Managed accounts, which had been relegated by investors and fund managers to the backburner in the days leading up to the financial crisis, have been making a comeback after 2009.

A lot of this has to do with the surge of funds that flowed to the hedge fund industry in recent years, particularly from institutional investors. An annual survey by Pensions and Investments showed that assets of the full universe of 159 institutionally oriented, single and multi-strategy hedge fund managers increased 15.4% to $1.5 trillion in the 12 months ended June 30, 2014.

Institutions coped with an ultra-low interest rate environment by increasing their allocations to the hedge fund industry, seeking better returns from alternative investing. Hedge funds appeared to have erased their somewhat negative public reception as sophisticated investors developed fresh appreciation for the benefits they offer.

The Madoff scandal, however, drove home the point that there must be a better way to hold and manage the assets entrusted to hedge funds. Here managed accounts offered superior control, governance and a welcome dilineation between the manager and the assets.

“Major institutional investors are making ever increasing allocations to hedge funds, and they are frequently choosing to do so through managed accounts – for the benefits of transparency, liquidity, and control that they provide,” says Howard Moore in his September 2014 report on managed accounts published by Hedge Fund Intelligence.

Managed accounts 101

A managed account is an investment account that is owned by an individual investor and looked after by a hired professional money manager. In contrast to mutual funds (which are professionally managed on behalf of many mutual-fund holders) or unit trusts, managed accounts are personalized investment portfolios tailored to the specific needs of the account holder. (Investopedia)

Here are charts that explain how managed accounts work.

Source: professionalplanner.com

Source: frmhedge.com

Managed account platforms became the interface between institutional or high net worth investors and their hedge fund manager, and offered, in addition to the known advantages of managed accounts, detailed information and monitoring data needed for the increasingly complex regulatory environment.

Managed accounts growth

“It is for this reason above all that managed accounts have become attractive for institutional investors that want access to the hedge fund manager in a structure that allows them to understand their investments, address their fiduciary duties. maintain control over their assets, avoid the risk of fraud, and obtain independent evaluation of the overall portfolio,” says Moore.

Lessons from 2008 also played a role – the opacity of hedge fund information and restrictions on redemptions hampered timely actions to minimize losses when the crisis struck. Today, managed accounts offer daily information, high technology data analysis, and risk management often customized to the needs of the investor. “This is a major shift for portfolio and risk management with the ability to take action, in a more tactical and timely manner,” observes HedgeMark’s global head of business development, Bill Santos.

Not surprisingly, assets on managed account platforms grew 8% during the first half of 2014, as shown in this table.

Indeed, according to the report, some of the largest global institutions are seeking to avail of these advantages by moving their entire hedge fund allocations onto managed account platforms.

Interestingly, there are occasions when an institution and hedge fund manager themselves select a managed fund platform to implement the management of the investments – a sea change from the traditional practice of a managed account provider getting a fund manager on board and then raising assets from investors.

Critical mass

Since a managed account requires more of a hedge fund manager’s time and attention, typically, only investments above a certain minimum make it worthwhile for the manager, and therefore the investor.

“The benefits of transparency, liquidity and control, when weighed against the costs, do not make sense unless they support a large investment,” says the report. In Europe, for example, $50 million is the minimum allocation that makes economic sense for a managed account platform.

At the other end of the spectrum, there are some pension funds considering investments in managed accounts of amounts as high as $4 billion $5 billion.

Customization on the rise

Investors now have the ability, through managed accounts to customize their investment profile – if necessary to avoid taboos like tobacco and weapons, or to focus on a specific region, or implement a desired strategy.

“Within a managed account structure, you can work with managers in more creative ways,” says Michelle McCloskey, senior managing editor at Man Investments FRM. “Based on the amount of interest we’re seeing in terms of customized investment solutions, we expect the momentum to continue.”

Costs

Another advantage of the managed account format is that it frees up the hedge fund manager to do what he does best – trade, leaving the other, non-investing functions to the platform administration.

This also reduces the fees payable to the hedge fund by the investor. In any case, managed accounts also make it easy to align to the hedge fund manager’s fees with a clearer picture of his performance.

“With managed accounts, you have the metrics to measure performance and the sources of that performance,” says Andrew Lapkin, CEO of HedgeMark. Additionally, investors may restructure the fees to ensure proper alignment.”

With managed accounts, the calculation of fees could even be done over a multi-year period, ensuring that longer-term perfomance is rewarded.