Press Releases - 2009
GlobeOp hosts Insights for Investors managed accounts seminar - speech highlights
28 Sep 2009
Conference draws industry attendees representing $260 billion in assets under management (AUM)
NEW YORK, LONDON – 28 September 2009 -- The challenges and best practices of managed account relationships drew a capacity audience of hedge fund investors and managers, representing approximately $260 billion in assets under management (AUM), to a recent GlobeOp-hosted seminar in New York City.
A panel of established experts from a cross-section of the industry addressed the key considerations of manager selection, legal requirements, middle-back office services, controls and monitoring.
Speakers representing Lighthouse Investment Partners, Lyxor Asset Management, Waterstone Capital Management, Bracewell & Giuliani, Newedge Group and GlobeOp offered the following insights:
Sean McGould, president and co-chief
investment officer, Lighthouse Partners
“We transitioned to managed accounts over the last five years
for the added benefits of transparency, flexibility, and control.
Full transparency allows for a deeper focus than has traditionally
been the case, especially during the manager selection process. For
prospective managers, there are three primary considerations.
First, does the manager offer real diversification or do they
merely compound existing risks? This can only be accurately
measured by layering a prospect’s daily position level data
into the portfolio and conducting a deep statistical analysis.
Second, is the portfolio highly correlated to the most widely held
names or other dominant themes within the hedge fund universe?
Having the ability to confirm the uniqueness of a prospect’s
portfolio is of great benefit and increases the level of overall
diversification. Finally, if the manager meets these tests, is
there a willingness to commit the resources necessary to make a
managed account feasible and the onboarding process as seamless as
possible? …Flexibility is key to remaining opportunistic and
taking advantage of market dislocations. …The benefit of
control speaks for itself after a year like 2008.
Nathanaël Benzaken, managing director,
Lyxor Asset Management
“The two main risks for
investors are market risk and operations risk – one to manage
and the other to mitigate… The challenge with transparency
is how to exploit it. To understand risk, investors need robust
software, experienced risk managers, and an appropriate risk
methodology. Only scenario and stress test models can help assess
tail risk in dislocated markets. VaR is not appropriate, unless
perhaps for manager-level portfolio construction… The
managed account’s segregation facilitates operational risk
management. This is the most important risk to eliminate because it
creates a short put equivalent position for investors –
it’s the ‘dark side’…. All managed
accounts and platforms are not equal. Some are
‘Madoff-able;’ some are ‘Amaranth-able.’
For full transparency and to identify risk and/or style drift
early, in-depth and regular due diligence should be done on the
underlying managers, the platform structure and infrastructure
– at inception and throughout the life of the
relationships.
Risk monitoring is nothing, what really matters is risk management.
The goal is not to second- guess or intervene in portfolio
management, but to understand and take clear action when it’s
necessary – for instance in the case of mitigating
counterparty risk or when confidence in the manager is lost (e.g.
breach of mandate).”
Martin Kalish, chief operating officer, chief
financial officer, Waterstone Capital Management
“Managed accounts are not for everyone - does it fit your
business plan? The manager seeks a long-term investor; the investor
requires assurance of the manager’s experience in running a
managed account. Consider whether the investor will understand and
be responsible for the portfolio information they receive -- is
more support time needed than for other fund investors? …The
mandate is also key – its definitions can significantly
impact asset allocation, concentrations, leverage, liquidity,
operations and risk management compared to the flagship fund.
Cost and resources also matter. Managed accounts are about data
management. Operational systems are needed to create reporting
transparency. Is there sufficient operational staff for trade
allocation, valuation and settlement, portfolio accounting and
programming? …It’s very difficult to run multiple
funds without investing in technology. Trade allocations should be
automated to mitigate manual intervention. ... Investors also need
resources to execute managed accounts - it requires two-three
months, including the key challenges of the legal aspects and
establishing prime broker accounts.”
John Brunjes, partner, Bracewell &
Giuliani
“The structure and terms an investor
prefers in the managed account involve a fully negotiated
process. For the investment advisor, a managed account is a
separate client under the Investment Advisors act. At the level
of 15 clients, the advisor must become SEC-registered and
operate in a registered environment – a new challenge for
some. For the investor, the arrangement gives power of attorney
to the manager to trade the account, subject to restrictions the
investor defines. It is a fee-for-service arrangement as opposed
to the two-and-twenty structure traditional in pooled capital.
Many investors, in consultation with their managers, create a
special purpose vehicle, usually a limited liability company. To
avoid project execution risk, investors should ensure the
manager has already strategically decided to undertake managed
account arrangements and is prepared for what it entails.
The mandate or operating agreement defines the type of trading
authorizations and restrictions governing the manager, including
sector, concentrations or company specifics. As the direct owner of
the securities, the investor also assumes liability and compliance
responsibilities.
Investors increasingly specify independent administrators to
provide checks and balances on managers, including asset and
portfolio valuation, daily position and risk reporting, etc. The
registered environment also stipulates administrative,
infrastructure and reporting requirements. Independent involvement
in providing transparency, checks and balances to various managed
account components can offer more comfort to investors, which is
why these vehicles are increasingly attractive.”
Cary Goldstein, associate director, Newedge
USA, Prime Brokerage Group
“A managed account
platform will have more than one hedge fund manager trading for
multiple vehicles, multiple prime broker relationships and a single
administrator across all accounts. From a trading perspective, the
most significant implication for each fund manager is the need for
a trade allocation process to split trades appropriately between
the managed accounts and the flagship fund. For liquid, listed
instruments, this is fairly straight-forward. But it can be more
complex for OTC and illiquid instruments - distinct trades may be
needed for each managed account and flagship fund, with good
monitoring to mitigate tracking errors… In a managed
account, investors view the ability to control of the amount of
leverage utilized to be an advantage.
Managed account middle- and back-office requirements impact the
investor, fund manager and prime broker as each managed account
requires its own daily position, trade and cash
reconciliations…. The investor may also be involved in
selecting prime brokers and counterparty risk
management.”
Vernon Barback, president, chief operating
officer, GlobeOp Financial
Services
“Administration for managed accounts
should focus on what the investor wants and needs. Best practice
requires a very deep level of service. Helping the investor
manage and mitigate risk across all portfolios is key; reducing
overall operational risk is the greatest value-add. The investor
should approach the administrator in a demanding and thoughtful
manner, as a partner who helps to mitigate operational risks and
provide transparency so the investor can ensure that the manager
is adhering to the agreed investment principles.
Due diligence is not a “tick the box” exercise. Rather,
it needs to be an ongoing and in-depth process. There are seven
administration areas where an investor should conduct deep due
diligence. Is technology a source of innovation and target of
continuous investment? Are processes subject to a control
environment and is realtime transparency accessible to investors
and administrator management? Is domain experience and scale being
developed in the human resource pool? Visit off-shore teams and
operations to ensure they are integral and adding value to
operations. Ask for a personal presentation of the SAS 70 to ensure
it is a single document whose scope covers all services &
controls the managed account requires, in all offices.
Reconciliations should be run daily, with breaks corrected with the
manager, and root causes should be investigated to prevent
repetition. As the devil is in the detail of the security master,
verify that customized risk reports can be run by the
administration organization keeping the managed account’s
books & records.”
All comments are quoted with the kind permission of the speakers.
The purpose of the seminar and the comments above was to provide general information only to a limited number of sophisticated investors. It was not intended to provide professional or other advice. The parties providing comments above do not warrant that the information contained in any of the comments is accurate or complete. When considering whether to purchase any financial instrument, no reliance should be placed on the information in the above comments.
—ends—
Notes to Editors— About GlobeOp Financial Services
GlobeOp Financial Services (LSE:GO.) is a leading, independent financial technology specialist providing automated, integrated middle- and back-office, administration and risk reporting services to hedge funds and asset management firms-including banks, insurance companies, mutual & pension funds and proprietary traders. Clients trading a wide range of asset classes and derivatives outsource to GlobeOp to reduce technology investments and operational risks, and to focus resources on asset generation and portfolio management. Established in 2000, GlobeOp serves over 180 clients worldwide, representing $83 billion in assets under administration (AuA).With headquarters in London and New York, GlobeOp employs more than 1,500 people on three continents; offices are also located in Dublin, Ireland; George Town, Cayman Islands; Harrison and Yorktown Heights, NY and Hartford, CT, U.S.A.; and Mumbai (Bombay), India. Further information: www.globeop.com
© 2009 - GlobeOp Financial Services LLC (GlobeOp). All rights reserved. GlobeOp and the GlobeOp "G" are trade and service marks of GlobeOp and its affiliates
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