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Improving Hedge Fund of Funds Liquidity through a Fund of Managed Accounts

In two recent articles in the Financial Times - "US retail industry embraces alternative strategies" by Michael Shari and "Money returns to FOHFs as industry rights itself" by Sam Jones, the authors note variously that:


[ The fund of hedge funds industry has struggled to justify itself since 2008. As many managers have discovered,simply to provide access – acting as expensive diversifiers for those looking to invest in hedge funds – is no longer enough in the post-crisis and post-Madoff world


“The access model has really gone away,” says Craig Stevenson, a fund of funds investment consultant at Towers Watson. “It’s now about differentiation and an increased appetite for customisation.”




In a trend that Tom Stringfellow, chief investment officer of Frost Investment Advisors, in San Antonio, Texas calls “the retailisation of alternative strategies,” traditional asset management groups like JP Morgan and Nuveen, hedge fund management firms like AQR and Goldman Sachs, and even boutiques like Frost, have registered 397 such funds under the Investment Company Act of 1940 as of April.


This trend is being driven by investor demand for increased Liquidity and Transparency.


“Retailisation” is growing even faster in Europe, where hedge funds in Ucits III wrappers are allowed to charge performance fees in addition to management fees.]


Another possible vehicle is the growing number of Managed Accounts platforms whereby third parties, typically banking institutions, offer access to the same hedge fund strategies run by the same managers in segregated accounts that are ring-fenced and also provide better liquidity terms than the pure hedge funds. Typically weekly liquidity and daily pricing.


The attached presentation illustrates the out-of-sample performance of a (hypothetical) systematically managed fund of managed accounts as an illustration of the type of returns available from these sort of funds.


There are a number of platform providers in this space and their selection universes vary. There is for example in general a significant bias to CTA's and my model deliberately seeks to downweight them this month. In this exercise I have used the Lyxor database purely for illustrative purposes and this does not constitute any recommendation. Nonetheless, I believe that for those Muti-Manager and Funds of Funds operators not in the fortunate position of having either tied distribution or significant AUM this may be one way to go to meet the growing client demands for liquidity and transparency.Ucits III and Act40. funds are of course another option.


Peter Urbani


+64 21 0255 2816