Natasha de Teran looks inside the world of alternative investment managed account platforms and finds out who’s new, who’s top and why?
Lyxor’s managed account capability is one of those fortunate accidents of history that occur only too rarely. The fund group’s Structured Alternative Investment arm has 1300 funds, 160 managed accounts and €21.1bn under management; it is the envy of banks and hedge fund providers everywhere and has won numerous hedge fund industry awards.
Lyxor was not really born to be a managed account platform: it was first created to give French bank Société Générale’s (SG) equity derivatives group a means of putting fund wrappers around structured products. However, it almost immediately gained a new remit after SG’s equity derivatives team decided that it wanted to write options on hedge funds.
SG’s risk management group was reluctant to take on hedge fund exposures, not least because the equity derivatives team’s interest in doing so had more or less coincided with the collapse of US hedge fund Long Term Capital Management. But the SG bankers were determined to find a means of satisfying risk management’s requirements, and so they addressed the liquidity, operational and transparency issues that were stalling their efforts. They did so by building a managed account platform under the Lyxor name.
|
“The concept of managed account platforms existed before we set up Lyxor but our initiative was unusual in that our platform was aimed exclusively at external investors – others were much more inward facing,” says Alain Dubois, chairman of Lyxor. |
The platform’s role
So what do managed account platforms do? Managed accounts effectively replicate and mirror the performance characteristics of a given benchmark hedge fund. The investment is called a managed account because it is a proprietary segregated fund vehicle in which investors’ assets are pooled and managed by the hedge fund manager of choice. The managed account platform’s role is to ensure that the manager replicates the strategy of the benchmark fund and complies with the platform’s pre-agreed transparency, risk management and trading requirements.
Richard Ho, head of fund-linked derivatives at Barclays Capital, says that the philosophy of using a managed account platform is best explained by looking at investor objectives. “Some investors are obviously much more sensitive to operational risk and transparency, and interested in seeing that a fund has safe custody arrangements. Typically, they will be looking for broad hedge fund exposure and for these investors the platforms work very well,” he says.
Ripe for growth
Mr Ho also believes that managed account funds should hold tremendous attraction to retail mom-and-pop type investors, a part of the business that is “ripe for growth”.
Elsewhere, however, there are mixed views on the benefits of managed accounts. Mr Ho says that for investors that are after niche hedge fund investments or that want exposure to well-established managers, managed account investments tend not to hold so much appeal. “Few of the better-established funds – such as those run by Citadel, Caxton and the like – are willing to replicate their funds for the platforms. Other funds that invest in niche markets will be put off by the transparency requirements of the platforms, and so also rarely replicate their funds on them.”
Although Mr Ho’s fund group has worked with both Lyxor and FTSE funds in the past, as well as having used HFR Asset Management’s platform more extensively, he estimates that in volume terms this represents less than 10% of his bank’s fund-linked structured product business. “We also write business directly on other funds; it very much depends on what we are trying to do, who we are doing it for and what their requirements are.”
Flagship funds
Julia Wilks, head of UK fund derivatives sales at BNP Paribas, says that the bank has found most investors are interested in BNP tying its products to flagship funds, “because investors feel they offer a more attractive proposition as managers are putting their life and soul into these funds”. But she says BNP will also build products around third party managed accounts “when it suits the structure”.
Amilcare Police, global head of the derivatives solutions group at ABN AMRO, is equally non-committal. He says that when his group does fund-linked transactions, it either takes the funds directly on to its books or it uses external managed account platform partners, “depending on the fund in question”.
Mixed views aside, there is evident envy of Lyxor’s business model, as demonstrated by the bank-led efforts to build a similar platform. Other banks that have attempted to emulate SG’s lead include Deutsche Bank, which hired Jean-Marie Barreau, a former head of SG’s fund derivatives group, in 2001 to build out the Xavex Alternative Investments platform. Mr Barreau has since left Deutsche to join CDC Ixis – and news about Xavex’s managed account platform capabilities has since been scant.
More recently, SG’s domestic rival, Crédit Agricole, ventured down the Lyxor route, again equipped with some former SG staffers to help it on its way. In September last year, Crédit Agricole Asset Management and Calyon, the bank’s corporate and investment banking division, forged a 50/50 joint venture, Crédit Agricole Structured Asset Management. The company closely follows the Lyxor model, bringing together a managed account platform, with structured investment products and exchange traded funds. Created with €33bn-worth of assets under management, it aims to reach €45bn by 2007.
Where others follow
Other banks on the trail, including Merrill Lynch and Morgan Stanley, are understood to have recently hired staff to build out similar capabilities.
There are others outside the banking sector. Although models vary from firm to firm, Lyxor also competes in the business with the likes of the Guggenheim managed account platform (run by the family office firm Guggenheim Partners), the US-based PlusFunds Group and Lyra Capital. Also in the managed account business are the Hedge Fund Investment Platform, which is owned by MSS, an independent alternative multi-fund asset management group, and HFR Asset Management, a platform run by Hedge Fund Research.
Of the latter, Mr Ho says: “We know and understand the HFR system and have a good level of comfort with it, its operational risk management and transparency requirements, and are able to structure a number of derivative solutions on its funds. HFR has also very helpfully introduced features that make it easier to structure products on its funds.”
Leading attractions
It is not surprising that others want to follow Lyxor’s lead in the managed account platform business. When SG’s equity derivatives business writes structured products linked to hedge funds, it has as close as possible to absolute control over the underlying fund – and it will not be giving up fees to outside firms as many of its rivals do. The economic importance of the venture is also undeniable. Lyxor now has €19.9bn in structured funds and more than E11bn in index tracking products, so there is more in its mix than the managed account business. However, JPMorgan analyst Kian Abouhossein estimates that it generated more than €500m of revenues for the bank last year – equal to about 25% of the bank’s total equity derivatives revenues. And, as more institutional money pours into the hedge fund sector, Lyxor’s star is set to rise even further.
Christophe Baurand, global head of alternative investment at Lyxor, says: “The fact that we are very risk focused is particularly attractive to institutional investors who are heavily regulated on the risk front but keen to add alternative investments to their portfolios. As a result, we are gaining more and more mandates from institutional investors to make allocations across funds on our platform.”
