How’d They Manage That?
In the wake of the recent financial crisis, many investors are looking for a higher degree of control. As clients of hedge funds, they were horrified to learn of the illiquidity and lack of transparency associated with the fund structure as losses mounted. Fraud cases such as Madoff Securities further heightened investors’ awareness of the need for greater transparency in this opaque industry.
For investors that enjoy the advantages of hedge fund investments but cannot stomach the risks involved, there is a solution: managed accounts. Managed accounts are an optimal way for investors to mitigate risk and develop a properly diversified portfolio. They provide investors with the opportunity to have a more transparent and liquid investment.
The type of investors using managed accounts has changed since the crisis. In the past, hedge funds generally required a minimum investment of about $10 million before they would create a separately managed account for an investor. Recently, however, investment managers have lowered the bar. Some managers are now offering managed accounts for an allocation as low as $5 million. This is due to the overall trend towards greater liquidity, transparency, and proper risk management in a hedge fund-like portfolio.
As we track investor trends, BHA has found many types of investors looking at managed-accounts investments, but the biggest change has happened in the fund of funds space. Many funds of funds managers have reported that going forward they will be investing only through managed accounts. Scores of funds of funds were burned by gates towards the end of 2008 and, in an effort to avoid making a similar mistake, are changing their current investment paradigm.
A fund of funds based in London noted that it now requires managed accounts and funds to undergo annual corporate financial audits. Another fund noted it was changing its investment structure to be 80 percent managed accounts and UCITS III investments due to the risky market environment.
Investors are starting to learn their lesson from the financial collapse. By demanding a higher degree of liquidity and transparency, investors are also demanding change in the financial system.