Managed accounts or “MACs” aim to provide bespoke, cost-effective solutions for a number of difficult challenges faced by global hedge fund investors. For a start, MACs are designed to increase the efficiency and transparency of hedge fund investments. What is more, a MAC seeks to help an investor exercise effective control over their hedge fund assets as well as to understand the liquidity profile of their investments.
Man FRM (FRM) began building MACs for its own hedge fund investments in the mid-1990s. Since then we have developed a broad range of skills, which we believe may be of benefit to many different types of investors ranging from pension funds to insurers and other financial services providers and consultants. We believe the sophistication of our in-house infrastructure and our hedge fund investing skill distinguishes us from other MAC providers. We believe we are equally adept at helping investors to model and risk monitor managers at either end of the complexity spectrum – ranging from complex credit and relative value strategies to managed futures and equity long long-short funds.
In this article, we want to highlight two specific ways we can provide MAC solutions to investors. The first is for investors that need a broad, full-service solution. The second is for investors that want an infrastructure provider to build and run MAC solutions for them.
Full service MAC solutions
In every mandate investors want to take advantage of FRM infrastructure, and what we believe to be industry-wide credibility, in hedge fund investing. This can result in potential cost savings on fees and provide investors with tools, which are designed to increase the performance and value of their hedge fund investments. We can, for example, help tailor the hedge fund selection to compliment an entire investment portfolio, and over time dynamically adjust the allocation as market conditions and the client portfolio evolve.
FRM has built and run full service MACs for very different types of clients. We have provided solutions globally for European insurers as well as Japanese and US investors and UK pension funds. We have designed specific reporting programmes (covering, for example, SRI and Solvency II) and are well versed in working with clients to articulate their particular data requirements (covering, for example, positions, performance and risk) and then developing customised MAC solutions. As part of our hedge fund investment offer, MAC clients are provided with FRM’s online risk analysis tool, Clarus. Although a highly analytical system, Clarus was designed to have an extremely intuitive user interface. With Clarus, users can translate daily position level data into information clients can use to monitor and risk manage their MAC exposures within their overall portfolio.
The FRM Full Service Solution MAC platform is investment led, so we only open MACs with managers in whom we have confidence to invest capital. We built our MAC platform to better understand the managers we allocate to as hedge fund investors. Our aim today remains the same: to construct better portfolios, exercise control of the assets and create better transparency and risk analytics around hedge fund investments.
FRM continues to develop new ways to supply the MAC platform to investors. A recent example of this is the scalable and cost-effective MAC solution we built for a local government pension scheme (“LGPS”) in the UK. In this case, we developed a solution to build a diversified hedge fund portfolio customised for the particular investment mandate and requirements of the LGPS member. At the same time, however, the program we developed allows all of the LGPS’ underlying funds using the FRM MAC platform to benefit from a sliding management fee scale based upon their collective assets. Consequently, all of the LGPS funds are treated as a single investor with regard to the pricing of the MAC programme, while each scheme is treated individually and given a customised solution.
By using an FRM MAC, each LGPS fund can exercise full ownership over its hedge fund investments and have greater transparency over the underlying holdings. In addition, each LGPS fund can also benefit from the sliding management fee structure, which we believe provides a real collaboration opportunity for all of the LGPS funds that invest in hedge funds.
Since the financial crisis, we have seen a number of substantial institutional investors pivot from comingled investments to allocating to hedge funds directly. To maximise transparency and control these investors are increasingly looking to use MACs to allocate to their hedge funds. But this presents a challenge as setting up a MAC platform takes specialist skills, is complicated to do and is expensive to build. FRM’s substantial infrastructure capability with MACs is complimented by Man Group’s global infrastructure, trading platforms, legal expertise and outreach.
For new sophisticated investors looking to build managed account platforms, FRM offers a suite of customised and innovative solutions across the MAC interface. Areas of particular expertise include:
- Legal structuring
- Negotiation of trading agreements
- Risk monitoring, reporting and analytics via Clarus
- Portfolio optimisation
- Systems development and operational integration
- Project management to launch the MAC and full lifecycle support of it.
Yet beyond this agile skill set, it is important to remember that FRM is not a service provider. Rather we bring the perspective of a hedge fund investor to MACs and our clients receive the full firm-wide benefits of Man Group’s expertise and global scale. As investors ourselves, we very clearly understand the challenges that investors face. It also means that as investors we can share insight and perspective, and collaborate with clients as investors.
From first contact, FRM facilitates detailed and collaborative discussion to understand each investor’s specific MAC needs. Jurisdictional requirements are assessed as are operational, structural and other factors.
The aim of all this is to set the client up to focus on the investment decision making. FRM puts in place the technology and processes to facilitate the operational heavy lifting in setting up the MAC solution. Our collaborative approach and commitment to facilitating client requirements is designed to provide a major boost in end-investor capabilities and control.
We believe the benefits of these synergies to investors are often considerable. Indeed, we believe that an investor that opts to set up an infrastructure MAC could see a positive impact on performance largely due to anticipated savings from negotiating lower management and performance fees. Furthermore, we believe that annual operational fee reductions obtained through a MAC can produce additional savings for an investor.
The outlook for MACs
Many investors may be attracted to the long-term benefit of building partnerships around terms, strategy development, implementation and ideas sharing. Others may be looking for a pure, costeffective infrastructure solution. We think the hedge fund market place shows that MACs are playing an increasing role at either end of the complexity spectrum.
We believe MACs may offer a compelling solution for virtually any type of investor. They can provide customised Solvency II reporting for insurers and through enhanced analytics capabilities aid pension funds to improve asset allocationsby selecting more granular return-drivers.
At FRM, we work with clients to design and create MAC solutions. We aim to empower investors with the tools and operating expertise they need to achieve better risk adjusted returns from their hedge fund investments.