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Investors must avoid complacency when conducting operational due diligence checks on managed account platforms, according to Amber Partners, a hedge fund-focused operational certification firm.
“Investors may assume that the operational risk associated with hedge fund investment through managed accounts is lower than that associated with direct hedge fund investment. Such an assumption may be wrong if the platform itself is operationally weak or has insufficient controls in place. We have conducted operational due diligence reviews on managed account platforms and have uncovered operational weaknesses in certain cases,” said Gareth Jones, director at Amber Partners in London.
Often times, the NAV calculation is performed in-house. “When we perform an operational risk review of a managed account platform, we expect to see either an independent full service administrator or a professional level of service delivered by a separate unit affiliated to the platform. We have failed a number of managed account platforms because the in house administration unit lacked sufficient systems, staff or expertise, or because there was a lack of segregation of duties,” he added.
There has been a substantial increase in investors utilising managed accounts. Deutsche Bank’s 2012 Alternative Investment Survey revealed 42% of investors use managed accounts with a further 23% intending to do so in 2012. The majority cited “transparency, ownership and liquidity” as the most attractive benefits of managed accounts.
However, Jones said that most managed account platforms often have rigorous controls in place. “We do not believe administration needs to be provided by a third party firm in all cases. After all, a platform with a high quality in house administration service with sufficient resources and strong segregation of duties can provide the required level of proficiency and independence,” said Jones.
The managed accounts universe is still small in the grand scheme of things. The largest managed accounts platform – run by Deutsche Bank – manages $12.4 billion in assets, substantially smaller than the largest hedge fund, for example. “Managed accounts are still an emerging business within the hedge fund landscape. With time, the operational implications of investing in hedge funds through managed account platforms will become more widely appreciated,” commented Jones.
Amber Partners Ltd.
Amber Partners is a leading independent Operational Certification firm to the hedge fund industry and one of the foremost experts in the field of hedge fund operational due diligence.