Managed accounts have experienced extraordinary growth in the aftermath of the financial crisis, according to a report published today by Moody’s Investors Service.
The report takes a look at this type of structure and the inherent risks involved, and assesses the future impact it may have on the hedge fund sector as a whole.
"Although managed accounts have been around for a while, they enjoyed a surge in popularity after the market upheaval of 2008 due to the benefits they offer, such as access to liquidity and ownership of assets," says Joanne Job, a Moody’s analyst and author of the report. "The financial crisis coupled with many hedge funds imposing liquidity restrictions prompted investors to look for fund offerings that gave them more control over their investments and managed accounts filled this market need."
In a managed account structure, a hedge fund manager is an investment adviser who is granted the authority to trade on the account, while the account holder has ownership and control of the assets. This arrangement provides investors with more transparency and can also, depending on the type of managed account, generally insulate them from the knock-on effects of other investors pulling out of the fund.
Estimates suggest that managed accounts through the top ten platforms have reached approximately USD41bn or two per cent of the total hedge fund industry assets.
The report notes that managed account adoption was limited in the past because this type of instrument is generally more costly than direct hedge-fund investments and can pose operational complexities. As the market continues to normalise, these limiting factors could again become more important and reduce future growth of managed accounts.
Furthermore, the report highlights the variations in the different managed account structures available and details some of the operational risks and challenges faced by investors utilising these investment vehicles.
"We believe that the managed account segment will continue to grow in a pronounced way in the short term and more moderately in the medium to long term," says Job.