CEO Akhshaya Bhargava on the Butterfield Fulcrum managed accounts platform

Aug 01, 2010
by Dominic Hobson

It is not hard to see why hedge fund managers are unenthusiastic about managed accounts. They make it harder to trade and easier for investors to exit, because assets are always held in the name of the managed account and not of the fund manager. Unfortunately, there are some large institutional investors who are developing an appetite for managed accounts, and for reasons which are the mirror images of the reasons why hedge fund managers dislike them: transparency and liquidity. Large pension plans reported to be investigating the costs and benefits of managed accounts include the US industry bellwether pension fund CalPERS, the C$96 billion Ontario Teachers Pension Plan, and the Teacher Retirement System of Texas.

Akshaya Bhargava, CEO of alternative fund administrator Butterfield Fulcrum, thinks this is precisely why hedge fund managers cannot afford to ignore managed accounts. “There are large institutional investors who will invest in hedge funds in no other way,” he says. “They are saying, `Guys, if you want our money this is the only way you are going to get it.” He says that a growing number of hedge funds have accepted this logic. The question is: even if a fund is willing to accommodate managed accounts, how can hedge fund investors open one? Bhargava says the Altinus managed accounts platform launched by Butterfield Fulcrum in February this year is the answer. It is aimed at what he calls “allocators,” a catch-all term that describes mainly private banks and family offices that do not manage money in-house, but especially funds of funds.

Managed account platforms are nothing new. Sociéte Générale launched its Lyxor platform in 1998. Deutsche Bank says its managed accounts platform put on $8 billion in 2009, and Goldman Sachs Asset Management has also developed a platform. Innocap, the joint venture between National Bank of Canada and BNP Paribas, has published a white paper promoting the benefits of its own managed accounts platform. Likewise, some funds of funds of groups that developed managed account platforms on the back of client demand are now offering them to third parties. The Kenmar group, which developed its ClariTy managed account platform for its own funds, now hosts third parties. Man Group offers something similar, as do Gottex Fund Management - through its Gottex Solutions Services subsidiary – and HFR Asset Management.

But Bhargava reckons Altinus, which Butterfield Fulcrum developed in consultation with London-headquartered managed account consultants the MAG Consultancy, is a better answer. “If you are a fund of funds who cannot afford to set up your own managed accounts platform, why would you want to go to a platform owned by a competitor?” he asks. “Your only alternative is to go to one owned by a bank, but bank platforms are very inflexible. They are not designed to take allocator investment. They can, but they are designed primarily to distribute a bank’s own structured products.” What Bhargava means is that the banks set up what they call managed account platforms primarily to sell their own structured products (mostly capital-guaranteed funds based on equity derivatives but also indexed products, including ETFs). As a result, a bank-owned managed account platform differs from a pure managed account platform, in that the managed account is merely an ownership device that facilitates the investment strategy, not a tool designed to enhance transparency and liquidity for investors. Using them, argues Bhargava, forces hedge fund managers to offer investors greater liquidity without any concessions made for the negative impact of that greater liquidity on investment performance. “Altinus is not a structured product platform,” says Bhargava. “Our intention is not to enhance liquidity for the investor but to mirror the performance of the underlying fund. If the underlying fund offers monthly liquidity, so will our managed account.”

Hedge fund managers ought to like the idea of a managed account platform that keeps the liquidity of managed accounts in line with the liquidity of the underlying fund. But what will investors like about it? “The primary benefit for the investor is an independent governance mechanism,” says Bhargava. “It is a Madoff-proof structure. The control of securities and cash does not rest with the hedge fund manager. The hedge fund manager has only a limited power of attorney to trade on behalf of the managed account, and it can be revoked at any time. If an investor wants to exit and sell, he cannot be gated by the hedge fund manager. Because the manager does not control the securities and the cash, the risk of fraud is also minimal.”

There are consolations for hedge fund managers dismayed by this cession of control. They include arguments familiar from outsourcing sales pitches: standardization of the prime broker, hedge fund administrator and custodian bank agreements, leading to quick and easy set-up and operational efficiency. In fact, although investors are obviously forced to appoint Butterfield Fulcrum as administrator, they can simply choose their other service providers from pre-selected, pre-approved lists of prime brokers (Butterfield Fulcrum had four signed up at the time of writing), custodians, lawyers and auditors which have agreed to work with Altinus. The platform then offers investors immediate connectivity to access daily reconciliation, P & L and risk reports, and daily monitoring of investment portfolios against the investment guidelines laid down by the investor. Breaches of guidelines will prompt discussions that hedge fund managers will not always enjoy. But, as Bhargava points out, that degree of oversight is exactly what institutional investors are now demanding.

“The power of Altinus is its ability to unify the reporting and risk monitoring, and report risk to investors independently of the fund manager,” says Bhargava. “That, primarily, is what the investor gets. But the only way you can deliver it is by standardizing everything at the bottom of the pyramid. Because you have uniformity, and a single engine producing data, you have strong data integrity and a single flow of information.” Bhargava knows that hedge fund managers dislike the position-level monitoring that every managed account platform promises investors, but he says Altinus is capable of reassuring hedge fund managers on that very point. “We can analyse a portfolio without disclosing position information,” says Bhargava. “I can look at your portfolio, and give you the VaRs, the Monte Carlos, the Greeks, the volatilities, the portfolio compositions and concentrations, liquidity analysis, leverage analysis, and stress-tests against pre-set scenarios without disclosing anything sensitive. Our engine uses position–level data, but does not disclose it.



Accordingly, his view is that hedge fund managers would be wise to focus not on what they find irksome about managed accounts, such as the higher level of disclosure to investors, but how best to manage the increased operational complexity managed accounts are bound to impose on them. “More and more hedge fund managers are willing to take on managed accounts, but that does not take away the increased operational burden they have to put up with,” says Bhargava. “If you want to set up a managed account, you could be working at it for six months. Setting up a platform for managed accounts could take 12 months. That is exactly why we think this is an opportunity.” He says a managed account can be up and running on Altinus inside three months.

Altinus offers both segregated accounts (which enable an investor to host multiple hedge fund managers in a single account) and commingled accounts (which enable a hedge fund manager to host multiple investors in a single account). Bhargava thinks commingled accounts enable hedge fund managers to offer managed accounts to much smaller slugs of money. “Hedge fund managers are reluctant to open managed accounts for investments worth less than $200 million,” says Bhargava. “A commingled account allows him to offer managed accounts to five investors with $40 million each. They can attract smaller investors who would not invest in their funds without a managed account.”

It follows that small or start-up funds are not going to find Altinus useful, and nor are successful and large or secretive funds which can pick and choose between investors. “It will appeal to the vast majority in between,” says Bhargava.

If Altinus does attract a following, it will mark an important stage in the slow maturation of the hedge fund administration industry. The fiduciary role of the administrator was long obscured by the relative weakness of the administrator in the bull market days when hedge fund managers carried all before them, and the challenge for investors was not to get transparency or liquidity, but allocations in the funds they admired. Now it is hedge fund managers that are courting investors, not investors hedge funds, and managed accounts are a symptom of that change in the balance of power. Bhargava is never slow to remind an audience of the importance of the role of the administrator (“The only source of independently reconciled information in the hedge fund industry is the administrator,” he says) and believes that the independence of Butterfield Fulcrum is the best sales tool for Altinus. “Altinus is owned neither by a bank nor by a fund of funds,” he explains. “It is completely independent and totally neutral. It does not provide investment advice. It does not do manager selection. It does not do portfolio allocation. It is basically a utility, with a framework of common processes and systems, that allow you to set up a managed account quickly, cheaply and easily.”

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