Amundi Alternative Investment has ambitious plans for its managed account platform as the European Union’s alternative investment fund managers (AIFM) directive drives change in the sector.

Big changes are afoot at Amundi Alternative Investment’s managed account platform (MAP). Currently with both a Bermudian and an Irish domicile on offer, the plan is to add to and grow significantly the Irish offering and eventually migrate the Bermudan offering over to Ireland.

The reasoning behind this is twofold, according to Franck Dargent, head of business development at Amundi AI. “Ireland was chosen as a safe and secure domicile to suit European investors in view of the forthcoming alternative investment fund managers (AIFM) directive, which will create a more regulated environment for European investors in hedge funds.”

So an Irish domicile sits well with the Paris-based company’s general ethos to operate in a secure European Union (EU) environment, especially when it comes to dealing with respected and well-­organised ­counterparties.

The plan is to add 40 or so managers to the Irish offering by the end of the year and to double assets under management (AUM) over the next six months. This will complement the 29 managers already listed on the Bermudan platform, launched in 2001 and now worth some $2.5 billion.

Overall, Amundi AI, which encompasses the platform and the funds of funds division of the company, has around $12 billion of AUM. The platform offering is expected to grow substantially over the next few years as Amundi AI bets institutional investors will be attracted to the dual benefits of greater risk controls coupled with liquidity.

“In a way the 2008 crisis and the subsequent volatility within the investment environment has confirmed the validity of using a platform as a means to deliver better liquidity and keep a lid on volatility,” says Dargent. “Investors have continued to be sensitive and are now seeking a greater and more granular level of understanding as regards the underlying factors that contribute to risk. Because the platform has full control over all underlying positions it is, we think, the best way to access the alternative space for those that value stability and risk management,” he adds.

Managing risk
One of the key facets of the platform is its enhanced risk management and reporting process, which is independent and allows a cohesive output to investors. Valuations are independent and the counterparties, prime brokers and legal teams must all satisfy stringent quality criteria.

“When we onboard a manager we’re very mindful that we are part of a much bigger banking retailing group and that we have a reputation for excellence to uphold,” notes Dargent. “We have lots of responsibility to provide comfort to investors and to make sure that any fund we onboard to the platform has deeply embedded safety and control procedures within the investment strategy. We have an independent risk, legal and compliance teams to ensure that this is the case and that policies are abided by on a daily basis,” he adds.

Investment guidelines and strategies are clear and fully transparent at position level. That information is used to maintain the risk management’s effectiveness. There is also a strong underlying independent valuation agent and methodology.

The inherent advantage of the platform, according to Dargent, is that its operational set-up is geared towards investor safety. The other critical factor is harmonisation as regards liquidity – on both the subscription and redemption side.

This differs directly from investing directly where investors might have lots of different times and other conditions to grapple with.

By accessing fund managers through a managed account platform structure, investors have a common way to put money into, as well as take money out of, managers. At the same time the platform offers a uniform way of monitoring a diverse range of strategies.

“The MAP approach means that you have a well-diversified universe sat there and that you can switch at will to protect returns and satisfy investment objectives. The platform has already done all the hard work in selecting the very best universe and installing all the controls and presenting the end investor with a report they can actually use,” says Dargent.

Because all the data is collected and presented in a harmonised format, investors get a better view of their holdings, allowing for more informed decision making as regards performance, risk and switching into and out of various funds. A single presentation of data, in direct contrast to investor holdings a number of direct investments with a variety of hedge funds, is a big plus for investors who want to be able to aggregate risk exposures and relate hedge fund investments in a more timely and constructive manner with other portfolio holdings. For Dargent this is a strong selling point for investors looking at a managed account platform as a credible and efficient alternative to direct hedge fund investing.

Reporting frequency
“We are very mindful that investors are demanding more granular reporting on a more frequent basis. We are always looking to improve the process to fit in with investor demand. There is more and more pressure on accuracy and timeliness,” says Dargent.

To fit these demands investors are able to access estimated net asset values (NAVs) on each fund on a daily basis as well as weekly. They also have access to trackable aggregated NAV. On a monthly basis the investor can access quantitative statistics and risk reports as well early-event debriefings and select reports focusing on specific managers and strategies. It is clear to Dargent that one of the value-added propositions of a platform, and something that will become more of a differentiator for investors in future, will be the depth and breadth of reports on offer, the ability to customise information and the frequency of access to details of holdings and performance.

The flipside of the risk and safety aspect is the work that goes into choosing the underlying managers. “We need to look at whether a manager will add diversification, what the exact style is and what edge the fund will bring to the overall offering,” says Dargent.

There are three main characteristics common to the funds chosen: liquidity (liquid strategies able to offer weekly and monthly subscriptions and redemptions, short timeframes to complete transactions and standardised access conditions); transparency (full transparency at position level, robust risk management using position-level data and standardised and comprehensive reporting) and control (secure legal and operational set-up, strict guidelines and monitoring, independent pricing and approved prime broker and counterparties).

The strategies currently on offer include commodity trading advisers (CTAs) 30%, equity market neutral 16%, merger arbitrage 10 %, equity long/short 10 %, credit long/short 8%, event driven 8%, mortgage-backed securities (MBS) 7%, global macro 6%, convertible arbitrage 3% and distressed securities 2%.

For liquid and non-complex strategies, the timeline to manager selection and onboarding is generally about four weeks to complete initial due diligence from a list of candidates. This then progresses to an advanced due diligence process, says Dargent.

At this point there is detailed portfolio analysis, a legal and financial review, a qualitative assessment of operations and trading infrastructure and an assessment of the fund’s service providers. If the fund passes this, it makes it onto a shortlist and further validation follows. The whole process takes between eight to 12 weeks to complete.

An overlay with Amundi’s own risk-management systems as well as Riskmonitor’s systems is used to monitor each manager to make sure there is no style drift and the manager is sticking to the investment mandate as well as operating within the risk limits. This is important, as Dargent notes, since Amundi is able to “identify shifts quite quickly and work to remedy that with the manager”.

According to Dargent a manager would be ejected from the platform if there was a continuous and unacceptable style drift or another serious issue affecting the due diligence on the fund. Overall, however, managers stick within the rules.

“In 2010 we had as many redemptions as we onboarded but this year [2011] we are looking to build the platform and so we expect to onboard more that we redeem,” he says.

As investor appetite for hedge funds picks up in future, Dargent thinks managed account platforms will become more popular. At the same time he expects more hedge fund managers to be open to the idea of joining such a platform.

Dargent expects managers to see participation on a platform expositing the strategy to a larger investor base. Large institutional pension funds with restricted mandates, for example, are attracted to the formality of a platform structure. In particular private banks and family offices are also a growing client base for managed account platforms. Platforms, says Dargent, offer investors an easier route to hedge fund investment and managers a way to access a wider investor base.

Dargent also believes there is evidence of interest from Asian investors, specifically in Japan and South Korea. Dargent hopes that by increasing the amount of funds on the platform, Amundi will be able to attract more of this dedicated business from Asia as well as some of the larger European larger pension funds keen to set up a more direct investment but not able or large enough to create their own dedicated accounts platform.

He also believes that domiciling the platform in an EU member state such as Ireland will help Amundi attract institutional investors limited to regulated onshore vehicles. Through a managed account platform structure, some of the more complex and illiquid hedge fund strategies less suited to direct investment may be accessible to investors based in Europe.

“By recognising the limitations of the MAP model, we are able to further expand the overall offering in the most appropriate format,” says ­Dargent.

“The investor universe interested in alternatives will expand rapidly in the next five years and that the MAP structure will be able to offset many of the concerns that institutions, private banks and high net worth individuals have,” he adds. “It’s a sustainable growth area.”