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Peter Sanchez, Northern Trust Hedge Fund Ser5vices

Consolidated IBORs deliver MAP transparency


Managed account platforms (MAPs) vary in size and sophistication. At one end of the spectrum, the simplest MAP provides a separate ownership structure whereby a single investor invested in a MAP is required to manage each counterparty relationship with the administrator, the prime broker(s), OTC counterparties, FX counterparties, repo counterparties and so on. 

The traditional fund of funds (FoF) investment model is structured so that the FoF manages the overall allocations into the hedge fund on behalf of the investor. However, transparency tends only to be provided on a monthly basis, and typically with a one-month lag. 

In some cases, the level of transparency relies on third party risk or data aggregators, which provide varying level of granularity. Month-end data that managers typically send to independent aggregators is used to provide P&L, attribution and risk vector analysis to MAP sponsors providing this more basic level of transparency. 

“The difficulty with this is the investor doesn’t get real-time investment management oversight nor are they able to monitor risk exposures, liquidity, leverage or style drift on an intra-month basis. More importantly, because they don’t get detail at a transaction level, it creates a problem of normalising position and securities data across managers,” says Peter Sanchez, CEO of Northern Trust Hedge Fund Services.

The problem that Sanchez refers to is that when MAPs or FOFs receive this data from third party aggregators, it is not normalised to account for a consistent valuation policy or risk model across all managers on the platform. Nor does it take account of intra-month changes that might not reveal spikes in performance volatility, or indeed shifts in liquidity or leverage. 

At the opposite end of the spectrum, the third and most sophisticated MAP model is one that provides full integration across all managers, such that it enables the platform to provide near real-time transparency. These platforms focus on daily trade processing, reconciliation, daily risk and performance attribution reporting and are able to provide a consolidated investment book of record (IBOR), giving sponsors an holistic view across all managers and strategies. 

“This approach also provides the opportunity to generate improved performance through an optimised treasury function – managing liquidity, financing, counterparty and FX exposure across multiple managers. Investors can also work with the manager to customise their exposure to particular investment strategies, with more or less leverage, or with a carve-out of a particular strategy to complement an investor’s overall portfolio,” says Sanchez. 

Such platforms are well placed to support the ever-changing investment needs of institutions as they seek out managers running niche, idiosyncratic strategies in non-crowded areas of the market. Distressed debt, special situations, bank loan and direct lending strategies – many of which operate at the more illiquid end of the liquidity curve – are complex, and as such require the platform sponsor to provide sophisticated data management capabilities to provide investors with the requisite transparency. 

Indeed, Sanchez points out that the most sophisticated investors seek to integrate `alternative assets’ data into their long-only portfolio decision-making process – a step which typically involves the MAP working with the investor’s custodian or data warehouse provider to create a holistic view of the risk and performance of the entire portfolio.

As a leading administrator, Northern Trust has built the technology infrastructure needed for MAPs to run the most advanced, integrated platforms, with Sanchez confirming, “all of our MAP relationships involve providing daily capabilities.”

“We enter into a service relationship with the platform provider in a way that white labels our capabilities. We’ve just signed on with one of the largest institutional investor advisors in Europe. They are white labelling our risk and compliance and treasury capabilities as they prepare to roll out their managed account platform,” confirms Sanchez.

As hedge fund managers roll out new strategies with an even wider array of instruments, the ability for any platform provider to generate a consolidated IBOR is no easy feat. Again, only those able to deliver daily transaction and position-level data across the platform are in a position to do this. Northern Trust is uniquely placed to provide this capability because across its systems it only ever works with a single data set. 

“We don’t have a separate equity system or bond system or OTC system, and we don’t have a separate system between our IBOR (middle office) capabilities and our accounting capabilities, known as ABOR. This is quite unique in the administration space. What this means is we are able to create an IBOR at any point during the day. The consolidation of IBOR across multiple managers and strategies is really what our system does in the context of attribution tagging,” explains Sanchez.

In order to extract value from a consolidated IBOR, MAP sponsors need integrated compliance, risk, performance and treasury tools that are derived directly from that golden copy data set.

One of the main reasons that institutions use managed accounts is because they allow them to manage their portfolio in an aggregated fashion. They can combine all of their different strategies across alternatives and align them with their investment objectives. And for the more sophisticated investors, they integrate their hedge fund managed accounts with their traditional long only investment portfolio of bonds and equities. 

“This allows investors to know the correlation between investments in both portfolios; that is a powerful proposition, having a lens that can be applied across all of their external managers. 

“I think transparency is therefore a critical feature of the managed account structure. It helps investors to manage the performance of the overall portfolio in an aggregated way across their long-only and hedge fund portfolios,” says Sanchez.

At the heart of any good MAP offering is quality of data. Not only does this refer to accuracy of data, but also completeness, timeliness and insight. 

Sanchez views completeness to mean that all attributes of a trade are captured. This is especially true of complex assets such as IRS/CDS or structured products where missing economic elements can impede analysis of a portfolio’s true performance or risk profile. 

Insight, says Sanchez, depends on the robustness of the data set. “The key is to give the investor the capability to do something with the data in a meaningful way like correlation to their other investments, liquidity management or concentration of positions. Using data normalisation tools allow investors to manage data in a productive way.” 

That ability for MAP sponsors to provide genuine insights into the data they provide to investors is a powerful proposition. After all, investors do not want to receive massive data files every day that are hard to make sense of. Rather than reams of numbers, they want patterns, trends, data presented in reports and charts that summarise exposure levels by asset class and geography. That way, they can make quicker more considered investment decisions. 

To perform the oversight and governance functions most effectively, Sanchez observes, sponsors are finding that they need daily trade level data that allows them to monitor exposures, style drift, performance attribution, risk and compliance in a meaningful way. “Even when investors do not expect to make frequent investment decisions, this level of granularity is necessary to provide accurate and complete information over time,” he says. 

In conclusion, Sanchez believes there are significant synergies to platforms that have the ability to run off of a consolidated IBOR. 

“They can net FX exposures, net collateral requirements and funding requirements of managers or offset currency balances across managers. Having that holistic view across the platform is one of the key value-adds a MAP sponsor can provide.”

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