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HFMWeek (HFM): What is a hedge fund dedicated managed account? Andrew Lapkin (AL): Dedicated managed accounts (DMAs) are typically single-investor hedge funds estab-lished for the exclusive use of, and owned and controlled by, an institutional investor, such as a public or private pension plan.

The term ‘managed account’ is the source of significant confusion in the hedge fund space. Investors often think of this term in the context of traditional investments where it means giving a manager trading authority over a broker-age or custody account. In the hedge fund context, we are almost always referring to a fund or other special-purpose vehicle when discussing a managed account. The use of leverage and short-selling by hedge fund managers can result in liabilities that exceed the amount of investment. As a result, a limited liability vehicle is typically used to house hedge fund managed account investments.

HFM: What is the difference between a commingled managed account and a DMA?Josh Kestler ( JK): A commingled managed account (CMA) is a pooled vehicle generally set up by a managed account provider who is offering a range of individual managed accounts covering multiple hedge fund strate-gies to institutional and high-net-worth investors. These vehicles or ‘funds’ are sponsored and controlled by the platform provider who is responsible for oversight of the funds.

A DMA is typically set up by a platform provider for a

single institutional investor who ultimately owns and con-trols the account. A DMA removes co-investor risk, pro-vides the investor with much more control than a CMA and allows the investor to customise the account structure, service providers and investment strategy. AL: While DMAs provide a number of advantages over a CMA, DMAs require a significant investment per fund, often $100m or more. As such, many investors will seek the benefits of managed accounts by investing in a spon-sored CMA.

HFM: Is a ‘fund of one’ the same thing as a managed account?AL: No; a ‘fund of one’ generally refers to a fund created and controlled by a hedge fund manager for a single inves-tor. In a fund of one structure, the manager rather than the investor typically controls the service provider relation-ships such as the administrator and auditor used for the fund. The manager would continue to have authority over key operational functions such as the ability to move cash and to value securities. While a fund of one can remove co-investor risk, it does not achieve all of the benefits of a managed account, including limiting the manager’s authority to trading authority only.

HFM: Is a fund of funds managed account a type of DMA? JK: No. A customised fund of funds product is often con-fused with a managed account. A custom fund of funds is a dedicated vehicle whereby a fund of funds manager invests

ANDREW LAPKIN AND JOSH KESTLER, CEO AND PRESIDENT & COO OF HEDGEMARK RESPECTIVELY, DISCUSS DEDICATED MANAGED ACCOUNT SOLUTIONS AND CLEAR UP SOME MARKETPLACE MISCONCEPTIONS

Joshua Kestleris chief operating officer, overseeing all departments associated with legal/compliance, operations and business development. Prior to joining HedgeMark in 2012, Kestler was a director of Deutsche Bank’s X-Markets Hedge Fund Platform and head of managed account platform operations in the United States.

Andrew Lapkinis chief executive officer and is responsible for overall management of the firm. Prior to joining HedgeMark in 2011, Lapkin was the co-founder, president, and chief operating officer of Measurisk , a JP Morgan company that was formerly affiliated with The Bear Stearns Companies.

DEFINING PLATFORMS

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in several different underlying manager-sponsored hedge funds on behalf of a single investor. This structure does not typically provide any of the tradition-al benefits of managed accounts – transparency, liquidity, governance or control. A custom fund of funds is equivalent to an investor making direct investments into traditional hedge funds under an advisor’s guidance.AL: We are, however, seeing a new trend where-by fund of funds managers are using managed accounts as the building blocks for client port-folios. Fund of funds managers are beginning to understand the additional value that they can pro-vide to clients by having position-level transpar-ency, applying investment guidelines and main-taining control over the underlying assets.

The use of managed accounts by these managers changes and enhances the value proposition that fund of funds can offer clients including the crea-tion of unique products that may meet investors’ demands for liquidity, asset control and transpar-ency. It seems reasonable to expect that an advi-sor can substantially improve their investment and risk management processes with complete daily position-level information as opposed to limited exposure level information on a monthly lag.

HFM: Can you discuss the different types of hedge fund managed account platform providers and wheth-er they all offer the same services?AL: The hedge fund managed account industry has evolved significantly in the last several years and we believe that it will continue to mature. Unfortunately, there remains a great deal of confusion in the industry gen-erally regarding the different types of managed account providers and the services that they each offer. Currently, every different type of provider seems to get lumped into the same category and compared on an apples-to-apples basis when in reality the comparison is often apples to oranges. JK: There is not currently one industry standard service model. There are several types of provid-ers: the most well-known providers are historically the CMA platforms, which effectively select and distribute hedge funds in a managed account for-mat. This model was really the first phase of the hedge fund managed account industry and persists today. Many of the CMA Platforms have now also delved into the DMA space as the demand for customised, dedicated accounts has been a growth trend.

Pure play DMA providers such as HedgeMark exclusively support institutional investors in the structuring, operational oversight and risk moni-toring of custom, private managed account plat-forms. Some providers do not offer structuring services which tends to be critical for many insti-tutional investors who do not have the expertise to perform these functions internally and hiring external counsel is not a complete solution. This component of the DMA service offering tends to be critical for many institutional investors who do

not have the expertise to perform these functions inter-nally, and hiring external counsel is not a com-plete solution. There are providers that do not offer all of the operational support necessary to run anything other than the simplest hedge fund strategies, leaving these functions with either the investor or hedge fund manager which defeats the purpose of having a DMA.

We have found that certain providers hold themselves out as DMA providers, but in reality their services are limited to processing data and delivering some risk reporting. We believe that institutional investors are looking for substantially more from their providers than this. The ability for investors to differentiate among providers with barely any publicly available information regard-ing the specific services offered or an industry standard service model remains a major struggle for the managed account industry.

There are several fund of funds businesses that have developed their own internal managed account platforms. Most of these platforms are used by the fund of funds as building blocks for various products and advisory portfolios. These platforms are typically commingled from the

investor’s perspective and the underlying funds are gener-ally not offered on a stand-alone basis, but rather as a part of a broader product or portfolio. The fund of funds plat-forms are offering investment advisory products and solu-tions; whereas most of the pure managed account provid-ers are offering a utility or service to facilitate investment management by the investor or its advisor.

HFM: Is an administrator a type of managed account platform provider? AL: No. Unfortunately, we have found this to be a source of major confusion and misinformation in the marketplace.

Managed account services and fund administra-tion services are different. These services are com-plementary rather than competitive. Since a hedge fund managed account is almost always structured in a fund format, every managed account requires a fund administrator to calculate an NAV, maintain the fund’s books and records, produce financial statements etc.

A managed account provider performs various non-investment functions that would have been performed by the hedge fund manager, not the fund administrator, in a commingled, manager-sponsored fund structure. The managed account platform provider is typically responsible for co-ordinating fund set-up; co-ordinating counterpar-ty agreement negotiations and account openings; overseeing the administrator including reconcili-ation reviews, review and approval of the NAV produced by the administrator, cash movements for trade-related payments, expense payments and margin movements; co-ordinating the audit pro-cess; and risk analytics and performance report-ing. Most administrators either do not have the expertise or the willingness to perform many of these services. n

A DMA REMOVES CO-INVESTOR RISK,

PROVIDES THE INVESTOR WITH MUCH MORE

CONTROL THAN A CMA AND ALLOWS THE

INVESTOR TO CUSTOMISE THE ACCOUNT STRUCTURE, SERVICE PROVIDERS AND INVESTMENT STRATEGY

”

UNFORTUNATELY, THERE REMAINS A GREAT DEAL OF CONFUSION IN THE INDUSTRY GENERALLY

REGARDING THE DIFFERENT TYPES OF MANAGED

ACCOUNT PROVIDERS AND THE SERVICES THAT THEY

EACH OFFER

”

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