By James Perry & Mark Weir/Maples Group
With the dawn of the global financial crisis of 2008 now over a decade behind us, it is important to look back and understand the evolution of institutional investment structures that has taken place. Manager-led products of the past are now often ignored in favor of more bespoke investment structures and customised, investor-driven solutions.
During the financial crisis, as redemption pressures led to the imposition of gating provisions and compromised liquidity terms, many institutional investors reconsidered their traditional approach of investing in commingled funds. As a result, there has been a surge in alternative structures, including managed accounts and the fund-of-one, that have provided investors with a greater degree of oversight and flexibility not typically found with more traditional commingled funds.
According to a recent AIMA survey[1] of 118 hedge fund managers globally representing approximately US$440 billion in assets under management, 53 percent of respondents agreed that offering customised solutions to asset owners is an important factor in aligning their interests with the investors. This is a significant increase from 2016 where only 14 percent of managers indicated the importance of customisation and an indication that this will continue to be a top priority as investment structures further evolve.
Managed Accounts
Historically, managed accounts have been the preferred structure for large, sophisticated institutional investors to create investment vehicles for the sole benefit of their participants or clients. This has enabled greater control of expenses, provides greater insight into the underlying portfolio of investments and overall performance, allows access to their own portfolio’s liquidity without impact from fund liquidity provisions, and mitigates risks from other investors.
An off-balance sheet managed account, in particular, can be a prudent structuring option and offers a number of benefits over on-balance sheet managed accounts that may lack overall structure and governance and pose greater risks. These off-balance sheet managed account structures ensure that there is a blocker entity which mitigates against contagion risk including the risk of excess losses through the use of derivatives. In addition, an off-balance sheet managed account often benefits from a higher degree of oversight with regard to its operations. It also typically includes independence of net asset value calculations, investment valuation verification, independent management fee and performance calculations, as well as expense processing and monitoring of expenses for compliance with the investment management agreement.
Overall assets among the top nine managed account platform providers stood at US$85 billion as of October 2019, a 13 percent increase compared to US$75 billion at the start of the year.[2] This growth is expected to continue as there has been increasing interest from a number of large allocators looking to build their own managed accounts platforms. However, there are a number of considerations that institutional investors should be aware of before building their own platforms.
With the increased flexibility that a managed account affords there comes significant additional operational requirements and burden for investors. Frequently, assets are held in the name of the investor which means that the investor may be directly responsible for all losses incurred on an investment. Additionally, because the institutional investor owns and controls the full infrastructure, they are responsible for ensuring smooth operations and contracting with the various service providers needed, a task that is often quite onerous and requires significant additional coordination and support.
Those who create managed account platforms directly often end up building out additional internal capabilities to oversee their platform’s operations. Institutions who do not have sufficient internal resources to manage the contracting and legal requirements will often hire a full service platform provider who will coordinate all aspects of the managed account platform. Larger institutions with greater internal due diligence and contracting capabilities similarly will often choose to work with a specialist service provider who can provide platform specific services such as legal entity structuring, operational set-up, service provider coordination and oversight, manager on-boarding, day-to-day operational coordination, daily risk and performance reporting as well as guideline monitoring.
The Fund-of-One Alternative
Increasingly, many investors who want to replicate the features of managed accounts without the operational and contracting burden have turned their attention to the more simplified fund-of-one structure. The fund-of-one is typically discussed in a similar context as managed accounts structures given that it is set-up to cater for the specific needs of an investor. However, the key difference lies in the fact that the fund-of-one structure is set up specifically for the investor with the underlying assets owned by the fund.
With the fund-of-one essentially being a single investor fund, the investment mandate and overall investment decision making process can be customised to specific requirements. In addition, these investment parameters can be incorporated into the governing terms which can be beneficial. In addition, the fund-of-one affords investors greater transparency and oversight with investors specifically able to obtain position-level information and more frequent and more detailed reporting. Investors may also have greater insight with respect to valuations and the calculation of fees.
The fund-of-one structure also offers an attractive combination of potentially improved performance along with reduced fees since they can be negotiated between the investment manager and investors on a standalone basis. Furthermore, the fund-of-one truly fosters better alignment, collaboration and consultation between investors and managers, ensuring there is a constructive dialogue taking place that clearly outlines the goals and objectives of the engagement to determine what solutions are most appropriate. Perhaps most importantly, the fund-of-one allows investors to capture almost all of the benefits of the managed account structure, including transparency, liquidity, increased control, and enhanced risk management. The institutional investor is still able to customise the mandate and segregate its assets from other investors without the associated operational burden and contracting responsibility.
Outsourced Support: The Maples Group Solution
The Maples Group combines industry leading capabilities in legal and structuring, fiduciary services, operations, reporting and technology to provide highly customised, cost-efficient solutions to help both managers and investors looking to establish managed account platforms or fund-of-one structures. Given the increase of investor-driven structures and the expectation that this trend will continue, the Maples Group is uniquely positioned to support institutional investors in establishing the optimal operational infrastructure.
Please visit the Maples Group’s website for more insights into the evolution of institutional investment structures.
Sources
[1] “In Harmony.” The
Alternative Investment Management Association. 2019.
[2] “Top Managed
Account Platforms 2019.” HFMWeek. 9 October 2019.
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