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Q&A: Andrew Allright, Infrahedge

Andrew Allright, CEO, InfraHedge, explains what emerging or new hedge funds need to be aware of given asset owners increased desire for separately managed accounts.

AW: Andrew, what trends are you seeing in the managed account space that start-up/emerging hedge funds need to be aware of specifically?

AA: We are seeing deeper and more rigorous due diligence than ever before, in particular when it comes to compliance and regulation.  Managers need to be prepared for intensive due diligence and continually increasing investor demands. Emerging managers also need to be able to demonstrate flexibility in deal arrangements from revenue share to preferred terms in considering who to partner with as they are establishing themselves.

AW: It’s easier for a CTA to offer separate account services to their investors than, say, an event-driven, equity or credit fund. Indeed, this is nothing new to managers of these strategies. Is this a benefit that CTAs are pushing hard enough? If so, what are the hurdles to them receiving an allocation? If not, what should they be doing better?

Andrew Allright
InfraHedge CEO Andrew Allright

AA: The main hurdle over the past 5 years has been in current market conditions is performance.  CTA performance has been muted, with managers finding it challenging to deliver alpha yields in markets that are being driven by regulatory intervention.  There is also a nuance in Europe that CTA managers are unable to trade their full strategy in UCITS structures due to the restrictions on trading commodities. CTA managers are continuing to develop new strategies given this is becomingly an increasingly crowded marketspace with increases in AI.

AW: It is argued that investors which allocate to managers which provide separate accounts are ‘stickier’ than those which invest in strategies supplied in a co-mingled fund. Is this true and if so, what are the main benefits of this stickiness?

AA:  I think one could make arguments both ways. My view is that a managed account increases the trust between the manager and the investor. The fact that the investor can see exactly what is happening in the Fund and has the general ability to liquidate their investments earlier than in a co-mingled fund enables a completely different dialogue. Ideas on investments (including increasing use of co-investments) and positioning is considered added value for the investor so they are likely to retain their investments when the fund is experiencing challenging market conditions. With respect to emerging managers though it is likely that the investor will provide a long lock up of capital to enable the Fund to have confidence to focus on its strategy whether this is a in co-mingled fund or managed account.

AW: Finally, Andrew, what advice do you have for hedge funds – emerging or not – who have so far resisted offering separately managed account services?

AA:  With the advance of technology , running a separately managed account is not as difficult as it once was and there are specialist providers who can provide cost effective services to reduce the burden especially for emerging managers.  It also enables the manager to offer a range of commercial terms to specific key investors who were not able to investor into the flagship fund. It is however important to establish the additional costs of supporting different fund operating models. This is why managers need to set a minimum AUM of usually in excess of $50m for liquid and $100m in more complex strategies.

The other concern from managers historically is providing full transparency to the investor due to the proprietary nature of the managers investment strategy.  We have found increasingly managers being more comfortable with this given the benefits of a more strategic investment from an institutional investor brings.

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