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New York (HedgeCo.net) – The GlobeOp seminar drew a capacity audience of hedge fund investors and managers, representing approximately $260 billion in assets under management, in New York City over the weekend.
Speakers representing Lighthouse Investment Partners, Lyxor Asset Management, Waterstone Capital Management, Bracewell & Giuliani, Newedge Group and GlobeOp offered insights on hedge fund manager selection, legal requirements, middle-back office services, controls and monitoring.
Excepts from the presentations include:
Sean McGould, president and co-chief investment officer, Lighthouse Partners “We transitioned to managed accounts over the last five years for the added benefits of transparency, flexibility, and control. Full transparency allows for a deeper focus than has traditionally been the case, especially during the manager selection process. For prospective managers, there are three primary considerations. First, does the manager offer real diversification or do they merely compound existing risks? This can only be accurately measured by layering a prospect’s daily position level data into the portfolio and conducting a deep statistical analysis. Second, is the portfolio highly correlated to the most widely held names or other dominant themes within the hedge fund universe? Having the ability to confirm the uniqueness of a prospect’s portfolio is of great benefit and increases the level of overall diversification. Finally, if the manager meets these tests, is there a willingness to commit the resources necessary to make a managed account feasible and the on-boarding process as seamless as possible? …Flexibility is key to remaining opportunistic and taking advantage of market dislocations. …The benefit of control speaks for itself after a year like 2008.
Nathanael Benzaken, managing director, Lyxor Asset Management “The two main risks for investors are market risk and operations risk – one to manage and the other to mitigate… The challenge with transparency is how to exploit it. To understand risk, investors need robust software, experienced risk managers, and an appropriate risk methodology. Only scenario and stress test models can help assess tail risk in dislocated markets. VaR is not appropriate, unless perhaps for manager-level portfolio construction… The managed account’s segregation facilitates operational risk management. This is the most important risk to eliminate because it creates a short put equivalent position for investors – it’s the ‘dark side’…. All managed accounts and platforms are not equal. Some are ‘Madoff-able;’ some are ‘Amaranth-able.’ For full transparency and to identify risk and/or style drift early, in-depth and regular due diligence should be done on the underlying managers, the platform structure and infrastructure – at inception and throughout the life of the relationships.
Risk monitoring is nothing, what really matters is risk management. The goal is not to second- guess or intervene in portfolio management, but to understand and take clear action when it’s necessary – for instance in the case of mitigating counterparty risk or when confidence in the manager is lost (e.g. breach of mandate).”
Martin Kalish, chief operating officer, chief financial officer, Waterstone Capital Management “Managed accounts are not for everyone – does it fit your business plan? The manager seeks a long-term investor; the investor requires assurance of the manager’s experience in running a managed account. Consider whether the investor will understand and be responsible for the portfolio information they receive — is more support time needed than for other fund investors? …The mandate is also key – its definitions can significantly impact asset allocation, concentrations, leverage, liquidity, operations and risk management compared to the flagship fund.
Cost and resources also matter. Managed accounts are about data management. Operational systems are needed to create reporting transparency. Is there sufficient operational staff for trade allocation, valuation and settlement, portfolio accounting and programming? …It’s very difficult to run multiple funds without investing in technology. Trade allocations should be automated to mitigate manual intervention. … Investors also need resources to execute managed accounts – it requires two-three months, including the key challenges of the legal aspects and establishing prime broker accounts.”
John Brunjes, partner, Bracewell & Giuliani “The structure and terms an investor prefers in the managed account involve a fully-negotiated process. For the investment advisor, a managed account is a separate client under the Investment Advisors act. At the level of 15 clients, the advisor must become SEC-registered and operate in a registered environment – a new challenge for some. For the investor, the arrangement gives power of attorney to the manager to trade the account, subject to restrictions the investor defines. It is a fee-for-service arrangement as opposed to the two-and-twenty structure traditional in pooled capital. Many investors, in consultation with their managers, create a special purpose vehicle, usually a limited liability company. To avoid project execution risk, investors should ensure the manager has already strategically decided to undertake managed account arrangements and is prepared for what it entails.
The mandate or operating agreement defines the type of trading authorisations and restrictions governing the manager, including sector, concentrations or company specifics. As the direct owner of the securities, the investor also assumes liability and compliance responsibilities.
Investors increasingly specify independent administrators to provide checks and balances on managers, including asset and portfolio valuation, daily position and risk reporting, etc. The registered environment also stipulates administrative, infrastructure and reporting requirements. Independent involvement in providing transparency, checks and balances to various managed account components can offer more comfort to investors, which is why these vehicles are increasingly attractive.”
Cary Goldstein, associate director, Newedge USA, Prime Brokerage Group “A managed account platform will have more than one hedge fund manager trading for multiple vehicles, multiple prime broker relationships and a single administrator across all accounts. From a trading perspective, the most significant implication for each fund manager is the need for a trade allocation process to split trades appropriately between the managed accounts and the flagship fund. For liquid, listed instruments, this is fairly straight-forward. But it can be more complex for OTC and illiquid instruments – distinct trades may be needed for each managed account and flagship fund, with good monitoring to mitigate tracking errors… In a managed account, investors view the ability to control of the amount of leverage utilised to be an advantage.”
Vernon Barback, president, chief operating officer, GlobeOp Financial Services “Administration for managed accounts should focus on what the investor wants and needs. Best practice requires a very deep level of service. Helping the investor manage and mitigate risk across all portfolios is key; reducing overall operational risk is the greatest value-add. The investor should approach the administrator in a demanding and thoughtful manner, as a partner who helps to mitigate operational risks and provide transparency so the investor can ensure that the manager is adhering to the agreed investment principles.
Due diligence is not a “tick the box” exercise. Rather, it needs to be an ongoing and in-depth process. There are seven administration areas where an investor should conduct deep due diligence. Is technology a source of innovation and target of continuous investment? Are processes subject to a control environment and is real-time transparency accessible to investors and administrator management? Is domain experience and scale being developed in the human resource pool? Visit off-shore teams and operations to ensure they are integral and adding value to operations. Ask for a personal presentation of the SAS 70 to ensure it is a single document whose scope covers all services & controls the managed account requires, in all offices. Reconciliations should be run daily, with breaks corrected with the manager, and root causes should be investigated to prevent repetition. As the devil is in the detail of the security master, verify that customized risk reports can be run by the administration organization keeping the managed account’s books & records.”
Alex Akesson
Editing for HedgeCo.net alex@hedgeco.net HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
West Palm Beach (HedgeCo.net) – Risk management expert, Dr. Stuart Turnbull, has been appointed as senior advisor to independent hedge fund technology provider GlobeOp’s Risk Services.
"Risk measurement, analytics and reporting are increasingly important to hedge funds and investors alike," said Tony Glickman, GlobeOp Financial Services head of Risk Services. "This presents GlobeOp with significant opportunities, as risk modeling is a core expertise and client service. Our clients can look forward to Stuart adding additional depth, creativity and pragmatism to the development of new GlobeOp risk models. They will also benefit from his expertise in transitioning theory to practical, efficient implementation."
Dr. Stuart M. Turnbull is the Bauer Chair Professor of Finance at the Bauer College of Business at the University of Houston, TX. He has authored more than 50 academic papers on financial economics, law and economics topics, as well as two books on derivatives. With Robert Jarrow he introduced the reduced form approach for pricing credit-risky assets. This approach was later extended to consider counterparty risk and credit rating transition matrices in risk management and pricing, and to the practical difficulties of credit default swaps valuation.
He currently serves as an associate editor of Mathematical Finance, the International Journal of Theoretical and Applied Finance and the Journal of Derivatives. Turnbull previously held executive positions in fixed income research at Lehman Brothers in New York and in risk management at the Canadian Imperial Bank of Commerce in Toronto, Ontario. He holds a Ph.D. in financial economics from the University of British Columbia, and an M.Sc. in statistics and operational research and a B.Sc. in physics from the Imperial College of Science and Technology in London, UK.
GlobeOp is listed on both the RiskTech 100 and FinTech 100 rankings of global risk and financial technology specialists.
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West Palm Beach (HedgeCo.net) – Hedge fund assets under administration (AuA) have grown to $91 billion as of 31 March 2009 from $88 billion at 31 December 2008, according to hedge fund tech. and analytics procider GlobeOp Financial Services S.A.
"I am encouraged by the level of fund inflows during the first quarter of 2009." Hans Hufschmid, chief executive officer, said, "New clients with AuA of nearly $12 billion, along with new funds from existing clients of $5 billion and subscription inflows of $3 billion, offset first quarter redemptions and terminations, which we knew would be substantial, as referenced in our 2008 preliminary results announcement."
"In addition," Hufschmid continued, "client fund performance generated over $1 billion, a positive sign that hedge fund managers may have begun adapting to the changing market environment."
GlobeOp noted a sustained investor demand for greater transparency, independent portfolio verification and control of capital. Fund managers are looking for operational solutions to meet these requirements and to improve their own operational cost structures that are challenged by redemptions and lower fees.
"Funds will remain under pressure from redemptions by investors and raising new capital will continue to be challenging. Thus, while GlobeOp’s current pipeline for new business is promising, we remain focused on prudent cost management and productivity improvements."
With headquarters are in London, New York, Dublin, Ireland; George Town, Cayman Islands; Harrison and Yorktown Heights, NY and Hartford, CT, U.S.A.; and Mumbai (Bombay), India, GlobeOp serves more than 180 clients worldwide, representing $91 billion in assets under administration (AuA).
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West Palm Beach (HedgeCo.net) – Hedge funds of varying sizes report being given notice by prime brokers that OTC derivative give up arrangements will end – quickly. Funds ranging in size from $25M to $2.5B are being told new derivative trades "done away" will no longer be accepted near the end of the first quarter and that give up relationships will end completely in April.
‘Give up arrangements’ are where the executing broker writes trade tickets on behalf of both counterparties to the trade – provided hedge funds with three advantages: easier post-trade operations, cross margining and credit intermediation.
“Challenged by investors to provide increasing levels of transparency, independent validation and reporting frequency, funds would also have to find the operational bandwidth and capability to efficiently manage the complexities of OTC trade processing involving multiple instruments, high volumes and multiple counterparties." Hans Hufschmid, CEO of GlobeOp Financial Services commented, "And the February 28 deadline after which major dealers will not accept novation consents by email looms.”
GlobeOp also noted that during the Lehman Brothers crisis in September 2008, hedge funds began diversifying counterparty risk by abandoning the practice of single prime broker give ups and converting to multiple direct counterparty relationships.
Now, Hufschmid observes, “Intense revenue pressure on banks and on credit risk overall is forcing banks with prime broking activities to take a very tough approach to profitability. Give ups were, for many, never a core business, used to support the profitable business of lending securities to hedge funds. As risk tolerances and the lending business have become less attractive, the reasons for providing low or non- profitable support services like give ups are falling away."
“If the initial signals become a trend as financial markets and the hedge fund sector restructure, out sourcing will increase in appeal as hedge funds simultaneously face increased investor demand for independent administration and robust infrastructure declining fund performance and management fees to fund or ramp up the required technology and people resources continued attractive opportunities for strategies involving OTC derivatives.”
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International Herald Tribune – It used to be that if you wanted a job done properly, you did it yourself. That no longer holds for the administration of hedge funds.
The practice of doing middle- and back-office administrative work in-house, especially prevalent in long-established U.S. funds, was already on the wane.
But Bernard Madoff’s alleged fraud, abetted by his self-contained operation, has accelerated the march toward outsourcing.
Exhibit A this week is Millennium Management, the old-school hedge fund firm run by Izzy Englander. All its funds are now going to be administered by GlobeOp Financial Services. That means that tasks like reconciling cash positions and trades, some pricing and asset value calculations, sending clients statements and so on will now be handled outside the firm.
