wants to be able to view their underlying investments in real time. Clients, quite rightly want to know their investments provide daily liquidity so they have quick and easy access to capital, as well as risk control. Ultimately, investors want to know their investments are secure and they have realised now that the best way for this is via managed accounts.
The key feature of managed accounts is that underlying investment assets are held personally by the investor. The investment account is then looked after by a hired professional manager. Unlike mutual funds, managed accounts are personalised investment portfolios that offer full transparency, liquidity and operational control.
The increase of interest in managed account structures as a route to exposure for top traders is a product of the recent financial crisis and harks back to a more simple, transparent investment structure. Billions of dollars – plenty of which is in institutional forex – is already being managed this way, and the amount will increase over the coming weeks and months.
We have seen several large institutional investors make public statements that they would be investing in managed accounts through large platforms, rather than directly into funds. And we have seen a growing number of investment platforms that continue to evaluate and promote managed accounts. Lyxor Asset Management, for example, has over ten years continued to grow and win awards as a leading platform provider for managed accounts. It now has about €95bn under management.
Managed accounts help take investment strategies further into the mainstream, where their benefits can give substantial upside, while protecting against risk in a domestic regulated environment. Clients are no longer in the dark.
Amit Mehta is a founding partner of Anello Asset Management.