It seems these days that the fashion accessory to possess is the Managed Account. Transparency, Liquidity and Control are all reasons given for why this structure is the panacea to the issues that have caused woe in recent times. Managed Accounts unquestionably have a place in an investors armoury and are extremely useful but they are not by any means the answer to all situations.
Managed Accounts have been around for a long time – they were often used by Private Wealth Managers and Funds of Funds to manage the limited capacity that was held by them in hard to access managers – remember those days? But they went out of fashion for a couple of reasons and I think it is worth revisiting those reasons if for nothing else but to keep a balanced perspective.
For a start ask any Chief Operating Officer of a family of funds what their nightmares comprise and fund allocation and the associated costs whether of trading or compliance will be somewhere near the top of that list and this is before the costs of the Managed Account itself are taken into account. Pooled structures are quite simple to manage – Managed Accounts are relatively complicated because you can no longer ignore tracking error, special investment restrictions, reporting requirements and possibly multiple outsourced service providers all with their uniquely tweaked ways of dealing with things.
Manager success was another reason why Managed Accounts seemed to suffer a quiet demise – as managers developed track records – they started to consolidate their businesses into single pooled structures which were simpler to manage operationally.
And then there was cost – legal, audit, compliance, trading and supervisory control.
But a buyers market means that Managed Accounts are back in fashion at least until it converts to a sellers market again.
Liquidity through a Managed Account is often misconstrued as it is actually investment risk being managed as liquidity risk. Managed Accounts do not make investment strategies more liquid – therefore the risks when capital is recalled are in fact no different to those in an ordinary pooled investment structure – but it is in relation to contamination risk and control over realisations where a Managed Account might offer advantages when liquidity becomes an issue.
Transparency can be a double edged sword. Beware holding information that you do nothing with………… Transparency brings with it responsibility – for monitoring, for identifying early warning signs of problems and proper management. Transparency brings with it an implicit requirement to act upon the information.
Control too comes in different guises and does not eliminate the need to do proper due diligence on counterparties and service providers. In a Managed Account they become the responsibility of the investor.
If the costs are manageable then unquestionably a sophisticated investor will reap the benefits of a Managed Account but it will not eliminate fraud, nor investment style issues unless the tools of transparency and control are used properly and even these will never eliminate investment risk and associated liquidity and valuation issues. Capacity in popular managers can also make Managed Accounts extremely desirable as hedge fund investing picks up again.
Choosing the right track for an appropriate investment structure requires careful consideration and is still as difficult as it ever was.
©Jaitly LLP