Managed Account Platforms: The Best Offense is Defence

For many years, institutional investors have been at the forefront of investing in the alternative investment space driving demand in the market for innovative solutions to reduce both investment and operational risk and enhance returns by creating the optimal conditions to generate and preserve alpha.  The shift from investing in commingled structures to bespoke solutions has significantly increased following the credit crisis and a number of well documented frauds within the industry.  As we go deeper into this economic cycle, it is a trend that is likely to continue.

Although there are various approaches to investing outside of commingled funds, this tends to be dependent on the level of sophistication of the investor as many continue to allocate capital to commingled structures despite the principal-agent issues inherent within such a structure where a conflict of priorities might exist between a manager and investor.   Canadian pension plans have had significant exposure to alternative assets over many years and a number of these plans have taken a more sophisticated approach towards investing by implementing either internally developed managed platforms or Dedicated Managed Accounts (“DMA”); which leverage the operational, risk management and legal expertise of a Managed Account Platform Provider (“MAPP”).

Internally developed and administered managed account platforms can be a useful tool to mitigate some of the problems typically associated with commingled funds, however these platforms tend to be limited to either long only or very simple long / short strategies due to the strain on the operational side, as well as the legal and back office departments that more complex strategies demand.   In order to gain exposure to more complex strategies while also remaining both nimble and flexible, the use of a MAPP has proven to be a highly effective tool.

A Closer Look

One of the key benefits of investing in alternatives via a managed account platform is the overall flexibility and increased operational efficiencies they provide.  Although the initial selection of a MAPP, and the standardisation of service provider agreements, ISDAs and the launch of the first product may take some time, the subsequent onboarding of trading advisors and the launch of new managed accounts can take as little as six weeks.  The use of a MAPP significantly reduces the ongoing operational burden that would otherwise tend to fall on an institutional investor or asset manager’s legal, back office and compliance teams as these functions generally fall within the domain of the MAPP and is where these platforms provide the value. All custody, administration,  prime broker, director services agreements etc., are generally extensively negotiated by the MAPP with input and oversight of the institutional investor, serving as a base for any relationships to be established during the life of the managed account platform.

Crucially, investing via a managed account platform also provides institutional investors with enhanced liquidity in response to market events; thereby eliminating the risk of suspensions of redemptions and liquidity gates which occurred quite frequently during the last financial crisis.

In addition to operational efficiency and control over liquidity, if structured properly, a managed account platform offers the ability to obtain cash efficiencies by allowing for notional funding with the potential for cross margining.  However, it should be noted that detailed analysis will be required in order to determine the margin requirement needed to support the particular trading strategy and to allow for a sufficient cash buffer to eliminate the risk of additional subscriptions.

Furthermore, institutional investors are also utilising managed account platforms with the objective of creating an enhanced risk management, compliance and governance structure.  Among the key components that will be integrated into the platform’s infrastructure are standardised valuation policies, trading restrictions, ESG and proxy voting protocols, alongside clear and robust expense policies and aggregated risk monitoring functionality.  From an institutional investor perspective, it is widely understood that the presence of experienced, dedicated, independent governance professionals allows the investor to leverage a deeper understanding of the alternative investments industry and its best practices.  This encompasses trends involving and impacting service providers, in addition to the greater familiarity that these directors will have with the regulatory and legal requirements that might be specific to a particular jurisdiction.  This use of professional governance service providers on managed account platforms is consistently applied across leading fund jurisdictions such as Delaware, the Cayman Islands, Ireland and Luxembourg, highlighting the importance of governance in the quest to preserve investor value and structure integrity, regardless of the choice of jurisdiction.

The Maples Group

As the alternative investment fund industry continues to evolve, so have the tools available to the sizeable pension plans gaining greater sophistication and looking to increase exposure to this space, with customised products that extend benefits across the operational infrastructure and risk spectrum to greater control, transparency and governance.  The Maples Group has extensive experience in structuring and servicing managed account platforms, which includes providing Cayman Islands resident directors to both Delaware and Cayman Islands structures.  On the structuring side, the Group’s law firm can provide the necessary assistance with a Cayman Islands, Irish or Luxembourg fund set up, advise on matters related to local laws and in some cases act as the registered office.

The Group’s fiduciary business  provides experienced independent directors to a multitude of managed account platforms, across a broad range of strategies and structures.  With extensive experience in the legal, accounting and investment management spheres, our teams of directors provide investors with greater comfort from a governance standpoint, with oversight over the DMA, the managed account platform and the various service providers, in addition to direct interaction with the underlying investor as desired.

Additionally, we can also provide the designated Anti-Money Laundering compliance officers and Automatic Exchange of Information  services in line with the appropriate tax information exchange requirements, as well as  liquidations where required.  The Group can also provide fund administration services, where a full service arrangement is under consideration, however from a governance perspective, care should be taken by the investor to ensure they are comfortable with the provision of directors and fund administration services from the same organisation.