Lyxor Asset Management runs one of the most well established MAPs in the hedge fund industry, having established it in 1998. It has seen a lot of hedge fund talent come and go over that time.
When it comes to investing in emerging managers, Lyxor is well placed to provide investors with the confidence, and assurances, needed. Whilst historically, emerging managers have tended to outperform larger established names – thereby making them an appealing alpha generator component to a portfolio – they often have less robust infrastructures. This is a risk for institutions.
As Daniele Spada (pictured), Head of Lyxor MAP, explains: “Using a managed account structure is now one of the main functions of a MAP in supporting institutional clients. If institutions want to look for new sources of alpha, they definitely have to look for small and mid-sized managers. We have had several discussions with large institutional clients who are asking us to help them select and perform due diligence on these kinds of managers.”
When institutions seek to build a portfolio of hedge funds, Spada says that given the portion of assets is often substantial it makes sense to assign a small percentage of those assets to smaller, up-and-coming managers who have yet to become household names.
“The reason why they don’t allocate directly to these managers is precisely because their infrastructure is often a bit weak. They might not necessarily be experienced at customising their investments or risk guidelines for a large institution, and the level of reporting they provide tends to be quite basic; institutions expect to see a high standard in all of these areas.
“As such, they rely on MAPs like ours because we run what we call an asset management model. We do active manager selection and active investment and all the necessary operational due diligence,” explains Spada.
This is a key role of MAPs as not all institutions will necessarily have the internal resources to scout for talent and create manager wish lists.
“Our clients want to know what we think about the skills of managers, which we do when we run our investor due diligence, and also what we think in terms of operational due diligence; are there reputational risks that the client hasn’t seen? Is the manager’s infrastructure robust enough to support customised investments? We can answer these questions,” says Spada, confirming that most institutions invest using their own dedicated managed accounts.
He says that institutions prefer to use dedicated structures when accessing emerging managers for two reasons. Firstly, they have specific requirements regarding risk and investment guidelines and reporting.
“Secondly, they usually want to allocate a significant amount of assets. This allows them to justify the cost of having a dedicated vehicle. Typically, a client will come to us and say they have X amount of assets to allocate. We then help them select the managers, validate the names, perform the due diligence, and then we run the vehicle.”
Lyxor recently selected a couple of emerging managers to add to the platform, which a large institutional investor decided to allocate to via a dedicated account, in addition to some existing managers on the platform.
“For one of these managers the client decided to invest part of their allocation directly with them, through our commingled managed account. There are many different combinations available to our clients when it comes to investing in hedge funds,” concludes Spada.