European Fund of Hedge Funds Awards 2016
Institutional investors want liquidity and transparency. How they access these two areas encompasses not only a wide range of structures and options but also entails a significant commitment to investment in the technology that allows analysis and integration of these investments into a wider portfolio.
As alternative investment strategies continue to be attractive for investors as a protection on the downside and as a diversifier, institutional investors, however, are still struggling to find cost-effective and efficient ways to access these strategies, and especially those in hedge fund formats. One way to gain the exposure with minimal fuss and in a cost-efficient regulated structure that is transparent and relatively liquid is through the Deutsche Bank Liquid Alternatives Platform, say Martin Fothergill, head of multi-asset product, and Manos Chatiras, head of liquid alternatives – hedge funds, at Deutsche Bank (DB).
The DB platform is made up of three distinctive parts and Fothergill and Chatiras believe it addresses a full range of strategies, while at the same time it is accessible for a wide range of investors.
One part of the platform focuses on Ucits funds through DB Platinum. These Ucits-compliant funds are domiciled in Luxembourg. There are funds on this platform covering equity hedge and equity market-neutral strategies as well as credit and commodity trading advisers (CTAs).
The dbalternatives brand covers alternative investment funds (AIFs) created under the European Union's Alternative Investment Fund Managers Directive (AIFMD), with more than 40 strategies currently available including equity hedge, equity market neutral, event driven, credit, CTAs and macro. EU AIFs domiciled in Ireland and non-EU-domiciled AIFs in Jersey are available, allowing for onshore and offshore structures.
The unfunded managed accounts, dbselect, gives the framework for investors to access margin-based strategies in a cash-efficient way. There are more than 100 managed accounts available covering CTAs, macro, commodities, foreign exchange and risk premia strategies.
Through these structures, investors have a range of investment products including commingled managed accounts and unfunded managed accounts as well as dedicated or single investor managed accounts and customised solutions. Tax- and regulation-efficient products and structured products are also offered along with indexes of managed accounts.
This business is only as good as its content. We pay attention to managers that add value to investors. Different investors use the platform differently and we need to be aware of that
In the immediate aftermath of the financial crisis, investors beat a path to any door marked transparency and liquidity. While managed accounts were initially seen as a solution, it became clear relatively quickly that the vast majority of investors could not manage such structures easily without spending a great deal of money. On the other side, hedge fund managers were reluctant to move into managed accounts, preferring commingled Cayman vehicles.
A lot has changed. Not only are more hedge fund managers interested in managed accounts but they are also much more flexible in how they offer their strategies. In addition, by necessity they have had to become used to more regulation and greater demands from investors for access to strategy details.
Liquid alternatives, shorthand for any strategy that offers daily or weekly redemption, have become the sought-after solution for many institutional investors, not least because, in Europe, liquid alts are found in a Ucits-compliant structure.
Most of the larger hedge fund shops with compatible strategies have products based on liquid alts, either through the US '40 Act or European Ucits wrappers. These managers are also much more open to managed account solutions.
There is another structure that works for almost all investors and alternative strategies but is not being explored by many institutional investors or managers. These are funds offered under AIFMD.
Despite the attractions of AIFMD funds, the fastest growth for DB has been in Ucits products, although Chatiras and Fothergill expect AIFMD structures to gain more traction once investors have become comfortable with the directive. Another reason investors will need AIFMD funds is in order to access the illiquidity premium, something more or less impossible through Ucits wrappers.
"We are spending a lot of time with managers at the moment talking about AIFMD. Instead of stripped-down versions of a strategy squeezed into a Ucits format, AIFMD allows the full strategy. We see this as an important evolution to our European onshore business," notes Fothergill.
Chatiras agrees that getting acceptance of AIFMD products is an educational and communications challenge. While it may take three or five years to broaden the investment universe, he is confident investors and managers will eventually embrace this structure. While AIFMD funds make up the smallest number across the platform at the moment, Fothergill and Chatiras believe this will eventually be the future and where growth will be.
Over the last 14 years, DB has launched more than 400 hedge fund strategies into the managed accounts segment of the platform, ranging from start-ups to large brand-name hedge funds. Growth has been strong in Ucits products, the fastest-growing area in 2016. The single manager Ucits platform has grown with a compound annual growth rate of more than 50% since inception in 2010, with the platform recognised as one of the fastest growing in this segment of the business.
Innovation breeds success
Success they say is due to continued innovation. At present, DB is focusing on content, regardless of the life cycle of the manager. "If it is the right content for the platform, we put in enormous effort to educate the manager in order to get them to sign up for the platform," says Chatiras. "This business is only as good as its content. We pay attention to managers that add value to investors. Different investors use the platform differently and we need to be aware of that," he adds.
The Ucits platform has seen interest growing for specialist strategies. Over the past 24 months, relative value strategies have been doing particularly well and so efforts have been made to bring good performing managers in this area onto the platform. However, it takes a lot of knowledge to bring these strategies into a regulated environment. "Innovation is paramount to enable managers of esoteric hedge fund strategies such as relative value to trade their strategy within the Ucits framework," Chatiras notes.
At the same time, hedge fund managers are continuing to launch strategies in different formats. While there is clearly a market for liquid alternatives, there are also investors happy to pay the 2% management fee/20% performance fee associated with pure-play hedge funds. In between, there is a range of different products managers are beginning to offer.
Some of the best-selling products on the platform, says Fothergill, are true hedge funds running relative value strategies. Investors are prepared to pay for that.
At the other end, managers that do not feel so capacity constrained are able to deliver products at lower costs.
DB is also seeing a second generation of funds, where managers are used to offering a strategy in the mutual fund format and are now able to offer better versions of the strategy at lower costs but closer to the flagship fund. Some are offering complete carve outs of multi-strategy products with lower fees.
What's really key is technology. Clients want transparency and risk reporting and they expect to receive it on demand and in a convenient, intuitive format
Whatever the solution, it comes down to technology, says Fothergill. "What's really key is technology. Clients want transparency and risk reporting and they expect to receive it on demand and in a convenient, intuitive format," says Fothergill.
This has led to constant updates of Mars (managed account reporting service), the custom-built daily online investor portal designed for hedge fund investors and asset allocators. "It's a huge part of what we do," says Fothergill. Mars 3, released in December 2016, significantly upgraded the functions and allows investors access to information when it is most convenient for them, in different formats and with the ability to combine with other portfolios.
The upgraded system allows live scenario analysis. For example, what would have happened to an investor's portfolio if on X day rates went up or oil or gold dropped? Click and the answer is available.
Investors will be able to observe correlations between asset classes and interest rates quickly and easily and to extrapolate information for other portfolios and uses.
The system is also in essence an online portfolio management tool that allows investors to go online and rebalance their portfolio on a T+1 basis without the need to wait for redemptions.
Used as a way to view transparency and risk reporting functions, it allows investors to view a portfolio at an aggregated and single manager level. "The biggest challenge was to make Mars 3 relevant for someone who is not a risk expert, but wants an understanding of the risk, while at the same time giving the depth the risk expert needs," explains Chatiras.
The platform also addresses environmental, social and governance (ESG) concerns and socially responsible investment (SRI) issues, which are becoming more pressing for many large pension funds. Fothergill believes the platform has been able to solve the challenge of addressing ESG/SRI concerns for a wide range of clients.
Since launching the alternative Ucits platform, several equities have been excluded from portfolios on the basis of ESG/SRI guidelines. Solvency II has also prompted further drilling down into holdings, giving the transparency needed for that directive as well as for further ESG/SRI monitoring.
Fothergill believes this area of monitoring will become even more prominent in future.
For the immediate future, Fothergill and Chatiras remain focused on finding more managers to bring onto the platform and finding solutions that allow more esoteric and niche strategies to be comfortable within a managed account format or other regulated wrappers. For the future, both say continuing innovation with an eye on the overall evolution of the alternatives industry will be needed to keep the platform relevant and useful for investors.
Deutsche Bank Liquid Alternatives Platform also won best managed accounts platform.
The week on Risk.net, July 14–20, 2017Receive this by email