Managed Accounts 2018 New ambitions, new solutions INCP-020_pub-INNOCAP_v01r2_203x273mm_bleed.pdf 3 2018-05-15 10:50 AM June 2018 Sponsors SOCIETE GENERALE PRIME SERVICES PROVIDING CROSS ASSET SOLUTIONS IN EXECUTION, CLEARING AND FINANCING ACROSS EQUITIES, FIXED INCOME, FOREIGN EXCHANGE INNOCAP.COMHedgeMark AND COMMODITIES VIA PHYSICAL OR SYNTHETIC INSTRUMENTS. CIB.SOCIETEGENERALE.COM/PRIMESERVICES THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT DIRECTED AT RETAIL CLIENTS. Societe Generale is a French credit institution (bank) authorised and supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) (the French Prudential Control and Resolution Authority) and regulated by the Autorité des marchés financiers (the French financial markets regulator) (AMF). Societe Generale, London Branch is authorised by the ECB, the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (FCA) and the PRA. Details about the extent of our authorisation, supervision and regulation by the above mentioned authorities are available from us on request. © GettyImages - FRED & FARID PARIS SOGE_METI_CIB_1705_EUROHEDGE_205x272_PLANETES_GB.indd 1 14/04/2017 15:29 NEW CLIENTS. NEW OFFICES. SAME TEAM. Managed Account Platform INCP-020_pub-INNOCAP_v01r2_203x273mm_bleed.pdf 3 2018-05-15 10:50 AM INNOCAP.COM NEW CLIENTS. NEW OFFICES. SAME TEAM. Managed Account Platform SPECIAL REPORT/MANAGED ACCOUNTS New ambitions, new solutions EDITORIAL/SUBSCRIPTIONS 5 Changing the rules of engagement This report was researched and written by Philip Moore 5 The shift to managed accounts Editor Nick Evans [email protected] 6 Operational benefits Head of content, HFM Global Paul McMillan [email protected] 6 A trend that is here to stay Data and research manager Siobhán Hallissey [email protected] 8 If you can’t beat them… Subscription sales (including database) and reprints Europe Joel Dudden +44 (0) 207 832 6691 [email protected] 9 Are some strategies less suitable than others? Asia Matthew Jarvis, +852 3602 3171 [email protected] 9 Taking back control US Charles Morris +44 (0) 207 832 6692 Daily transparency [email protected] 10 Advertising and sponsorship UK/US James Barfield The value of transparent data [email protected] 11 Production Michael Hunt 11 The importance of digesting and aggregating data Chief executive Charlie Kerr 14 Every basis point counts HFM Global supports a global community of hedge fund professionals by providing intelligence and insight across a wide range of news, research, data, analysis, performance, events, contacts, networking 15 Quantifying the cost benefits opportunities and online resources. Our products, networks and memberships span HFM Week, HFM Technology, HFM Compliance, HFM InvestHedge, AsiaHedge, EuroHedge, Absolute Return, 17 A lifeline for emerging managers Alt Credit Intelligence and CTA Intelligence. 18 Pension funds become more receptive 20 The diversification of institutional demand PUBLISHED BY 21 Room for smaller investors? Pageant Media, One London Wall, London, EC2Y 5EA, UK Telephone +44 (0)20 7832 6500 Website hfm.global 22 The rapid growth of MAPs Disclaimer: This publication is for information purposes only. It is not investment advice and any mention of a fund is in no way an offer to sell or a solicitation to buy 26 Ripe for consolidation? the fund. Any information in this publication should not be the basis for an investment decision. Pageant Media does not guarantee and takes no responsibility for the accuracy of the information or the statistics contained in this document. Subscribers should not 28 HFM InvestHedge MAP survey circulate this publication to members of the public, as sales of the products mentioned may not be eligible or suitable for general sale in some countries. Copyright in this document is owned by Pageant Media and any unauthorised copying, distribution, 30 Sponsor profiles selling or lending of this document is prohibited. All rights reserved. hfm.global 3 MANAGED ACCOUNTS/2018 The rise and rise of managed accounts Among all the big changes in the alternative asset management industry since the global financial crisis, one of the most significant has been the growth of managed accounts. Once disparaged as a mechanism suitable principally for lesser-quality managers and investors, managed accounts – and, in particular, managed account platforms – have come in recent years to occupy centre stage in the fast-evolving relationship between allocators, underlying managers and intermediaries. In terms of transparency, liquidity, cost-effectiveness, customisation, flexibility and control, managed accounts present numerous benefits to end investors and multi-managers alike – whilst there are now very few top-tier management firms that will not accept managed accounts. As Philip Moore outlines in this special HFM report, managed accounts have gone from being the poor relation of the co-mingled fund to becoming the preferred investing route for allocators across the spectrum of the alternatives world – offering the ‘Holy Grail’ of better returns at cheaper cost re hedge funds out of the dog- of about $40bn in 2018. We also forecast that house? Yes and no. gross allocations will be about $330bn and According to a recent survey that most channels will be net allocators.” published by BNY Mellon, alter- The improved performance of hedge funds Anative assets under management reached a has, of course, worked wonders in helping record $7.7trn in 2017. That record is unlikely investors to forgive the industry for many of to stand for long. More than half (53%) of the shortcomings that were exposed during respondents to the BNY Mellon survey expect the global financial crisis. their allocations to increase over the next 12 A study released in February by Preqin months, up from 39% in the 2016 survey. and the Alternative Investment Management Perhaps more significant, for the longer Association (Aima) found that hedge funds term rehabilitation of the alternative invest- had produced “more consistent and steadier ments industry, 59% of respondents to the returns than equities or bonds over both the survey indicated that they now have more short and the long term”. The same study confidence in hedge funds, while only 5% said found that about 32% of all hedge funds pro- they are now more negative. duced double-digit returns in 2017, up from Other surveys paint an equally upbeat about 23% the previous year. picture of likely future demand. In its latest survey of the global hedge fund industry, CHANGING THE RULES OF Barclays’ Capital Solutions team advises that ENGAGEMENT 49% of investors plan to boost their net While investors may have forgiven the hedge allocations to hedge funds in 2018. “Given the fund industry for some of the failings of the positive backdrop,” says Barclays, “we expect past, they certainly have not forgotten them. the hedge fund industry to garner net inflows The result is that while institutional alloca- 4 www.hfm.global 2018/MANAGED ACCOUNTS tions to alternative products are on the rise, for a projected saving of $240m over four the rules of engagement between hedge fund years. That figure exceeds Folwell’s pledge to managers and investors have changed. cut fees by $100m over four years.” Institutions are increasingly insistent that The Massachusetts Pension Reserves these rising allocations are made on their Investment Management Board (MassPRIM) terms, rather than on those of managers who has also been explicit about its commitment were used to calling most of the shots prior to to reducing the fees paid by the Pension the financial crisis. As BNY Mellon puts it in its Reserves Investment Trust (PRIT), which had latest survey, “as alternative allocations have a net asset value of $71.6bn at the end of risen, so have investors’ voices”. March 2018. “We value a basis point of cost The increasingly vocal influence of institu- reduction more than a basis point of return,” tional investors in the market for alternative said chief investment officer Michael Trotsky products has been sending shockwaves in his February 2018 update on the fund’s through the hedge fund industry for several performance. “Why? We can count on cost years. As well as pushing many managers into savings every year, but nobody ever really adopting a more open and communicative knows what the markets will deliver.” stance towards their investors, it is forcing most to compromise on their fee structures in THE SHIFT TO MANAGED ACCOUNTS a way that would have been unimaginable a One of the most discernible by-products of decade or so ago. the increasingly vocal institutional support for According to industry data, average man- hedge funds has been the sharp increase in agement fees were 1.4% in the first quarter assets migrating towards managed accounts, of 2017, with performance fees slipping to an and more specifically towards managed average of 17.1%. 82% of respondents to the account platforms (MAPs), which saw their as- BNY Mellon survey, meanwhile, expect fees sets rise from $41bn in March 2010 to $112bn to fall further over the next 12-18 months. in March 2018. 1.4 plus 17.1 may not trip off the tongue quite This explosive growth reflects the fact that as alliteratively as 2 and 20, but hedge fund hand-in-hand with demanding more bang managers had better get used to the new for their buck, deep-pocketed and influential reality, which is that fees are heading inexo- institutional investors have also insisted on rably lower. TLC, the catchy acronym for transparency, Nowhere has the institutional clamour for liquidity and control. reduced fees across their investments been In a nutshell, managed accounts achieve more deafening than among US public pen- this by effectively relieving managers of sion funds. State retirement schemes in par- responsibility for all the day-to-day functions ticular have become increasingly preoccupied of managing a fund other than the invest- by management fees against the backdrop of ment or trading decisions that generate an environment of low inflation, low yields, the alpha which is their raison d’être.