Custom House outlines the advantages of using a managed account platform and how the group can assist with the establishment and running of such a structure
Over the past several years, hedge fund conferences have often been dominated by the proponents or opponents of funds of hedge funds (FoHFs), on the one hand, and multi-strategy funds (MSFs) on the other.
There are quite obvious pros and cons and this has been a fairly close run thing, although the recent Amaranth debacle has undoubtedly mitigated against MSFs for the time being.
The tortoise that has crept up on these two hares has been the multi-managed account platform (Map), often structured as a master feeder fund (MFF).
It is clear the Map offers all the advantages of both FoHFs and MSFs, with few of the disadvantages, except perhaps the cost structure. The Map also provides the portfolio manager with all the liquidity and flexibility of managed accounts, together with the elimination of the counter-party risk inherent in a portfolio of managed accounts.
This is because the structure can be created as an MFF and each of the managed accounts can be incorporated into a segregated cell within the master fund, thus ring-fencing each managed account from any excess losses that may be suffered by one of the other managed accounts - what appears to have been the Amaranth problem.
Last year, Custom House assisted in the establishment of one such MFF structure for a North American institution, in order to eliminate the counterparty risk and remove the Map from the institutions balance sheet and into a separate fund structure.
This assisted the institution financially and also enabled the institution to establish a marketing plan to attract outside investors into the programme. The MFF structure had several sub-funds within the feeder fund to enable investors to have different allocations between the managers. Each manager is represented by a separate segregated sub-fund of the master fund.
This structure is, in itself, complex, but, of course, that complexity is exaggerated by the requirement to have daily net asset value (Navs) and daily dealing on those Navs at the master sub-fund level. This is necessary in order to give the manager the flexibility and liquidity referred to above.
Accordingly, Custom House had to establish a team and the technology to enable us to capture all the trades carried out in 28 separate sub-funds, the managed accounts - between 1,500 and 2,000 trades on a daily basis, this information is then sent to the manager, promptly followed by reconciliation of all the trades, both those executed on the previous day and all those open across all the other accounts - a total of about 5,000 to 6,000 positions.
This is completed usually by around lunchtime (Dublin time) each working day. The manager is then able to input the information and carry out his risk assessment of the portfolio and check the values at risk (Vars) et al.
Once that information has been dispatched, we are then in the position to commence our Nav calculations, which we complete partly in Dublin and partly in Chicago. In any event, the manager receives all of the Navs by 4:30pm or 5pm, Chicago time.
The main disadvantage - the cost referred to above - is that this service is expensive and can only be justified by platforms with very substantial assets under management. But that seems to be the way that FoHFs and Maps are going. After all, Amaranth still had between $2bn and $3bn after all the kerfuffle, although subsequently they have decided to liquidate the funds.
The next decision that we at Custom House made was to open an office in Singapore in order to carry out the majority of the trade recapture and reconciliation tasks while Dublin is asleep, so we can then calculate all of the Navs in Dublin and, subject to receiving all the trade information in a timely fashion, have the Navs winging their way to Chicago before 8am their time.
Once Singapore is up and running, Custom House will be able to operate around the clock.
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