Deutsche responds to shifting investor demands for managed accounts

Service Provider Rankings 2012

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Use of managed accounts by hedge fund investors is changing. As the investor base becomes more institutional, there is also a growing demand from private banks and family offices for a way to invest in hedge funds that does not expose them to the same risks as a commingled fund and at the same time offers more transparency.

The reasons for investing through a managed account are also evolving and broadening. “We are seeing reporting becoming a much more important area. The bank can provide aggregated reporting that can only really be done when you have a managed account. We are seeing a driver from the regulatory side as well with Basel III and new solvency requirements,” says Martin Fothergill, a managing director at Deutsche Bank.

The investor base may shift and change but the traditional reasons for investing through managed accounts – liquidity, transparency and risk controls – remain the same. “As a business we are seeing a much broader range of reasons why people invest in managed accounts. Some investors will be focused on liquidity. Some investors aren’t interested so much in liquidity, for them it’s all about risk management and fraud control. Clients have much more diverse needs.”

Another factor is the shifting nature of funds of hedge funds (FoHFs), which are taking a more consultative approach when working with investors. This trend is also driving a change in the way managed accounts are used. In some cases, says Fothergill, end-investors are putting money directly into Deutsche’s managed accounts platform (MAP) with the FoHF providing advice on the investment strategy.

Deutsche Bank ranked top for all four platform categories in the service provider rankings, topping the voting for managed account and Ucits platforms from a hedge fund/FoHF and investor viewpoints.

The bank has risen up the platform rankings this year. Last year, it topped the MAP from an investor viewpoint category but was second when ranked from a hedge fund/FoHF viewpoint. It ranked third in both Ucits platform categories.

Goldman moved to second place from fourth place in the MAP from an investor viewpoint category, securing 14.1% of the vote this year. Lyxor Asset Management slipped from first place in the MAP from a hedge fund/FoHF viewpoint in 2011 to second this year.

Bank of America Merrill Lynch lost its top spot in the Ucits platform from an investor viewpoint ranking, coming second this year with 17.7% of votes.

Deutsche runs two MAPs. The dbalternatives platform had assets under management (AUM) totalling $6.7 billion with 84 funds at the end of June 2012. The db Select Managed Investment Platform, which started operating in 2005, had $5.1 billion AUM in June 2012 with 148 funds.

The dbalternatives MAP celebrated its tenth anniversary in October. Despite its longevity, Deutsche is continually updating the platform and reacting to changing investor demands.

One of these is customisation. For the past three years, the MAP has been taking a more bespoke approach to building portfolios for customers. This includes offering funds of one, the demand for which has particularly grown over the past 12–18 months with investors taking a more proactive approach to manager selection.

“We are seeing many clients now using some of the existing managers on the platform and asking us to on-board particular managers who they like or are core for their portfolios,” explains Fothergill.

“That flexibility is attractive to investors and also to the managers. When you look at it from the manager’s perspective, they are coming under pressure from their own clients to be on MAPs so we are satisfying both communities – the manager community and the investor community.”

The move towards customisation extends across the industry, driven mainly by institutional investors who are increasingly using managed accounts. Lyxor Asset Management, which ranked second among hedge funds and FoHFs for its MAP, taking a 14.5% share of votes, runs a private managed account platform for Dutch pension fund PGGM. Lyxor is also developing the same type of platform for the California State Teachers Retirement System.

Investors are also becoming more demanding about the levels of reporting that MAPs provide. This is part of a general shift in the hedge fund industry as more institutional money is invested. “There is definitely a heightened demand for more detailed and more sophisticated reporting,” says Fothergill.

“The industry as a whole has taken huge steps forward in that area over the past few years but there is no doubt managed account investors are looking to managed account providers and platforms to offer ever more detailed reporting,” he adds.

Deutsche has been rebuilding its reporting systems in response to this demand. The new system is able to handle more sophisticated instruments and enhances the platform’s risk management, regulatory monitoring and client reporting. The investor reporting part of this system became available to clients in October.

Adding the capability to price and risk manage more complex securities has allowed the platform to expand to take on board different strategies and managers. It has added bank debt, mortgages and interest rate swaps to the instruments that can be traded on the platform.

Overall the range of hedge fund strategies on offer from MAPs is broadening. However, according to a Hedge Funds Review survey, 50% of total MAP assets are still in macro strategies including currency, commodity and managed futures strategies (www.hedgefundsreview.com/2208972).

The addition of new instruments to the Deutsche platforms means the accounts can track the underlying strategies more effectively. This is key, says Matthew Lamb, a managing director at GAM, which uses Deutsche’s MAP for its single manager funds.

“The end goal for everybody, which should be the platform’s goals as well, is to make sure the tracking error between the two funds is as negligible as possible,” he says. Deutsche’s platform runs its funds pari passu to the reference fund so there should be little tracking error between the two.

Two funds, GAM Star Global Rates and GAM Star Emerging Markets Rates, are on the dbalternatives platform. A carve out of its global rates product, which provides just the foreign exchange part of the fund, is on the db Select platform.

“If you can give someone the benefits of a managed account without any of the tracking error issues, that has to be the ultimate goal, especially in an environment where there are Ucits funds and other ways to get good governance and liquidity around hedge fund strategies. Managed accounts are not the only solution,” says Lamb.

“We think [Deutsche] are one of the best out there in terms of operationally being able to set things up and the support they offer from an infrastructure perspective. The ability to trade on the account and run the account pari passu to the reference fund has been seamless,” he continues.

“Their programme allows great flexibility for us to manage the managed account in exactly the same way we manage the reference fund. It’s important for clients, it’s important for us as it means it’s not a distraction. That’s why the relationship works.”

Demand for managed accounts is expected to increase as more institutional investors opt for this method of direct investment. As assets in MAPs continue to grow, Deutsche is confident it will be able to expand its offering.

In addition, the appetite for Ucits hedge fund strategies with a Ucits wrapper remains strong, particularly among European institutions limited in their ability to invest directly into funds. Fothergill believes demand for both Ucits hedge funds and managed accounts will remain robust. However, the industry as a whole faces some challenges. “Clearly managers need to perform relative to markets. That is an industry-wide issue,” says Fothergill.

Regulatory changes will continue to be another key consideration for hedge funds over the coming year. Institutional investors face their own regulatory requirements, such as Solvency II for insurance companies. While this presents challenges for the hedge funds industry, Fothergill believes the changing regulatory environment will benefit Deutsche’s platforms.

“In many cases [the regulations] are positive for Ucits and managed accounts in that we can address investors’ regulatory requirements either through a regulated structure or various constructs or particularly where reporting is required.”

 

Managed account platform from hedge fund/FoHF viewpoint - global votes
1 Deutsche Bank (25.5%)
2 Lyxor Asset Management (14.5%)
3 Goldman Sachs (9.8%)
4 AlphaMetrix (9.5%)
5 Gottex (7.1%)

Managed account platform from investor viewpoint - global votes
1 Deutsche Bank (20.6%)
2 Goldman Sachs (14.1%)
3 Innocap (9.2%)
4 AlphaMetrix (9.0%)
5 Lyxor Asset Management (8.5%)

Ucits from investor viewpoint - global votes
1 Deutsche Bank (24.7%)
2 Bank of America Merrill Lynch (17.7%)
3 Morgan Stanley (12.0%)
4 Lyxor Asset Management (9.6%)
5 Credit Suisse (6.4%)

Ucits platform from hedge fund/FoHF viewpoint - global votes
1 Deutsche Bank (20.9%)
2 Bank of America Merrill Lynch (13.7%)
3 Lyxor Asset Management (10.3%)
4 Morgan Stanley (9.6%)
5 Credit Suisse (7.4%)

 

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