Managed Accounts Driving the revolution in transparency

April 2016

Main sponsor Associate sponsors SPECIAL REPORT/MANAGED ACCOUNTS

EDITORIAL/SUBSCRIPTIONS 04 07 This report was researched and written by Philip Moore, special reports writer for Fund Intelligence. Alternative TLC Receding scepticism

Editor Nick Evans [email protected] Managing director David Antin [email protected] Commercial director Robert Dunn [email protected] 08 10 Advertising and sponsorship/Europe Ian Sanderson [email protected] Pension funds Rising institutional Advertising and sponsorship/US James Barfield fuel change demand [email protected] Data and research manager Damian Alexander [email protected] Data and research Siobhán Hallissey Production Michael Hunt 13 14

Subscription sales UK (and for reprints) Future growth The regulatory UK Ruta Balasaityte potential driver [email protected] Asia/Europe Joel Dudden [email protected] US Augusta McKie [email protected] 15 16

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2 hedgefundintelligence.com 2016/MANAGED ACCOUNTS Institutional investors demand greater control and customisation

Managed accounts take centre stage for hedge fund allocation

ince the global financial crisis managed accounts IN TERMS OF COST AND have gone from being a relative sideshow in the FLEXIBILITY, MANAGED hedge fund universe – and historically a rather un- ACCOUNTS OFFER BENEFITS popular one with most asset managers – to being TO THE INVESTOR THAT one of the foremost drivers of change and growth COMMINGLED FUNDS OFTEN CANNOT MATCH Sacross the industry. Fuelled by growing institutional demand for greater control and customisation over their investments, managed accounts have taken centre stage in the re-ordering of the way in which major investors allocate to hedge funds – and in the liquidity and transparency that they require. In terms of cost and flexibility, managed accounts offer bene- fits to the investor that commingled funds often cannot match. And there are few managers these days that remain unwilling to offer separately managed accounts, either to investors directly or via the various managed account platforms that are growing rapidly as a result of this sea change in hedge fund investment trends. In this special Hedge Fund Intelligence report, Philip Moore looks at the transformation of the managed account business in recent years, the potential for future growth and innovation to come and the ways in which managed accounts are reshap- ing the whole landscape of hedge fund investing for investors, managers and intermediaries alike.

Nick Evans, editor, Hedge Fund Intelligence

hedgefundintelligence.com 3 MANAGED ACCOUNTS/2016 Managed accounts: driving the transparency revolution

s recently as 2012, Keith Haydon “Managed accounts link asset owners’ capital – the chief investment officer at to asset managers’ investment strategies Man FRM, the London-based fund while separating back and middle office, of hedge funds specialist which governance, control and oversight respon- Awas set up in 1991 and became a division of sibilities from trading activities,” it explains. the in 2012 – was sceptical about “By combining asset managers’ strategies and managed accounts. traditional service providers within an inde- Today he is a firm believer – which is just pendent investment vehicle (managed account), as well, given that Man FRM now has over $8 asset owners obtain an enhanced and inde- billion on the managed account platform that pendently governed investment framework.” it originally set up for its internal use. The firm adds: “The strength of a managed The financial firepower that the Man FRM account resides in the clear separation of group has put into developing its platform responsibilities between the parties involved. certainly helped to accelerate Haydon’s epiph- The independent nature of the managed any. But there are plenty of other very good account seeks to ensure that conflicts of reasons explaining why Haydon has been per- interest are mitigated and investment activi- suaded of the merits of managed accounts, ties are governed using best practices.” and why his confidence in their continued growth is shared across large swathes of the ALTERNATIVE TLC management industry. This is very different from the way in which The growing popularity of managed investors traditionally accessed hedge accounts is attributed chiefly to the protec- fund strategies, which was through direct tion of investors’ assets that they provide. exposure to commingled funds, or through Definitions and types of managed accounts indirect participation via funds of hedge – also known as separately managed funds. Either way, they were exposed to the accounts – differ. But in a nutshell, in a same panoply of dangers, which ranged from managed account the underlying assets are outright fraud to the risks associated with owned by the investor and registered in the opacity and illiquidity that came to the fore investor’s name. in the global financial crisis. This means that the hedge fund manager’s “Firms running large multi-manager role is concentrated on day-to-day invest- portfolios under the old model are exposed ment management decisions. Operational as- to a number of risks,” says David Saunders, pects such as the appointment of third-party co-founder and chief executive officer of the service providers – including prime brokers, hedge fund investment advisory firm K2 Advi- administrators and custodians – are the David Saunders, sors. Since 2012, K2 has been part of Franklin responsibility of the investor or, more usually, co-founder and CEO, Templeton, which had $742.6 billion in assets the managed account platform. under management as of March 31 2016. K2 Advisors Montreal-based Innocap gives a neat “One risk is that they relinquished control, summary of the benefits of this arrangement. which has been delegated to the respective

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IT BECAME ESSENTIAL THAT WE CHANGED More specifically, Haydon says that he had THE NATURE OF OUR RELATIONSHIP WITH two principal reservations about managed MANAGERS AND MOVED TO A STRUCTURE account platforms. The first arose from the WHERE WE AS A PUBLICLY LISTED FIDUCIARY promises that a number of platforms were OVERSEE THE ASSETS AND ARE ABLE TO HAVE making at the time about the transparency THEM PRICED INDEPENDENTLY EACH TRADING they could deliver for their clients. “It was all DAY, SO THAT WE CAN CREATE THE LIQUIDITY very well promising to provide tens of thou- THAT OUR CLIENTS DEMAND AND EXPECT sands of line items of data every day,” Hay- DAVID SAUNDERS, K2 ADVISORS don recalls. “My concern was that it would not be much help providing clients with all hedge fund managers,” says Ben Browning, this data if they did not have efficient ways of who heads K2’s hedge fund managed account turning this into meaningful information.” business. “This means they may not be able Haydon’s second misgiving about managed to access their capital quickly if we experi- account platforms in 2012 was a familiar ence another 2008-style event.” one among investors at the time. “I had my Browning adds: “The second risk was that doubts that the platforms could solve the they were dependent on the hedge fund problem of negative selection bias,” he says. managers, or service providers selected This is a reference to the suspicion that by the respective hedge fund manager, for the only managers that would be prepared prompt and reliable data. Say they had 12 to compromise on time-honoured practices managers in their underlying fund, and just by allowing their strategies to be accessed one of those managers failed to report their via managed account platforms were those pricing accurately and on time. In that case that were desperate to raise assets. By the multi-manager fund would have signifi- extension, it was assumed that the managers cant challenges publishing a timely NAV.” with the strongest pedigree across a range These vulnerabilities, says Saunders, of strategies would exclude themselves from potentially left funds of funds and other the platforms, which would therefore only be investors hopelessly compromised in their able to offer their clients an undistinguished fiduciary duties. “It therefore became B-list of hedge fund managers, generating essential that we changed the nature of our risk-adjusted returns to match. relationship with managers and moved to Both these reservations have been more a structure where we as a publicly listed fully addressed to Haydon’s satisfaction over fiduciary oversee the assets and are able the last three years. The second of the two to have them priced independently each has been resolved largely by the industry trading day, so that we can create the li - itself, with all but a few hedge fund managers quidity that our clients demand and expect,” now convinced that if they want to secure he says. access to new capital, they will have virtually Managed accounts, he adds, tick all these no choice but to climb aboard the managed boxes decisively, because they provide in- accounts juggernaut. vestors with TLC – the transparency, liquidity The first was a more formidable challenge, and control that were all so conspicuous by which required a substantial investment their absence during the crisis. in what Haydon describes as a complete These weren’t arguments that Haydon technological re-think across the entire Man found especially persuasive in 2012. “At FRM group. This has led to a transformation in I hadn’t historically been a big believer in the quality of data visualisation available to managed accounts,” he says. “This may have Ben Browning, head, Man FRM and to the clients using its man- been because prior to our merger with Man hedge fund managed aged account platform. we probably didn’t have the technological This was anything but a simple exercise. account business, oomph or the investment capability to make “Such is the enormous complexity of the K2 Advisors the best use of them.” range of instruments that hedge funds gener-

hedgefundintelligence.com 5 MANAGED ACCOUNTS/TITLE

INNOVATIVE ALTERNATIVE SOLUTIONSINNOVATIVE ALTERNATIVE SOLUTIONS INSTITUTIONAL wrongINSTITUTIONAL FRAMEWORK.ad size FRAMEWORK.

Man FRM (‘FRM’) is one of the largest and most experienced providers of alternative investment solutions. Working in collaboration with institutional investors world-wide for over two decades, we offer a comprehensive suite of innovative solutions, drawing on the resources of one ofMan the world’sFRM (‘FRM’) preeminent is one alternative of the largest investment and most groups. experienced FRM is focused providers on theof needalternative to help investment investors maximisesolutions. theWorking benefi tsin theycollaboration receive from with alternativeinstitutional investments. investors world-wide To accomplish for over this, two we decades, offer a rangewe offer of ahedge comprehensive fund and liquid suite ofalternative innovative investment solutions, optionsdrawing in on a thenumber resources of formats, of one includingof the world’s our state-of-the-art preeminent alternative managed investment account platform. groups. FRM is focused on the need to help investors maximise the benefi ts they receive from alternative investments. To accomplish this, we offer a range of hedge fund and liquid alternative investment options in a number of formats, including our state-of-the-art managed account platform.

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frmhedge.com Unless stated otherwise this information is communicated by Financial Risk Management Limited and Man Investments (UK) Limited which are both authorised and regulated in the UK by the Financial Conduct Authority. In Australia, communicated by Man Investments Australia Limited ABN 47 002 747 480 AFSL 240581, which is regulated by the Australian Securities & Investments Commission (ASIC). This information has been prepared without taking into account anyone’s objectives, fi nancial situation or needs. In theUnless US, distributedstated otherwise by Man this Investments, information Inc. is communicated which is authorized by Financial and regulated, Risk Management but not endorsed, Limited byand the Man US InvestmentsSecurities and (UK) Exchange Limited whichCommission, are both the authorised Financial and Industry regulated Regulatoryin the UK byAuthority the6 Financialhedgefundintelligence.com and the Conduct Securities Authority. Investor In Protection Australia, communicatedCorporation. No by portion Man Investments of this material Australia should Limited be construed ABN 47 as002 an 747 offer, 480 solicitation, AFSL 240581, or recommendation which is regulated for bythe the purchaseAustralian or Securities sale of any & .Investments All investmentsCommission involve (ASIC). risks This includinginformation the has potential been preparedfor loss of without principal. taking Alternative into account investment anyone’s strategies objectives, involve fi nancial magnifi situation ed risks, or are needs. In speculative,the US, distributed are not suitableby Man Investments,for all clients, Inc.and whichintended is authorized for experienced and regulated, and sophisticated but not endorsed, investors bywho the are US willing Securities to bear and the Exchange high economic Commission, risks of the the Financial investment. Industry Regulatory Authority and the Securities Investor Protection Corporation. No portion of this material should be construed as an offer, solicitation, or recommendation for the purchase or sale of any security. All investments involve risks including the potential for loss of principal. Alternative investment strategies involve magnifi ed risks, are speculative, are not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. 2016/MANAGED ACCOUNTS

ally deal with, it is mind-bogglingly difficult to by Haydon was widespread within the hedge aggregate quality data from a large number fund management community, with many of portfolios in such a way that risk can be of the most successful managers being un- visualised meaningfully,” Haydon explains. impressed by a concept that was perceived INNOVATIVE ALTERNATIVE In the case of Man Group, which is the to expose them to a host of undesirable world’s largest publicly-listed hedge fund elements ranging from sharing proprietary firm, the range of instruments is particularly information to compromising on fees. comprehensive, given that the four divisions Haydon’s scepticism was also shared by SOLUTIONS within the group cover such a global and the community of consultants. well-diversified set of investment options. Keith Haydon, As Towers Watson conceded in an update Man FRM itself is the opera- CIO, Man FRM published in March 2014, “historically, our tion, with $12.3 billion under management as view on managed accounts and MAPs [man- of 31 December 2015. Man GLG is the group’s aged account platforms] has been that they $30.5 billion discretionary investment divi- provided a solution for a subset of investors, INSTITUTIONAL sion, while Man AHL manages $16.5 billion in but that for the main part, the potential systematic strategies, with the fundamental disadvantages outweighed the advantag- and quantitative-driven Boston-based Man es, particularly for -term institutional Numeric arm managing some $19 billion. investors.” FRAMEWORK. “Because the group manages everything In that update, Towers Watson explained from complex credit instruments to finan- that it had recognised that managed cial futures in styles ranging from securities accounts could provide greater transpar- selection to quant and macro-based strategies, ency and scrutiny of manager activity, as we needed to build the technology that gave well as improved governance of investment management the kind of accurate insights they guidelines and enhanced liquidity. But the need to take control of this data,” says Haydon. consultant had historically worried about None of this came cheap, which is why it the additional operational burdens de- would have been impossible had Man FRM manded of hedge fund managers, foremost not had the scale implied by becoming part of among which are the requirement to split Man Group, which had close to $80 billion of trades, as well as the use of several different (AUM) at the end counterparties and – potentially – alterna- of 2015. “It has been immensely expensive, tive investment guidelines. and it is not an investment that we could It was not just adverse selection bias that have borne as an independent fund of funds had historically made Towers Watson uneasy Man FRM (‘FRM’) is one of the largest and most experienced providers of alternative investment solutions. Working in collaboration with business,” says Haydon. “It was only possible about managed accounts. It also questioned institutional investors world-wide for over two decades, we offer a comprehensive suite of innovative solutions, drawing on the resources of one because of Man Group’s size and scale.” whether long term institutional investors of the world’s preeminent alternative investment groups. FRM is focused on the need to help investors maximise the benefi ts they receive from The first incarnation of this investment IT HAS BEEN genuinely required the additional liquidity alternative investments. To accomplish this, we offer a range of hedge fund and liquid alternative investment options in a number of formats, was an operational platform named ROSA, IMMENSELY they provided. “Our concerns made us cau- including our state-of-the-art managed account platform. which provides comprehensive support EXPENSIVE, tious about whether institutional investors for risk, performance analysis and opera- AND IT IS NOT AN would receive sufficient additional benefits tional control within a secure and scalable INVESTMENT THAT to justify the costs associated with managed environment. More recently, ROSA has been WE COULD HAVE accounts or MAPs,” Towers Watson added. complemented by Man FRM’s online portal, BORNE AS AN Like Haydon, the influential community Clarus, which allows the group to share INDEPENDENT FUND of pension fund consultants has now largely investment insights with clients and provide OF FUNDS BUSINESS. been persuaded of the benefits of managed more data and analysis than historical perfor- IT WAS ONLY accounts. “A number of our reservations mance-based reporting. POSSIBLE BECAUSE regarding MAPs may in theory have eased,” OF MAN GROUP’S Towers Watson acknowledged in its 2014 RECEDING SCEPTICISM SIZE AND SCALE update. “In particular, the ability to dictate frmhedge.com As recently as four or five years ago, the scep- KEITH HAYDON, the structure of the managed fund enables ticism about managed accounts harboured MAN FRM the investor to mimic more closely the

Unless stated otherwise this information is communicated by Financial Risk Management Limited and Man Investments (UK) Limited which are both authorised and regulated in the UK by the Financial Conduct Authority. In Australia, communicated by Man Investments Australia Limited ABN 47 002 747 480 AFSL 240581, which is regulated by the hedgefundintelligence.com 7 Australian Securities & Investments Commission (ASIC). This information has been prepared without taking into account anyone’s objectives, fi nancial situation or needs. In the US, distributed by Man Investments, Inc. which is authorized and regulated, but not endorsed, by the US Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. No portion of this material should be construed as an offer, solicitation, or recommendation for the purchase or sale of any security. All investments involve risks including the potential for loss of principal. Alternative investment strategies involve magnifi ed risks, are speculative, are not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. MANAGED ACCOUNTS/2016

guidelines, structure and counterparties grew fourfold, from $491 billion to $1,868 of the pooled hedge fund and, thus, make billion. “A massive wave of inflows from the managing money in such a structure as institutional audience accounted for the ma- painless as possible.” jority of that growth,” notes the Citi analysis. The firm added: “In return, this, coupled In the five years to 2007, according to with the ability of the investor to select the the Citi numbers, investment by high-net- manager, should help to alleviate some worth individuals and family offices in hedge of the adverse selection bias that has funds continued to expand, rising from $500 historically concerned us with commingled billion to $990 billion. But this expansion platform accounts.” Joshua Kestler, was dwarfed by the increase in institutional president and COO, investment, which over the same period PENSION FUNDS FUEL CHANGE HedgeMark exploded from $125 billion to $878 billion. Today, the majority of consultants are much This increase still needs to be seen in its more comfortable with giving their blessing historical context. By December 2007, 73% of to managed accounts, which has been an institutional respondents to an SEI poll said important fillip for platforms. “We spend a they had increased their allocations to hedge lot of time talking to consultants and in the funds over the previous several years. But last two or three years we have seen a major overall institutional participation in the hedge change in their attitudes towards managed fund market remained modest. While 30% accounts,” says Joshua Kestler, president and of the endowments polled by SEI in 2007 chief operating officer of the New York-based had investments in hedge funds, allocations HedgeMark, which is owned by BNY Mellon among pension funds were just 13%, and for and has about $9 billion of institutional assets all institutions they were 24%. on its dedicated manager account platform. It was the crisis of 2007-2008, together “A handful now recognise that managed with its messy aftermath, that dramatically accounts have a very useful role to play for changed the way pension funds accessed their clients.” hedge funds, rather than their appetite for Consultants’ road-to-Damascus conversion alternative strategies themselves. These to the benefits of managed accounts has changes look as though they are here to stay. either coincided with – or been driven by – a “The extreme shock of the crisis and the wholesale change in the ownership structure way markets functioned – or failed to function of hedge funds over the last 20 years, which – in 2009 and 2010 left investors battle-wea- has seen a continuous increase in institution- ry, cynical and worried,” says Michelle al demand for alternative strategies. McCloskey, president of Man FRM. “While the It is sometimes assumed that it was the immediate reaction to the fall-out may have financial crisis of 2007-2008 that drove pen- receded, I don’t believe the lessons learned sion funds and other institutional investors during that time were lost.” towards hedge funds. In truth, the process Those lessons were many and varied. Per- had been gathering notable velocity long haps the most extreme was the need to guard before then. continuously against any external influence with According to a briefing published by Citi the potential to compromise institutional inves- Prime Finance in 2013, between 2000 and tors’ fiduciary duties, such as the Madoff fraud. 2007 hedge funds’ assets under management “The big institutions recognise that they need to take a certain amount of risk to WHAT WE DO IS EMPOWER INSTITUTIONAL generate a return for their clients, but at the INVESTORS TO USE OUR PEOPLE, PROCESSES same time they are more aware than ever AND TECHNOLOGY TO BUILD AND OPERATE of the need to take care of their investors’ THEIR OWN PLATFORMS WHICH ARE dollars and to ensure that their assets are as COMPLETELY WHITE-LABELLED safe as they possibly can be,” says McCloskey. JOSHUA KESTLER, HEDGEMARK Another painful lesson investors were

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forced to take on board during the crisis ers say that their understanding of transpar- was how exposed they can be to so-called ency goes well beyond simple aggregated re- co-investor risk. “What we saw during the porting. “The technology we have developed financial crisis was the funds’ equivalent of at HedgeMark takes the data from managers, the classic run on the ,” says Kestler at puts it in a user-friendly format and allows HedgeMark. “If you have a situation where in- investors to understand both on an individual vestors become nervous and run for the door, fund basis and across their portfolios exactly everybody else needs to follow, irrespective what their exposures are,” says Andrew Lap- of whether or not they believe in the strategy kin, CEO of HedgeMark. and want to ride out the -term turbu- Rick Frisbie, “This is a very powerful tool, because it lence. When you’re in a commingled fund, head, Franklin enables investors to analyse the drivers of your destiny is controlled by other investors, Templeton Solutions performance and their leverage as well as whereas in a managed account you have a their sector, strategy, country and issuer choice on whether or not to pull the plug.” exposure, amongst many other metrics.” Dangers ranging from fraud to co-investor The second key attraction of managed risk served as a timely reminder that there accounts, which is the control that inves- can be no substitute for transparency in any tors enjoy over their assets, is perhaps best investment strategy. That may seem blin- illustrated by the rise of so-called dedicated dingly obvious today, but in the early 1990s managed account platforms such as the one those hedge fund specialists who adopted an run by Innocap. almost evangelical approach to transparency “Our model allows investors to tailor were generally regarded with suspicion by everything to their specific needs,” explains hedge fund managers. Caroline Bergeron, manager of business Among those that were unfashionably development and investor relations at preoccupied with the importance of transpar- Innocap. “Our institutional clients, which are ency was the specialist hedge fund of funds, highly sophisticated pension funds, insur- K2 Advisors, which was established back in ance companies and private , want to 1994. “While in recent years an emphasis on have increased control over a vehicle which seeking transparency from underlying funds effectively acts as their own. That means they has become somewhat standard in terms of want a customised investment vehicle giving industry best practices, for K2 it has been a them the opportunity to select the service central component of the firm’s investment providers and asset managers they prefer as approach since its beginnings, and one of the well as tailored reporting.” key drivers in Franklin Templeton’s interest “One example of the added value that in acquiring K2,” says Rick Frisbie, head of Innocap provides is that we have a large Franklin Templeton Solutions. business-oriented legal team,” says Bergeron. “The bottom line,” adds Saunders, K2’s “This means that instead of acting as a project co-founder and CEO, “is that you cannot manager and having to hire very expensive measure what you cannot see.” external counsel, we offer our in-house ex- While memories of the crisis may be fading pertise which reduces cost and delivery time. among some investors, their awareness of the Moreover, our operations in several jurisdic- need for transparency is still sharp. According tions – including the Cayman Islands, Ireland to a recent State Street survey of global pen- and Malta and Canada – enable us to build in- sion funds published in February (Pensions ternally the knowledge to negotiate, compare with Purpose), while 51% of respondents say and draft documents between jurisdictions.” they plan to increase their exposure to funds The control that large institutional of hedge funds, 46% believe that they still investors now enjoy in dedicated managed lack transparency over the risks stemming account models is a very far cry from the from investment in alternatives. days when they were jittery about adverse The top managed account platform provid- selection bias. These days, in some cases

hedgefundintelligence.com 9 MANAGED ACCOUNTS/2016

hedge fund managers are virtually being of firms like ours to build funds of managed forced by institutional investors to dance to accounts,” says McCloskey. “Rather than go out the tune of the platforms. and select their own managers, in many cases “Some of our clients that were invested clients would prefer a solution that looks rather in commingled funds have gone to their like a traditional multi-manager product made managers and indicated that they will redeem up entirely of managed accounts. In other their investment and will only reinvest in words, they still benefit from all the transpar- the same strategies if they are offered in ency and data analytics that our platform can managed account format,” says Bergeron. offer, but they delegate the responsibility for “So we’re noticing a lot of investors stating Caroline Bergeron, running the portfolio and selecting the manag- that they are no longer prepared to invest in manager, business ers to us.” flagship funds.” That is quite a change, and it is development and Others add that the rising popularity of man- empowering investors as they have never been aged accounts is supporting a broader revival investor relations, empowered before.” in the market for funds of hedge funds. “Funds Innocap Investors’ control also encompasses their of funds have been especially useful for smaller ability to liquidate assets quickly, which is re- institutions looking for greater segregation and garded as a huge plus for investors in managed better reporting,” says Lapkin at HedgeMark. accounts, even if some of the clearest examples “We have seen many funds of funds migrating of this do not necessarily make very encourag- their investments to managed accounts in order ing reading for the global hedge fund industry. to create the building blocks for more tailored For instance the Dutch pension fund PFZW, portfolios.” which chose to discontinue its allocations to hedge fund strategies in 2014, reports that one INSTITUTIONAL DEMAND RISING of the benefits of its managed account platform There is broad agreement that it is pension was that it had facilitated “a seamless liquida- funds that have been the main reason behind tion of the assets for PFZW”. the recent turbo-charged growth in assets The requirement to cater to the very precise invested in alternative strategies via managed needs of an increasingly demanding institu- account platforms. tional investor base perhaps helps to explain The basic statistics tell their own story. In why managed account platforms originally 2015, according to the most recent InvestHedge built by funds of hedge funds for their own Managed Account Platform survey, assets on the internal use have built up so much traction leading 16 platforms increased by 15% to reach with institutional investors in general, and $94 billion (see page 22). with pension funds in particular. Some individual platforms have recorded “Managed accounts have been fundamental much more eye-catching growth than this to our own alternative investment strategy headline number over recent years, which may for 18 years,” says McCloskey at Man FRM. reflect the fact that in many ways the ranking “So it made sense for us to take what we had compares apples with oranges and several already built and offer it to our clients. This other fruits. means using our technological infrastructure This is because the recent explosive growth to provide a very high touch, comprehensive in demand for managed accounts has led to service based on rigorous manager analysis the emergence of an increasingly diverse com- with data delivered in a very user-friendly way munity of managed account platforms, each to investors’ desktops.” with different ownership structures, business Demand from pension funds for exposure models and targeted investor bases. to alternative strategies is leading to a rising “Because the managed account industry requirement for the diversification benefits that is still very much in its infancy, there is still can be offered by funds of managed accounts. considerable confusion about the definition of “A trend we’ve seen – especially in Europe a managed account platform,” says Kestler at – has been a growing interest in the capability HedgeMark.

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A wholly-owned subsidiary of BNY Mellon the various managed account platforms since May 2014, HedgeMark describes itself differ, the business model is clearly gaining as a specialist in the structuring, oversight, very rapid traction – with assets having risen and risk monitoring of hedge fund invest- by close to 70% in 2015, from $5.2 billion to ments. “If you look at 10 different service $8.8 billion. providers you may find yourself comparing 10 This has elevated HedgeMark to fourth different service offerings,” Kestler adds. position in the 2015 InvestHedge ranking, “Even industry surveys bundle together narrowly behind FRM ($8.9 billion), but still dedicated managed account platforms with with some work to do to close the gap on those that are used to distribute fund of Jonathan Planté, the top two. These are State Street’s subsidi- fund products which invest using managed manager, business ary Infrahedge, which saw its assets rise last accounts, or with commingled platforms that development and year by 27% to $19.27 billion, and Deutsche are really just distribution channels for fund Bank, where assets expanded by 21% to investor relations, managers and structured products, and now $12.1 billion. Innocap alternative platforms,” he says. Another dedicated managed account plat- In addition to these varieties, investors form that has posted notable growth in recent have the of ‘Funds of One’, which are years is the Montreal-based Innocap, which sometimes confused with dedicated managed dates back to 1996 and is now jointly-owned accounts. But a Fund of One differs in the by National Bank of Canada and France’s BNP key respect that the assets are not legally Paribas. Its assets rose last year by 56%, from controlled by the investor. Although they are $2.8 billion to $4.3 billion, and stood at close protected from co-investor risk, this means to $5 billion at the end of March 2016. that the investor in a Fund of One remains According to Jonathan Planté, manager of exposed, theoretically, to several other risks business development and investor relations which attracted so many institutions to the at Innocap, growth in assets over the last managed account concept in the first place. three years to the end of March 2016 was Kestler considers HedgeMark to be what about 130%, which he attributes chiefly to a he calls a “pure-play dedicated managed strategic change to Innocap’s business model account provider”. “What we do is empower following the appointment in 2013 of Francois institutional investors to use our people, pro- Rivard as chief executive officer. cesses and technology to build and operate “I wouldn’t say we re-oriented our busi- their own platforms which are completely ness model, because we had been offering white-labelled,” he says. “In other words, it is dedicated managed accounts since the mid- their platform, not ours. We act as the service 2000s,” Planté explains. “But when Francois provider to the structure and launch the joined we made a complete reassessment of platform and we do all the operational heavy the skills we had in-house in areas like legal, lifting for the investor.” operations, IT and risk management. It was Kestler explains that although it took a on the basis of this reassessment that we while to educate the market about how the chose to move away from the previous model HedgeMark offering works, and about how which was based on on-boarding managers and then trying to sell their strategies to IT WAS DECIDED TO MOVE AWAY FROM clients via managed accounts.” MANAGER SELECTION AND DISTRIBUTION, He adds: “It was decided to move away AND TO FOCUS ON PROVIDING CUSTOMISED from manager selection and distribution, and INVESTMENT INFRASTRUCTURE, IN WHICH to focus on providing customised investment WE DO MOST OF THE WORK INTERNALLY, infrastructure, in which we do most of the NOTABLY RISK MANAGEMENT, LEGAL, work internally, notably risk management, OPERATIONS, COMPLIANCE AND IT. IT HAS legal, operations, compliance and IT. It has BEEN A GAME-CHANGER FOR US been a game-changer for us.” JONATHAN PLANTÉ, INNOCAP The model has certainly been instrumental

hedgefundintelligence.com 11 YOU STEER. WE NAVIGATE. Enabling & protecting your investment decisions.

MANAGED ACCOUNT PLATFORM

1 INNOCAP $ Bn $ 4.98Bn CELEBRATES A 5.0 4.5 129% GROWTH 4.0 OF ITS ASSETS 3.5 3.0 UNDER MANAGEMENT 2.5

IN 3+ YEARS 2.0 January 2013 – March 2016

innocap.com

1 Refers collectively to Innocap Investment Management Inc. (“IIM”) together with Innocap Global Investment Management Ltd (“IGIM”). The assets under management, including their growth, disclosed herein are those of both IIM and IGIM collectively. This report does not constitute and should not be construed as an offer or solicitation to enter into any transaction in a jurisdiction where such offer would be unlawful under the laws of that jurisdiction. 2016/MANAGED ACCOUNTS YOU STEER. WE NAVIGATE. in attracting key institutional clients in North are exciting opportunities for the HedgeMark Enabling & protecting America and Europe, and Planté believes that business model to thrive. “We’re seeing tre- your investment decisions. the assets on the Innocap platform will con- mendous interest and traction in Asia, where tinue to grow at a similar speed to previous we see no slowdown in institutional investors’ years as the penny drops among institutions allocation to alternatives in general and MANAGED ACCOUNT PLATFORM about the benefits of dedicated managed hedge funds in particular,” he says. accounts. “We believe dedicated managed This, says Lapkin, mirrors the more general accounts will gain substantial importance in appetite for hedge fund exposure among the future for institutional investment in the institutional investors across the world. hedge fund space,” he says. Andrew Lapkin, “Given the low interest rate environment and CEO, HedgeMark the high correlation across more traditional FUTURE GROWTH POTENTIAL asset classes, institutions are recognising that The $100 billion or so that is now invested they need to expand into long/short and less through managed account platforms is proba- liquid strategies in order to build a diversified bly no more than the tip of an iceberg in terms portfolio earning consistent returns,” he says. of the longer-term growth potential. At K2, “The result is that we will see allocations to Saunders puts the numbers in context when hedge funds rising, and as investors look to he says that the global hedge fund industry is ensure they have a better structure for in- worth about $3 trillion. vesting in hedge funds, demand for managed Individual platforms share Saunders’ accounts will grow.” optimism about the outlook for growth. This confidence is supported by a number Kestler, for example, is confident that there is of independent surveys. For example, hedge still plenty of gas left in HedgeMark’s growth fund manager respondents to a recent KPMG tank. “I think we’re still in the early innings of survey reported that 23% expect corporate this industry’s growth, and that most of this pension funds to be their primary source 1 expansion will be on the dedicated managed of capital over the next five years, with 21% INNOCAP $ Bn account side,” he says. saying that public pension pots will be their $ 4.98Bn 5.0 “Over the next couple of years we see no main source of new funds. CELEBRATES A reason why we shouldn’t post the same kind Lapkin bases his optimism about the 4.5 of growth rate that we saw last year, which outlook partly on the fact that in spite of was in the order of 70%. This will be driven the clear growth in institutional demand for 129% GROWTH 4.0 both by the addition of new investors and by managed accounts, the growth in take-up our existing clients increasing their exposure from pension funds has been slightly disap- OF ITS ASSETS 3.5 and allocating to new managers.” pointing. “Although many thought-leaders in Lapkin adds that he expects the bulk of this the pension plan community have been very 3.0 growth to come from the US, which provides public in their support of using the dedicat- UNDER MANAGEMENT more than three-quarters of HedgeMark’s ed managed account model, we have been 2.5 assets. “We’ve seen less growth from Europe, surprised that there hasn’t been a second IN 3+ YEARS 2.0 in part because the size of individual pension wave of state plans that have embraced the January 2013 – March 2016 funds there tends to be smaller. Because model,” says Lapkin. “We understand that there are fewer pension funds with assets of WE’VE SEEN LESS large pension plans don’t often move fast, $15 or $20 billion there are fewer candidates GROWTH FROM but in some cases the slow take-up has been for dedicated managed accounts.” EUROPE, IN PART surprising given that managed accounts tick It is a valid point. Although Norway’s BECAUSE THE SIZE so many fiduciary boxes.” government pension fund dwarfs the largest OF INDIVIDUAL Kestler believes that there may be two US fund, only seven of the world’s largest 40 PENSION FUNDS reasons explaining why some pension funds innocap.com pension funds (eight, if you include Russia) THERE TENDS still need to be convinced about the benefits are in Europe, according to Towers Watson’s TO BE SMALLER of dedicated managed accounts. The first 2015 ranking. By contrast, 20 are in the US. ANDREW LAPKIN, appears to be continued confusion about the 1 Refers collectively to Innocap Investment Management Inc. (“IIM”) together with Innocap Global Investment Management Ltd (“IGIM”). The assets under management, including their Asia is an area where Lapkin believes there HEDGEMARK merits of the transparency provided by the growth, disclosed herein are those of both IIM and IGIM collectively. This report does not constitute and should not be construed as an offer or solicitation to enter into any transaction in a jurisdiction where such offer would be unlawful under the laws of that jurisdiction. hedgefundintelligence.com 13 MANAGED ACCOUNTS/2016

top platforms. which provides daily position level transpar- “We think that having position-level trans- ency and complete control of assets.” parency into what is actually being traded in “We believe the opposite – that managed the portfolio is one of the greatest benefits accounts reduce potential liability for plan associated with the managed accounts sponsors,” he adds. “Investors in managed model,” he says. “So we have been surprised accounts are able to deal much more effec- by the number of pension plans that ask us tively with a crisis situation than institutions how they can use the information provided by still investing into commingled funds, because managed accounts. There is a huge amount managed account investors control the assets that can be done with the data. HedgeMark’s and have daily transparency into perfor- technology can assist in processing this data mance and the securities being traded.” into a more usable format, and where the pension plan doesn’t have the internal exper- THE REGULATORY DRIVER tise or resources to analyse and evaluate it, More broadly, Lapkin believes that some of the we have seen clients working with an advisor rising demand for alternative strategies and or consultant to help them.” for exposure to them via managed accounts is The fact that some institutions seem to being driven by regulation. “Whether it’s banks remain unconvinced about the value that having to change the structure of their invest- platforms’ transparency can provide may be a ments because of Basel III or insurers because function of a belief that there is no substitute of Solvency II, overall the global opportunities for meeting managers on an eyeball-to-eye- for hedge funds and managed accounts are ball basis. Some 40% of institutions polled significant,” he says. in a recent SEI survey, for example, indicated Others share the view that regulatory that “system-generated transparency is irrel- forces are likely to redefine the managed evant without access to managers”. accounts world and change the competitive Another surprising concern that some pen- landscape among the platforms. In particular, sion funds continue to have about managed thinks Saunders at K2, a stiffer regulatory accounts, says Kestler, arises from perceived burden may weaken the position of banks potential liability risk. KPMG draws attention in general and prime brokers in particular to this misgiving in its report on managed within the hedge fund market. “Hedge fund accounts published in November. YOU NEED SCALE assets sitting on banks’ balance sheets will be “Certain hedge fund strategies utilise TO BE SUCCESSFUL subject to much higher capital requirements instruments, such as derivatives, that have IN THIS BUSINESS, under Basel III,” he says. “This will increase the potential to magnify losses (as well as AND AS WE NOW costs across the board for banks, which will gains),” this explains. “This could result in an HAVE A MOTHER- be passed on to clients.” investment losing more than the initial capital SHIP IN FRANKLIN Additionally, says Saunders, tougher capital allocated to it. While this is mitigated in com- TEMPLETON WITH requirements will generate capacity con- mingled funds by their structure such that the $742.6 BILLION straints for prime brokers. “The global hedge amount invested is the maximum that could OF AUM AND fund industry is now worth $3 trillion, and we be lost, in managed accounts the ultimate 9,200 EMPLOYEES guestimate that capacity constraints will start liability lies with the investor as owner of the WORLDWIDE, WE to kick in at about $3.6 trillion, which is a bar- underlying assets.” CAN LEVERAGE rier we will reach fairly quickly,” he explains. “We’re surprised about these liability OFF THIS This, he believes, will generate attractive concerns among institutions,” says Kestler. INFRASTRUCTURE opportunities for non-bank platforms. “We “It seems completely illogical to say that a IN A WAY THAT don’t have the same capital constraints as the pension plan is more likely to meet its fidu- SMALLER FUNDS OF banks, some of which are still operating at ciary duty by investing in a commingled fund FUNDS WOULD BE very leveraged levels,” says Saunders. “So the that offers limited to no transparency and UNABLE TO DO natural place for platforms in the future won’t restricted redemption rights, as opposed to BEN BROWNING, be banks, which have leverage and financing a managed account with the same manager K2 ADVISORS issues. Instead, the market will move towards

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platforms like ours, run by non-banks with being used by managers as a means of carv- cash on their balance sheets, which along ing out and distributing separate portions of with our administration and custodian part- their portfolios for the retail market. ‘Liquid’ ners can effectively utilize economies of scale therefore refers to the products themselves to keep processing costs down.” rather than to the underlying strategies. “This is a trend we are already preparing Like their alternative UCITS counterparts for,” adds Browning. “You need scale to be in Europe, liquid alternatives have been very successful in this business, and as we now popular with US retail investors disenchanted have a mother-ship in Franklin Templeton with the performance of long-only products. with $742.6 billion of AUM and 9,200 em- But as Dan Elsberry, head of alternative sales ployees worldwide, we can leverage off this for North America at Franklin Templeton infrastructure in a way that smaller funds of Investments says, liquid alternatives are still funds would be unable to do.” in their infancy within the retail market. For the time being, the expected continued “Typically, about 2% to 4% of retail in- growth of the market for managed accounts vestors’ portfolios are in alternatives, which means that there is unlikely to be any short- compares to 30%-plus among the larger in- age of demand among investors for the broad stitutions,” he says. “So clearly there is plenty range of platform types already available. of room for growth in retail demand for liquid “In recent years the landscape has changed alternatives, a lot of which will need to hap- in terms of what investors are looking for and pen in a managed account environment.” in terms of what the platforms are providing,” Franklin K2 itself now has more than $2.3 says McCloskey at Man FRM. billion of assets in its Alternative Strategies “Some large institutions only want data Fund, which sets a minimum investment aggregation, rather than a product with all level of $1,000 on its multi-manager the analytical bells and whistles, which is product offering exposure to long/short why the services provided by the platforms equity, relative value, and range from super high-touch to basic admin- event driven strategies. istration.” Elsberry’s confidence in the outlook for McCloskey says that in broad terms there retail demand for liquid alternatives is shared are also two basic forms of business model by an number of independent analysts. PwC, among managed account platforms. “Ours is for example, forecasts that demand for liquid very much an investment-led model, which alternative mutual funds will rise from $260 means we only put managed accounts around billion at the end of 2013 to around $664 hedge funds that we consider to be attrac- billion by 2020. tive investments. The other business model, Liquid alternatives are, however, by no which is probably targeted more at retail than means restricted to the retail market. “Liquid demand, is based on alternatives have been a huge source of attracting as many manager names as possi- growth for us over the last 12 months,” says ble and offering clients a very large menu of Planté at Innocap in Montreal, which has managed accounts to choose from.” seen very significant appetite for Irish UCITS and QIAIFs since their launch in 2013. “This THE GROWTH OF LIQUID ALTS represents more than $2 billion under man- Another powerful driver of demand for agement in Irish-domiciled funds, which has managed accounts has been the growing been driven by clients’ demand for enhances importance of liquid alternative products independent governance and transparency.” providing retail investors with exposure to At K2, Elsberry also sees immense poten- hedge fund strategies. tial for demand for liquid alternatives among With 1940 Act mutual funds in the US institutional investors, which will help drive unable to access traditional hedge fund strat- another phase of expansion for managed egies, managed accounts are increasingly accounts. He points to the example of a fund

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like the California State Retirement System sectors from a portfolio in accordance with (CalSTRS) which last year announced that it the investor’s specific requirements. was looking to invest $20 billion in a range of One simple example of where this may be alternative strategies, as symptomatic of this necessary is for Islamic investors requiring trend. “We’ve heard rumblings among a num- sectors that are non-compliant with Shariah ber of the largest pension funds about their law to be screened out of a portfolio on a plans to increase their exposure to liquid daily basis. More broadly, customisation can alternatives, and when the bell cows lead, the be used as a way of minimizing liability risk herd tends to follow,” he says. by, for example, prohibiting the use of certain Elsberry echoes a number of other analysts instruments. when he says that he sees liquid alternatives Similarly, says McCloskey, customised IMAs rapidly closing the gap, in terms of its size, can be used to tilt an investor’s exposure with the hedge fund market. “Today the liquid towards selected components of an underly- alternatives market is worth about $260 ing manager’s strategy, or towards individual billion, but it is growing at something like portfolio managers. 20% a year, compared with an annual growth Customisation of portfolios, she adds, has for hedge funds closer to 3%,” he says. “A been a notable recent feature of Man FRM’s number of projections are suggesting that it managed accounts strategy. “Over the last will be a $1 trillion market by 2020.” 12-18 months we have been putting together K2’s Saunders says that there is a symbiotic speciality strategies on our own platform relationship between retail and institutional which seek to take advantage of managers’ demand for liquid alternatives. “The demand best ideas,” she adds. “This helps allows us we have seen in the institutional space has to get around some of the constraints on supported the development of our retail busi- individual position sizes, for example, that ness, and vice versa,” he explains. “To survive you find in a commingled fund.” and thrive going forward, multi-managers At K2, which has about 70% of its assets are going to have to cater to both markets, in what it describes as “custom-tailored” and we are uniquely positioned to offer both portfolios, Saunders echoes the view that types of solutions.” customisation via managed account platforms can be a powerful tool for optimizing portfo- NOT JUST A DEFENSIVE TOOL lio construction. In the immediate aftermath of the global “Managed accounts have allowed us to tilt financial crisis, it was chiefly the defensive and overweight strategies, and to identify qualities of managed accounts that were em- the managers we think will do well in this phasised by platform providers and demanded environment,” he says. “The enhanced trans- by the wave of institutions that migrated to parency and control they give us means that managed account platforms. we can generate better performance while But market participants are quick to point better mitigating certain risks. In effect, this out that managed accounts can also be TYPICALLY, ABOUT has meant that we have migrated from being used to enhance performance at a number 2% TO 4% OF a fund of funds to a more efficient multi-man- of levels. The simplest of these is through RETAIL INVESTORS’ ager type strategy.” customisation of investors’ exposure to al- PORTFOLIOS ARE Haydon, Man FRM’s CIO, adds that customi- ternative strategies, which can be deployed IN ALTERNATIVES, sation has become an increasingly important both as a defensive mechanism and as a WHICH COMPARES TO consideration for investors disappointed driver of . 30%-PLUS AMONG at the performance of hedge funds and in As Man FRM’s McCloskey explains, one of THE LARGER search of alternative strategies with the the benefits of managed account platforms is INSTITUTIONS potential to offer more consistent return that the Investment Management Agreement DAN ELSBERRY, streams that are not solely dependent on (IMA) drawn up between the platform and the FRANKLIN TEMPLETON ever-rising asset prices. manager can eliminate certain securities or INVESTMENTS “When we were developing our managed

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account platform, I ran into a number of build a strategy that is concentrated on fewer investment problems which were the same as managers – hence increasing – with- those faced by anybody else who invests in out an accompanying increase in idiosyncratic portfolios of hedge funds,” says Haydon. One manager risk. of these, he says, was the risk that investment “A lot of people argue that funds of funds returns were being sacrificed in pursuit of dilute their returns by investing in too many investor protection against fraud and other managers, and that to generate extra vola- abuses that surfaced during the crisis. tility they should cut down on the number “While managed account platforms can be of managers,” says Haydon. “I recently ran a defence against Madoff risk, the worry is Dan Elsberry, head an example where we had 20 managers in a that by the time you’ve built the barbed wire of alternative sales, portfolio with a volatility of 2.6%. In order to that helps protect you from being defraud- North America, lift that volatility to 5%, we would have had to ed, you have little if any returns left for the reduce the number of managers to five.” Franklin Templeton client,” he says. “In light of some investors’ Haydon says that he would be uncom- Investments early experience with managed accounts it’s fortable with effectively making a fourfold no surprise that while people may initially increase in the idiosyncratic risk of any fund have liked them in principle, in practice the as a way of potentially increasing its return. “I return for the investor was often the part that wouldn’t mind doubling the risk by reducing was missing.” the number of managers to 12,” he says. “But Specifically, Haydon says that he identi- I wouldn’t like to go beyond that because I be- fied a demand for investment solutions that lieve the idiosyncratic manager-specific risk is offer higher returns, but with lower costs the single most challenging problem you have and greater risk capacity. The result was when you’re investing in a hedge fund. After the development of a new breed of system- all, funds are very entrepreneurial, which in atic strategies. general is positive, but it can also expose you As Haydon explains, “spare capacity arises to more style drift and performance risk. So in funds which employ a number of different running highly concentrated bets does not investment strategies, some of which hit a feel right to me.” limit to their ability to manage money before However, he believes that by using a man- others. In many cases, the manager will ac- aged account platform, it is possible to gener- cept allocations to these ‘other strategies’ at ate a more acceptable trade-off between the lower fees because the cost of production for added idiosyncratic risk of reducing the num- the spare capacity and the opportunity cost ber of managers in a fund of funds portfolio to the fund are both quite low”. and generating superior risk-adjusted returns. He continues: “For example, consider a “Using managed accounts gives you much strategy to extract factor returns from the more control,” he explains. “The individual 1,000 biggest stocks by market cap. It would manager risk goes down considerably if offer very high diversification but at a cost. you’re able to monitor what the manager is Using the same strategy, but only investing in doing every day, because you can filter every the top 500 stocks, would offer lower diver- security he trades and control the risk levels sification, but at a potentially reduced cost if any exposure becomes too large.” of production to the fund manager and with Haydon adds: “By giving you much more lower fees for investors.” clarity about your risks, it also means you Fundamental to the delivery of these types are much better positioned to hedge those of solutions, says Haydon, are risk control and risks efficiently. Using the managed account transparency. One objective of this strategy platform has enabled me to reduce my is the delivery of enhanced risk-adjusted hedging costs from around 50bp to an returns at reduced costs. This is because the average of zero.” enhanced visualisation provided by its man- The attractive cost-return profile is already aged account platform allows Man FRM to winning an encouraging following among

hedgefundintelligence.com 17 Dedicated Managed Accounts Next Generation Hedge Fund Investing

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An investment in hedge fund strategies is speculative, should be discretionary capital set aside for speculative purposes, involves a high degree of risk and is not suitable for all investors. Investors could lose all or a substantial portion of their investment and must have the financial ability, sophistication, experience and willingness to bear the risks of an investment long term. Hedge fund strategies may be significantly leveraged and performance may be volatile. Accounts pursuing hedge fund strategies commonly enter into swaps, futures, forwards, options and other transactions for various hedging and/or speculative purposes that can result in volatile fund performance. No representation is made that any Dedicated Managed Account’s investment process, objectives, goals or risk management techniques will or are likely to be achieved or be successful or that any Dedicated Managed Account or any underlying investment will make any profit or will not sustain losses. The risks of investing in hedge fund strategies will not be negated or even mitigated by HedgeMark’s platform, analytic tools, compliance policies or monitoring and no assurance is given that any Dedicated Managed Account will not be exposed to risks of significant trading losses. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. HedgeMark Advisors, LLC is an SEC-registered investment adviser. ©2016 The Bank of New York Mellon Corporation. Services are provided by The Bank of New York Mellon and its various affiliates. All rights reserved. 2016/MANAGED ACCOUNTS

institutional investors. “These types of strat- the service providers to the account such as egies can potentially be used as a standalone prime brokers and administrators, as well as investment by any institutional investor with the underlying managers themselves. who is thinking about investing in diversified By passing these discounts back to the growth funds but is worried that traditional client, we can achieve a fee structure which assets may not perform well over is cost-equivalent to commingled funds. This the next five years given where bond yields includes our fee for setting up the account.” are today,” says Haydon. “Or it could be Others go further. “Given the size of the used by anybody who is looking for an investments we’ve been seeing from pension additional way of diversifying the risk of a Michelle McCloskey, funds, and the long-term nature of the traditional portfolio.” president, Man FRM commitment they are making, we have seen He adds: “It may also be appealing to inves- a willingness of many managers and service tors in the defined contributions pensions mar- providers to compromise on their fees,” ket where fee constraints have prevented them says Lapkin at HedgeMark. “This, combined from investing in alternatives in the past.” with the broader fee pressure across the industry, has enabled some of our clients THE APPEAL OF LOWER FEES to reduce the fees they pay to well below Whether or not there are substantial cost the standard 2+20. In some cases we’ve savings to be generated for investors choosing seen management fees fall below 1% and the managed account platform route has been performance fees being negotiated down to a subject of animated debate for years. In a 10% or 15%.” report published in 2013, Citi advised that Other platform providers confirm that “the convenience of these platforms cannot their clients have seen fees fall well beneath be disputed, but there is little cost saving the 2+20 level that has traditionally been involved, as the platforms charge substantial regarded as par for the hedge fund course. fees for their services. Even in cases where “Not only have our clients had great success a platform negotiates reduced management with lowering their fees,” adds HedgeMark’s and performance fees with an underlying Lapkin. “By creating their own managed account manager, those savings are not accounts they have also been able to cus- necessarily passed on to the investor”. tomize their fee structures. So we’ve seen Managed account platforms insist, investors negotiate flat management fees however, that the cost benefits associat- with no performance fee and vice versa. ed with managed accounts are becoming We’ve also seen them negotiate hurdle rates increasingly visible. Man FRM’s alternative and clawback structures, and demand great- beta initiative, for example, is an illustration er clarity on the manager-related expenses of the role that the technology of managed allocated to them.” account platforms can play for institutions At Man FRM, McCloskey agrees that the looking for access to hedge fund strate- WHEN WE BUILT transparency of the fee structure charged by gies at lower fees. More broadly, managed OUR OWN INTERNAL managed account platforms is an impor- account platforms say that their objective PLATFORM, ONE tant feature for their institutional clients. has always been to offer investors a service OF OUR GOALS “Investors can see the full details of every for a fee that is at least the equivalent of WAS TO MAKE single charge that is made, from the audit what they would pay for access to similar MANAGED ACCOUNT fee through to the costs,” strategies in commingled format. INVESTING MORE she says. “This is very different from the fee “When we built our own internal platform, COST-EQUIVALENT structures of commingled funds which still one of our goals was to make managed TO INVESTING tend to be very opaque.” account investing more cost-equivalent to DIRECTLY IN THE This is echoed by Kestler at HedgeMark. investing directly in the underlying fund,” UNDERLYING FUND “We read a lot in the press about pension says McCloskey at Man FRM. “The way we MICHELLE McCLOSKEY, plans being under scrutiny because of the do this is by negotiating discounts with all MAN FRM perception that they don’t have a good

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understanding of the fees and expenses and retail demand for exposure to hedge fund they pay,” he says. “A dedicated managed strategies in managed accounts format, some accounts model addresses these concerns hedge fund managers still swim against the because it gives investors complete transpar- tide, resisting invitations (or exhortations) to ency and control over fees and expenses.” make their strategies accessible via platforms. At K2, head of research Rob Christian EVERY BASIS POINT COUNTS says that those managers reluctant to offer Competitive and transparent fee structures will managed accounts generally have very spe- be a pre-requisite for the continued growth of cific reasons for doing so. “To some extent, managed account platforms because for pen- Rob Christian, it depends on the strategy,” he says. “In the sion funds, every basis point counts these days. head of research, case of a credit manager who is buying direct This is not just because negative bond yields K2 Advisors loans, for example, it may be more difficult to and the anaemic performance of mainstream offer managed accounts, because a number assets are making returns increasingly hard to of complications would emerge in a workout come by. It is also because pension funds’ cost situation where it would be impossible to split bases are coming under more pressure than a loan.” ever before. According to State Street’s most As KPMG notes in its report published in recent Pensions with Purpose survey on global November, “some managers continue to view pension funds published in February this year, their underlying positions as key intellectual six out of 10 funds say they are under pressure property and want to limit the opportunity to cut costs. for position replication and trade crowding Their alternative investment portfolios are by others (for example within event-driven one obvious place where pension funds can look strategies)”. in order to cut costs, and institutions like Orange At Man FRM, McCloskey agrees. “There will County Employees Retirement System (OCERS) always be a handful of managers who believe have been outspoken about their resistance to they have already met their AUM limits and high hedge fund fees. therefore will always say no to managed ac- So has Massachusetts Pension Reserves count proposals,” she says. “Generally, howev- Investment Management (Mass PRIM), which er, it is only some of the household names and launched its Project SAVE (Strategic Analysis tiny specialist managers that say no. But even for Value Enhancement) in January 2013, Hedge before the crisis, the number of managers who fund fee renegotiations and managed accounts refused was diminishing.” have already made notable contributions to the It is open to debate whether or not it SAVE initiative. One of the highlights of its last matters that some of the so-called house- financial year, Mass PRIM says in its 2015 annual hold names are still reluctant to offer access report, was that it “successfully negotiated all to their strategies via managed account new hedge funds in managed accounts with platforms. “What we’ve seen in the past two significant fee discounts”. or three years is that on the institutional side, The sensitivity of institutional investors to pension funds and companies are fees was reflected in a recent KPMG/AIMA/MFA no longer chasing the large, blue-chip hedge hedge fund survey, in which two-thirds of re- funds in New York and London,” says Planté spondents indicated that they expect specialised at Innocap. “Increasingly, they are chasing the fee structures to be a key factor in attracting mid-sized funds, which gives them more lever- investors over the next five years. This suggests age when they’re negotiating their contracts.” that compression of fees across the alternative Even the household names may have investment management industry will continue little choice but to capitulate. “I’m reminded over the foreseeable future. of when we started to implement our new transparency programme via Measurerisk in A POSITIVE SELECTION BIAS? 2002,” says Saunders at K2. “At the time we In spite of the conspicuous rise in institutional encountered some adverse selection bias, but

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managers who were reluctant to share their to a resurgence in new fund launches.” risk data back then have now recognised they Others agree that managed accounts can have no choice. I think we’ll go down a similar play a critical role in supporting the develop- road with managed accounts.” ment of emerging managers. This has been King Canute-style hedge fund managers who a notable priority for the Montreal-based are still unwilling to offer managed accounts Innocap, which has played a pivotal role in are increasingly likely to find themselves in the launching the Quebec Emerging Manager Pro- minority. Today, according to a recent KPMG gram (QEMP). This provides investors with the survey, 47% of all hedge funds say they offer opportunity to allocate to five hedge fund and investors either a managed accounts product six long-only managers. or its first cousin, a fund of one. A further 21% Innocap is co-ordinating the programme, say they plan to do so over the next five years. which is being developed in collaboration with the asset management, actuarial and academic HELPING EMERGING MANAGERS communities in Quebec. It is also designing, im- This suggests that managed accounts’ historic plementing and operating QEMP’s customized problem of so-called negative selection bias has managed accounts infrastructure. long since receded. Indeed, at Man FRM, McClo- Even among managers which now accept skey points to what she describes as “positive the value of making their strategies available to selection bias” in the managed accounts space. pension funds and other institutions, there may “From my experience of originating manager still be work to do in order to enlighten them to relationships, one of the positive trends I’ve the benefits of managed accounts. seen is that it is possible to access manag- McCloskey says that this is why Man FRM ers early in their career by offering them a spends much of its time working with manag- managed account capability,” she explains. ers, explaining how the process of participating “They recognise that using a managed account in a managed account platform works and structure can help them to reach a level which reassuring them that the disruption to their is more acceptable to institutional investors.” day-to-day investment management responsi- At K2, Christian says that one of the bene- bilities will be minimised. ficial side-effects of the growth in managed “We try to make the whole process extreme- account platforms has been the support that ly easy for managers,” she says. “We explain they have given to emerging managers in the our technology to them, reassure them that alternatives space, which can only be healthy we are able to work with whichever systems in an industry which is still too concentrated for provider or administrator they are familiar its own good. with, and that we can model all the underlying “Although there are about 10,000 managers securities they trade. So even if they’re reticent out there, no more than 750 or so control the to begin with, they generally become more vast majority of the industry’s assets,” he says. comfortable with the concept very quickly.” “Stricter regulation, leading to higher com- She adds: “To their credit, a number of pliance costs, has made it even more difficult managers also need reassuring that all their for start-ups to break into the market, which investors will be treated fairly and equally, means that depending on the strategy, the bar ALTHOUGH THERE whether they invest directly or via managed for emerging managers has probably been ARE ABOUT 10,000 accounts.” lifted from between $200 million and $500 MANAGERS OUT Once the initial educative work has been million to $1 billion.” THERE, NO MORE done, says McCloskey, the process of running He adds: “Under a separate accounts struc- THAN 750 OR SO a managed account on a daily basis is smooth ture, in which we operate as the counterparty CONTROL THE VAST and mechanical. “We have a team of about 40 to the investor in most respects, much of the MAJORITY OF THE people who work in this area every day, with infrastructural burden is removed from the INDUSTRY’S ASSETS two teams of lawyers responsible for all the manager. This means we can take much smaller ROB CHRISTIAN, structuring and counterparty negotiations,” managers on to the platform, which may lead K2 ADVISORS she says.

hedgefundintelligence.com 21 MANAGED ACCOUNTS/SURVEY

Demand for institutional bespoke solutions drives growth of managed account platforms/ By Siobhán Hallissey

ssets on managed account platforms increased by reports its asset figures once a year, 16% in 2015 to reach $94 billion thanks to at least one so the $19.27 billion figure – and the sizeable new entrant to the InvestHedge rankings and 27% growth rate listed in the table Aan increased reliance on dedicated managed accounts – reflects growth over the 12-month among funds of hedge funds (FoHFs). period to June 2015. The offerings of the 16 providers are featured in the Inves- InfraHedge launched its DMAP tHedge Managed Account Platform Survey. They range from in 2011. The firm’s clients, which are traditional platforms that build commingled managed accounts large institutional investors, use the to dedicated platform providers that offer the infrastructure operational and investment infra- and technology that clients need to create in-house dedicated structure to create their own custom- platforms. ised managed account platforms and Institutional investors, as well as asset managers and FoHF allocate to hedge fund managers of Bruce Keith, firms, have been driving the growth of dedicated managed their choosing. CEO, InfraHedge account platforms (DMAPs). These platforms do not perform The demand for customised traditional asset management services. Instead they offer solutions is driven by institutions transparency, governance, and tailoring of strategies to investors such as pension plans, sovereign that lack the resources to build and maintain a managed account wealth funds, and large institutions, as well as FoHFs and asset platform in-house. managers that are driving hedge fund managers into vehicles According to Joshua Kestler at HedgeMark, a number of other than commingled funds. pension plans have begun to use dedicated managed accounts These sophisticated investors deploy larger capital so the (DMAs) as the preferred way to access hedge funds. mandates are sizeable in terms of initial capital. As a result, the Kestler has seen pension plans with experienced hedge fund assets of the platforms that offer dedicated mandates have teams decide to shift their investment model to DMAs because increased significantly in a short space of time. of the many benefits these structures bring. These benefits HedgeMark’s dedicated managed account platform is one include asset control, transparency, the ability to customise such example. The assets serviced by HedgeMark increased by investment strategies, and greater ability to negotiate reduced nearly 70% in 2015, to reach $8.8 billion up from $5.2 billion at or custom fee arrangements with managers. the beginning of the year. “Others have started to view DMAs as a way to break into, and It is notable from the participants in the InvestHedge Man- get comfortable with, the asset class,” Kestler says. “We believe aged Account Platform Survey that the multi-managers that this is an emerging trend which is still in the early innings, but we have built managed account platforms internally are among expect that DMAs will eventually be the standard structure for the largest firms in the InvestHedge Billion Dollar Club rank- large pension plans and other institutional investors when they ings – which also have the scale and resources to facilitate the invest in hedge funds.” infrastructure, technology and staff-build internally. For those DMAP providers were the driving force behind the overall FoHF managers that do not run an internally managed account managed account asset growth in 2015. The three dedicated platform, an external platform provider allows a firm to respond platforms listed in the rankings, which include new entrant to client need for customised solutions without having to build a HedgeMark, all grew by more than 25% in 2015 – demonstrating platform from scratch. investors’ appetite for bespoke solutions. A large portion of HedgeMark’s 2015 growth was from FoHF According to Bruce Keith, chief executive officer at InfraHedge, managers that are evolving their business model from pure prod- the DMAP market saw significant growth in 2015, with providers uct shops to solution providers and looking for ways to be more of these platforms much busier and seeing more mandates creative, as well as to facilitate liquid alternatives products. across markets. “We provide large institutional asset managers with an “There was a real change in 2015 with investors increasingly efficient outsource solution, allowing them to focus on core looking for bespoke solutions and transparency. The trend investment management functions while leveraging Hedge- isn’t slowing, we won large mandates last year and I know our Mark’s staff, processes and infrastructure for non-core functions competitors did as well,” Keith adds. “In the coming months I like platform implementation, accounting, operations and risk believe the DMAP market will look considerably different from reporting,” Kestler says. “Our DMA solution offers clients an the traditional managed account platform market.” efficient way to develop their own dedicated hedge fund man- InfraHedge continues to lead the ranking of managed account aged account platform without the need for additional staff or platforms in terms of assets. The State Street subsidiary only infrastructure and technology development.”

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The assets on Innocap’s managed account platform grew by this segment will contribute to the growth of its managed 56% in 2015, driven by the firm’s loyal clientele, including large account platform in 2016. European and North American financial institutions. A number of providers have evolved the model of their plat- Assets on the platform rose from $2.8 billion in 2014 to $4.3 form in response to investor trends. billion by the end of 2015. Under the stewardship of Francois The flexible nature of managed accounts means the structure Rivard, Innocap’s chief executive officer, the platform has grown can allow managers to create strategies that fit with the con- by 101%. His arrival in 2013 brought a new focus to the firm, now straints of regulations, such as AIFMD, and liquid alternatives centralising efforts on its customised managed account offering products. which provides clients with tailored investment vehicles and an The assets on Amundi AI’s managed account platform fell by independent oversight on their assets. 30% in 2015 to finish the year with $2.63 billion compared to $4 According to Rivard, last year’s asset growth was led by a sig- billion in January. nificant appetite from large institutional investors for Innocap’s According to Amundi AI, the disappointing performance of the Irish UCITS funds. “With the increase of regulation in every juris- hedge fund industry in 2015, which saw the InvestHedge Com- diction and institutional investors’ focus on governance and risk posite Index flat for the year and a macroeconomic environment management, Innocap’s independent business model appears to with strong uncertainties and high volatility in the third quarter solve numerous investor concerns,” he says. of the year, led some institutional investors to reduce their expo- Deutsche Asset & Wealth Management has seen more of a sure to the hedge fund asset class in general. solutions-based approach to managed accounts, whether it is Some large mandates managed by Amundi AI on behalf of through dedicated accounts, customised mandates, Solvency large institutional clients, among which some are subject to the II or other tailored approaches. According to Martin Fothergill, new prudential rules covered by Solvency II and Basel III, have global head of liquid alternatives at Deutsche Asset & Wealth had their assets greatly reduced. Management, the group has also seen some more performance In the first half of 2016, adjustments will be made in the man- fee pressure coming from the influence of the US alternative agement process in order to optimise performance drivers, and 1940 Act industry and from the risk premia approach. this should encourage a reallocation of these institutional clients The assets on the Deutsche Asset and Wealth Management into Amundi AI’s FoHFs or tailor-made mandates, officials say. managed account platform grew by more than 20% in 2015 Heinrich Merz, who joined Amundi AI in February as the group’s to $12.1 billion. Fothergill explained the platform saw growth chief investment officer, and his team will be reviewing the across all strategies and product types. “UCITS continued to be a management process with the main aim of improving perfor- very popular format for investors, as were ‘unfunded’ managed accounts, and we see growing interest in the AIFMD managed account format,” he says. Lyxor’s managed account platform grew by 9% in 2015 to Managed account platforms: ranked by size reach $8.4 billion. Stephane Enguehard, managing director and head of product development of alternatives and multi-manag- AUM AUM ers at Lyxor, says the growth was driven by the expansion of Lyx- 31/12/15 01/01/15 Growth % Total $bn Total $bn $bn growth or’s alternative UCITS single-manager range. The firm has also † made progress in the institutional field where Lyxor, for instance, InfraHedge 19.27 15.17 4.10 27.01% acts as a hedge fund advisor to a large US public pension fund Deutsche Bank 12.10 10.00 2.10 21.00% that continued to deploy a risk mitigating strategy through a FRM 8.90 7.80 1.1 14.10% portfolio of global macro and CTA dedicated managed accounts. HedgeMark 8.80 5.20 3.60 69.23% The $189 billion California State Teachers’ Retirement System Lyxor Asset Management 8.40 7.70 0.70 9.09% (CalSTRS) opted to keep Lyxor Asset Management as its hedge Permal 7.70 9.10 -1.40 -15.38% fund consultant following a recent search for consulting services. Lighthouse Partners 7.50 6.90 0.60 8.70% CalSTRS originally hired Lyxor in 2011 to help develop a global LGT Capital Partners 4.71 3.90 0.80 20.59% macro hedge fund strategy. CalSTRS’ hedge fund programme in- Innocap Investment Mgmt. 4.33 2.78 1.55 55.76% cludes global macro hedge funds and trend-following commod- ity trading adviser buckets and each amounts to approximately Pacific Alternative Asset Mgmt. Co 4.15 3.31 0.84 25.36% $875 million – Lyxor will advise on both. Amundi Alternative Investments 2.63 4.00 -1.37 -34.30% The UCITS segment of Lyxor’s managed account platform NB Alternative Investment Mgmt 2.17 1.90 0.27 13.99% grew by 30% in 2015 and attracted $500 million of net new Private Advisors 2.12 2.17 -0.05 -2.53% assets to reach $2 billion by year-end. AllianceBernstein 0.55 0.43 0.13 29.81% Enguehard explains that Lyxor is expanding its UCITS compli- JP Morgan Alternative Asset Mgmt 0.45 0.10 0.35 341.58% ant offerings and has been working on two fund of managers’ Gottex Fund Management 0.43 0.45 -0.02 -5.08% funds, which is a fund of sub-advisers rather than a fund of commingled funds. One offering is for a private European wealth Total 94.2 80.92 13.28 16.41% manager and the second is a Lyxor product. Enguehard believes †Assets as of 30 June 2015 Source: InvestHedge

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mance and having a more dynamic that are customised to that individual client’s needs. asset allocation among the different For sophisticated hedge fund investors, managed accounts are strategies. Opportunities arising from increasing in popularity as they allow for far greater flexibility in regulatory developments will also be the investment strategy employed by the underlying manager. taken into account as part of this review “The platform has been growing significantly in terms of num- in terms of further development of the ber of managers as well as AUM. As of today we run 69 managed offering and of the use of the managed accounts,” says Pernet. “Over the years, the platform has become account platform. more diversified in terms of the types of hedge fund strategies. Amundi AI has chosen to go down Today it caters to the entire spectrum of hedge fund styles.” the AIFMD route with its MAP, with the For the largest FoHF firms, managed accounts are quickly result that there is a clear segregation becoming a lifeline to future product development. Francois Rivard, of duties on the platform. “We have to The assets on ’s managed account platform CEO, Innocap use third party external providers. For did fall slightly in 2015 from $9.1 billion to $7.7 billion, but the instance, we cannot use our in-house group’s total assets were flat at $22.10 billion. The buy-side prime broker. As a result there are no managed account platform has investments that were created potential conflicts of interest which can for Permal’s own use, allowing the investment team to dictate only benefit the client. In addition, from the liquidity, structure, and hedge strategies. an investment’s perspective, with AIFMD you are able to adapt “Because it is for our own use, we turn over managers regularly and encapsulate in a regulated and highly controlled format all if the investment has run its course or perhaps the manager has hedge fund strategies including the most complex, leveraged or disappointed,” says Roberto Giuffrida, executive vice president, concentrated ones which is not possible under UCITS,” Dupuy international business development at Permal Group. says. PAAMCO took the decision several years ago to employ all Leveraging the experience and success in UCITS of its parent of its hedge fund investments via managed accounts. By early company (Amundi Funds), the firm is in the process of building 2015 the group transferred all the remaining active assets it held an alternative UCITS-compliant offering to meet the demand in commingled hedge funds to managed accounts either via its from private banking clients. The platform will be more focused managed account platform or a fund of one structure. on the distribution side and the first fund is set to be launched This decision contributed to the growth of PAAMCO’s during the first half of this year. managed account platform in 2015 and assets on the platform JP Morgan Alternative Asset Management (JPMAAM) devel- increased from $3.3 billion in January to $4.1 billion by the end of oped its managed account platform to support its move into the December, the balance of its AUM being in funds of one. liquid alternatives space. The platform grew by 340% in 2015 to PAAMCO runs a managed account platform that is focused on reach $450 million as the firm saw good uptake from investors creating the most efficient portfolios for its investors. The firm for its liquid alternatives products as, according to John Ander- serves as the investment advisor and engages sub-advisors to son, president and managing director of JP Morgan Alternative create portfolios of various hedge funds that are governed by Asset Management, the downside protection characteristics of PAAMCO. PAAMCO views managed accounts as the best way to the funds delivered throughout the year. invest in hedge funds as they help to protect investor interests The group also sourced new managers to the platform last more effectively and allow PAAMCO to work with the underlying year and expects the assets on the platform will continue to hedge fund manager to construct the portfolio. grow as opportunities arise. “Managed accounts provide us with more flexibility so we can According to Anderson, the firm would consider expanding the create more focused funds,” says Stephen Oxley, vice chairman purpose of the platform to extend beyond supporting its liquid at PAAMCO. alternatives capabilities. As more and more hedge fund managers respond to investor LGT Capital Partners’ managed account platform grew by 21% demand and embrace the managed account structure the oppor- in 2015 to reach $4.7 billion in assets. According to Pascal Pernet tunity set for platform providers will likely grow. at LGT Capital Partners, its buy-side managed account platform Kestler expects HedgeMark to have significant continued has become an important cornerstone of the firm’s offering. growth in 2016 due to the accelerating trend towards DMAs. LGT uses managed accounts as building blocks for its mul- “Our existing clients already have plans to increase the number ti-manager programmes, as well as for customised client solu- of DMAs on their private platforms in 2016, and we have several tions as for some clients LGT runs dedicated managed accounts new clients launching platforms throughout the year,” he says.

OUR EXISTING CLIENTS ALREADY HAVE PLANS TO INCREASE THE NUMBER OF DMAS ON THEIR PRIVATE PLATFORMS IN 2016, AND WE HAVE SEVERAL NEW CLIENTS LAUNCHING PLATFORMS THROUGHOUT THE YEAR JOSHUA KESTLER, HEDGEMARK

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Main sponsor Franklin Templeton Investments

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management to retail, institutional and sovereign wealth clients in over 180 countries. Through specialized teams, the company has expertise across all asset classes—including equity, fixed income, alternative and custom solutions. The company’s more than 600 investment professionals are supported by its integrated, worldwide team of risk management professionals and global trading desk network. With offices in 35 countries, the California-based company has more than 65 years of investment experience and over $742 billion in assets under management as of March 31, 2016. For more information, please visit franklintempleton.com. For further information/ Daniel Elsberry (Americas) Scott Collison (Asia) e/ [email protected] e/ [email protected] Peter Vincent (EMEA) Sam Mann (Australia) e/ [email protected] e/ [email protected] w/ www.franklintempleton.com

Associate sponsor HedgeMark

HedgeMark, a BNY Mellon Company, specializes in supporting institutional clients in the development and operation of their own private hedge fund dedicated managed account platforms. HedgeMark’s dedicated managed account services and position-level risk and performance analytics are aimed at institutional investors seeking increased customization, transparency, control and governance around their hedge fund investments. HedgeMark’s team is led by well-established industry professionals with extensive experience in the structuring, operations, monitoring and oversight of hedge fund managed account structures. To learn more about HedgeMark please visit www.hm.bnymellon.com

For further information/ Bill Santos, Managing Director, Global Head of Business Development HedgeMark Advisors, LLC, 780 Third Avenue, 44th Floor, New York, NY10017 e/ [email protected] t/ Main: +212 888 1300 w/ www.hm.bnymellon.com the new hedge fund Associate sponsor Innocap Performance data With more than a decade of experience in the hedge fund industry, Innocap1 operates a managed account intelligence platform across various jurisdictions. news and analysis The firm designs, implements and operates dedicated investment infrastructures, all while providing rigorous is here risk management and to enable and protect asset owners’ investment decisions. indices and tables Characterized by its specialized legal knowledge and its operational and risk management skills, Innocap facilitates institutional investment decisions via an enhanced investment framework, flexible and capable of research and rankings meeting evolving needs. Innocap has the advantage of leveraging the infrastructure of its shareholders, two o large financial institutions, while still remaining flexible. the only 360 view of mandates 1 Innocap Investment Management Inc. together with Innocap Global Investment Management Ltd the hedge fund world investors For further information/ Jonathan Planté, CAIA Caroline Bergeron, LL.M, CAIA Manager, Business Development & Investor Relations Manager, Business Development & Investor Relations e/ [email protected] t/ +1 514 390 7918 e/ [email protected] t/+1 514 390 5740 Sign up for free inS tant acceSS today m/ +1 514 242 3548 m/ +1 438 993 4351 w/ www.innocap.com www.hedgefundintelligence.com

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Man FRM (“FRM”) was founded in 1991 as a hedge fund research consultancy and in 1997 began managing outside capital in funds of hedge funds, with a focus on institutional clients. With an AUM of USD 12.3bn as at December 31, 2015, FRM is a specialist provider of open architecture hedge fund investment services to institutional investors. Working in partnership, FRM offers a flexible approach to implementing Hedge Fund solutions as an investor can choose to use our proprietary investment infrastructure (to operate their own internally managed portfolio), an advisory arrangement or a full discretionary mandate. FRM is and has always been a dedicated advisory and manager of hedge fund solutions ranging from customized and non- discretionary solutions, commingled fund of hedge funds, managed accounts implementation and outsourced research and consulting. FRM is wholly owned by Man Group plc (‘Man’), which is one of the largest, publicly listed, global alternative investment providers managing around USD 78.7 billion as at December 31, 2015. Man comprises four key investment engines, Man AHL (‘AHL’), Man FRM (‘FRM’), Man GLG (‘GLG’), and Man Numeric (‘Numeric’).

For further information/ Michelle McCloskey e/ [email protected] t/ +1 212 649 6611 w/ www.frmhedge.com

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