Larger Allocators Favoring Managed Accounts
In these turbulent economic times, the power in the alternative investment marketplace has begun to shift. In the “good old days,” many large funds had no need to market themselves; investors were chomping at the bit to allocate capital to top performers. Today, that is no longer the case, and many managers are facing the reality that it is now the big allocators who have the power in the alternatives space. This shift recently manifested itself when the California Public Employees’ Retirement System (CALPERS) renegotiated the fee structures of its managers in its favor.1 Managers are now catering to investors in ways they previously were not.
Take, for example, the use of managed accounts. Managed accounts are by no means new, but recently they have become increasingly popular. Because of the financial crisis, investors are more scrupulous than ever in their search for alternative investments, and they value the liquidity and transparency that managed accounts can provide. In addition, with the shifting power in the marketplace, more investors are in a position to demand access to funds through managed accounts.
The investors that are most able to take advantage of the market’s changing landscape are large allocators, such as government pensions, endowments, and foundations. These institutional investors are able to use their size to force fund managers to take on the added back-office complexity of managed accounts. Indeed, some say that the approximately 4 percent of hedge fund assets that are currently in managed accounts could increase to as much as 20 percent.2
Data gathered by BHA analysts reinforces this idea. Almost 70 percent of government pension plans contacted by BHA expressed an interest in managed account investments, compared with 38 percent for family offices.
Other large investors such as foundations and endowments also expressed similarly strong preferences for managed accounts. Seventy-nine percent of foundations and 63 percent of endowments contacted by BHA would invest in managed accounts.
Of course, with increased privilege comes increased responsibility. Managed account investors receive significantly more data regarding their investments, but this information is worthless without the ability to interpret and act upon it. Thus we find that institutional investors are investing more through managed accounts not only because they now have the power to do so, but also because they have the ability to benefit most from this structure.
1 Bloomberg Businessweek, “Calpers Managers Relational, Ares Agrees to Cut Fees,” June 17, 2010, http://www.businessweek.com/news/2010-06-17/calpers-managers-relational-ares-agree-to-cut-fees-correct-.html.
2 Financial News, “Breaking free from hedge fund gates,” June 7, 2010, http://www.efinancialnews.com/story/2010-06-07/breaking-free-from-hedge-fund-gates.