In the press

• Hedge fund investors brace managed accounts
  Dane Hamilton, Reuters, 14 March 2007
  NEW YORK, March 14 (Reuters) - The abrupt implosion of the $9.5 billion hedge fund Amaranth Advisors last year boosted demand for a relatively new investment called the managed account, participants heard at a New York conference on Wednesday. While still a small proportion of the $1.4 trillion hedge fund industry, managed account use is growing because it offers benefits over traditional hedge fund investing, proponents said. Top among them is transparency: an investor knows which holdings a hedge fund is invested in and can liquidate those positions quickly..........Click here to read on..
  
• More from Managed Accounts USA in New York
  http://www.allaboutalpha.com/blog/
  Alpha Male hangs out with managed account types in Lower Manhattan again today at Managed Accounts USA.
  Jack Schwager, best-selling author and executive with Fortune Group, a fund of funds manager, just redeemed all his underlying hedge funds. But business is better than ever, he says.....Click here to read on..

Jack Schwager, best-selling author and executive with Fortune Group, a fund of funds manager, just redeemed all his underlying hedge funds. But business is better than ever, he says.

Instead of investing in hedge funds by buying units directly in the LPs, he has directed all of his managers to establish accounts on a managed accounts platform.  Now he essentially owns the same funds, but with the transparency, liquidity and valuation of which most funds of funds can only dream.

A lack of transparency is the root cause for all blow-ups and frauds in the hedge fund industry, he says.

“Every problem, I don’t care what it is – whether it’s a fraud, blowup or whatever, is caused by one thing: a lack of transparency.”

To add insult to injury, Schwager contends that this lack of transparency is compounded by litany of other problems with traditional hedge fund investments (lack of liquidity, lockups, redemption penalties, slow return of capital, audit holdbacks, gates, side pockets).

He claims to have solved all of these issues by moving from direct investments to managed accounts. In addition, he says he now has access to a host of smaller funds on the platform that were either too small or had inadequate infrastructure to allow a direct investment by Fortune.

Like long-only investors, Fortune is now able to construct alpha/beta “core/satellite” portfolios. But instead of owning the passive market (beta) and a hedge fund (alpha), he can – in effect – own a passive hedge fund index and overlay upon it Fortune’s own active fund picks.

Schwager says the number of hedge funds on managed account platforms will “dramatically increase” over the next five years. To back up this prediction, he lays out the following evolutionary path:

• Some investable indexes will begin to offer their portfolios via managed accounts. 
• A few funds of funds will begin offering dynamically managed portfolios via managed account. More funds of funds will follow suit. 
• Institutions will begin to see similarly performing portfolios via managed account that offer full transparency and better terms. Large investors will migrate to managed accounts. 
• Managers see investment bleeding to those who provide managed accounts. More managers will join managed accounts platforms.

Heard on the floor…

An anonymous institutional investor on position-level transparency: “I’m sick and tired of managers not wanting to reveal their “secret” position in, like, Cisco.  Please!”

Freeman & Co’s Eric Webber on Funds of Funds M&A: “As far as potential acquirers are concerned, the funds of funds industry is becoming divided into the ‘haves’ and ‘have nots’. The ‘have nots’ tend to be the fund of funds managers with a 25-year career on Wall Street and a great rolodex who acts as a classic “’tock picker’ of managers. The ‘haves’ tend to be those funds of funds that take a far more systematic approach. You may not agree with that characterization, but that’s the way the potential buyers see it.”

Hedge fund investors embrace managed accounts
Dane Hamilton, Reuters, 14 March 2007

NEW YORK, March 14 (Reuters) - The abrupt implosion of the $9.5 billion hedge fund Amaranth Advisors last year boosted demand for a relatively new investment called the managed account, participants heard at a New York conference on Wednesday.

While still a small proportion of the $1.4 trillion hedge fund industry, managed account use is growing because it offers benefits over traditional hedge fund investing, proponents said. Top among them is transparency: an investor knows which holdings a hedge fund is invested in and can liquidate those positions quickly.

The use of managed accounts, which are essentially segregated portfolios directed by a hedge fund manager, comes as demand for hedging strategies continues to surge with institutional investors looking for consistent and high returns.

But investors are equally worried about avoiding hedge fund implosions that periodically rock the industry, such as Amaranth, Bayou Group and Singapore-based Aman Capital, which blew up in 2005 after it lost 20 percent of its $242 million portfolio over one week. Some say better transparency and liquidity is one solution.

"Things can go spectacularly wrong over a short period of time," said Simon Hookway, chief executive of London-based MSS Capital Ltd., which has some $300 million allocated to 40 hedge funds, including managed accounts. "The hedge for investment risk is adequate transparency and diversity across a portfolio."

In a typical hedge fund, investors are privy to the fund's strategy and objectives, but not individual holdings, leverage levels and other data. In a typical managed account, however, investors have daily access to data on a hedge fund's holdings, leverage positions and net asset values.

And importantly, the managed account is considered the property of the investor, meaning positions can be liquidated as soon as trouble is sensed.

For instance, some investors could have bailed out of Amaranth prior to its collapse had they known the fund was heavily allocated to one highly leveraged strategy: betting that the price of natural gas would rise. The firm lost over $6 billion over two weeks last September, the worst loss in hedge fund history.

Hedge fund managers, which typically cherish their secrecy and independence, have not embraced managed accounts, however. Investors generally have to allocate some $30 million to $100 million to persuade a hedge fund manager to set up such an account, according to MSS.

Still, many of the largest hedge fund groups, such as London-based GLG Partners, RAB Capital Plc (RAB.L: Quote, Profile, Research) and Lansdowne Partners, do accept managed accounts, and more are considering it.

"What you end up with is for a client to be able to create unique risk-return solutions," said Garry Crowder, chief executive of CASAM Americas, which helps manage some $4.3 billion, much of it through 71 managed accounts as part of Credit Agricole Structured Asset Management (CAGR.PA: Quote, Profile, Research).

Crowder said some investors are not enthralled with the concept of managed accounts, since knowing each of the thousands of trades a fund many execute daily may not be indicative of how the fund is performing. But his firm provides investors with daily net asset values and other information to investors to better evaluate their holdings and avoid risk pitfalls.