Managed accounts to cost smaller hedgie clients

LONDON/ZURICH (Reuters) - A switch by some big investors chastened by the Madoff scandal and the credit crisis into managed accounts at hedge fund firms could end up penalising smaller clients in mainstream funds.

Managed accounts offer greater visibility and flexibility for larger investors such as funds of funds and big institutions by giving them direct ownership of underlying assets and the option to sell the portfolio if they want to get out quickly.

However, investors in the mainstream hedge funds such as so-called high net worth individuals and small institutions unable to stump up $25 million (17.12 million pounds) or more to set up a managed account could be disadvantaged if managed account holders pull out of an asset before they do.

"Who pays for your better liquidity? With managed accounts the problem doesn't go away, it's just been shifted on to investors who don't go down that route," said Robert Macrae, managing director of hedge fund firm Arcus Investment.

"Hedge fund investors should be asking... how much of a hedge fund manager's assets is in managed accounts."

Managed accounts are personalised investment portfolios owned by a client and looked after by the fund manager, and often run alongside a fund investing in the same strategy.

Many hedge funds, including high profile funds run by GLG Partners, Basso Capital and Ore Hill Partners, have limited or suspended redemptions, often after liquidity dried up in certain assets. That has left many investors unable to access their cash just when they needed it to meet other obligations.

That has driven investors to seek greater control of their investments while still having access to hedge fund strategies, and firms such as HSBC (HSBA.L) Global Asset Management say they have fielded an increasing number of investor enquiries about managed accounts in the past six months.

Deutsche Bank's survey on alternative investments published in March found that the proportion of respondents using managed accounts has risen by more than 75 percent since 2005.

MADOFF IMPACT

Bernard Madoff's giant fraud has played a role in driving the demand. The irony is that managed accounts offered by the crooked financier gave little protection since they were run through Madoff's own trading house.

"An increasing number of investors want to invest in a different way which will provide better governance and transparency and more control over liquidity," said Gabriel Bousbib, chief executive of Gottex Solution Services, a managed account platform the Swiss hedge fund firm launched in February.

Man Group (EMG.L), the world's largest listed hedge fund firm whose RMF unit took a $360 million hit in the Madoff fraud, has said it will put a greater focus on transparency and risk management and double the number of managed accounts to between 140 and 150 in the next year.

Goldman Sachs Asset Management is also developing a managed account platform, citing visibility and investors' ability to choose their own custodian.

"Institutions have been on the sidelines in recent months. When the time comes to reinvest they will consider aspects like transparency, governance and liquidity," said David Browne, head of group funding and external relations at Man Group (EMG.L).

DANGERS

A major danger is that managed account investors get an edge on fund investors by having the ability to sell their positions whenever they want, independent of the fund manager.

If this occurs before the fund manager sells the fund's positions, then less liquid assets -- and many assets have become less liquid during the credit crisis -- could see prices depressed, while selling the fund's positions could be harder.

"The segregated account investors ultimately retain one advantage -- they have an emergency panic button they can press at any time -- it's their assets," said Bill Maldonado, head of alternative investments at HSBC's Halbis unit.

"We really don't want to have two classes of investors. We don't want to have a privileged class of investors that has better liquidity, lower fees, lower access costs. You have to work very hard to make sure you align the terms and conditions of managed accounts with those of the fund."

Some executives have turned down client requests for managed accounts and many firms are wary of the higher costs involved, particularly when they are in illiquid or niche assets and require multiple derivative trading agreements.

"There is no question that you have size constraints," said Gottex's Bousbib. "Based on the strategy, $25-50 million is the type of size where cost will be acceptable with respect to benefit."

"There are relatively few people who can invest in clips of the required size," HSBC's Maldonado said. "(And) setting up accounts for trading in emerging markets for example is not trivial."

The issue around which clients have the ability to use managed accounts would seem to skew the market yet further in favour of the large institutional investors such as pension funds and endowments.

Last month, data from the Alternative Investment Management Association confirmed institutions owned more than 50 percent of hedge fund assets for the first time, knocking the traditional high-net-worth client base off top spot.

(Additional reporting by Claire Milhench; Editing by David Cowell)