One of the more enduring criticisms of the so-called “hedge fund model” has been that the relationship between manager and investor is asymmetrical. Mark Anson, CAIA, the president of mega-manager Nuveen Investments discussed three dimensions of this asymmetry in a column for Pensions & Investments on Monday. Regular readers of this website may remember Anson as the former CIO of both CalPERs and Hermes (manager of the British Telecom pension plan among others).
Anson argues that managers have an advantage over investors when it comes to:
- knowing the true amount of beta in their funds,
- the fee structure (everyone wins when the fund is up, but only investors can lose when it’s down), and,
- information on the true risks of a particular investment strategy.
While he does not prescribe any kind of remedy, you don’t have to be a rocket scientist to figure out that managed accounts would greatly mitigate these asymmetries.
So why the debate then?
But as we have recently observed, the debate over institutional managed accounts continues. Sure, many sophisticated institutional investors are now turning to managed accounts to address age-old concerns about transparency, liquidity and fees. In fact, the new CIO of CalPERS, Joseph Dear recently reiterated the pension plan’s concerns when he told Bloomberg News this week that:
“We’re a large hedge fund investor and we’ve been extremely distressed at the misalignment of interest…Compensation schemes that pay off for the managers but not for the investor, lack of transparency, lack of control — we want to change all those things.”
But this piece in the Wall Street Journal raises nagging questions about the effect of behemoth managed accounts on the smaller investors in a hedge fund:
“…most funds require a minimum investment of $10 million, or even $20 million, to create a separate account. That could lead to a two-tiered system, with individual investors who can’t meet the minimum treated like second-class citizens. More large investors likely will negotiate lower fee structures, adding to the mismatch.
“Discriminating against high-net-worth individuals, who until this decade were the biggest clients, could cost hedge funds if more institutions reduce their exposure to the industry. And, after a desultory performance last year, large institutions gaining special treatment could alienate even more wealthy individuals.”
If managed accounts promise to reduce the “asymmetry” between managers and investors, then might they inadvertently create new asymmetries among (large and small) co-investors?
David and Goliath
But what is the retail investor David to do when he or she finds himself co-invested with the CalPERS Goliath? Simple. Start your own managed account!
The retailization of hedge funds will likely be aided by the growing popularity of managed accounts. Lyxor’s recent launch of the “Lyxor Hedge Fund Index Fund” (yes, the actual name) is an agglomeration of managed accounts that is Ucits-compliant and has been described as:
“…aimed at giving a large audience access to the performance and diversification benefits of the hedge fund industry.”
So it would appear that managed accounts may be a weapon that can be deployed by both large and small investors.