Deutsche Bank believes more investors will opt for a managed account platform solution, looking for liquidity and transparency as well as better operational risk management control.

By focusing on eliminating the negatives of hedge fund investing, managed account platforms have a bright future, according to Martin Fothergill, global head of managed accounts at ­Deutsche Bank.

Platforms, he says, are inherently risk averse with stringent structures in place to manage operational risk, allow for diversification and give transparency and liquidity to investors as well as extra layers of supervision and control. Because investments are made directly into the accounts, investors have total control over their investments.

Additional independent verification as well as due diligence on the managers operating on the platform are other advantages, believes Fothergill, for investors concerned with commingled investments. For Fothergill the managed account structure offers investors a sensible alternative to direct investment in hedge funds in the wake of the 2008 financial crisis and a way to address almost all the concerns coming out of that ­experience.

“Going into 2012 there can be no contest that the platform structure adds considerable comfort on the risk front as well as giving investors a uniform and consistent approach. This makes access to hedge funds via a platform inherently attractive when compared to direct investment in a number of distinct hedge funds; all with their own risk and reporting characteristics,” says Fothergill.

Deutsche Bank’s X-markets hedge fund platform was launched in October 2002, originally as the basis for structured product transactions. Over time, and specifically since the 2008 crisis, the platform’s appeal has significantly broadened resulting in a growth in assets to $7.2 billion.

Fothergill says the bank has made a number of “significant operational enhancements” to the platform such as the addition of prime brokers, a second independent administrator and a “meaningful build-out” of its risk and operational teams. The platform addresses investor concerns about fraud, liquidity and transparency. It offers access to leading hedge fund managers in a risk-controlled framework through innovative access routes.

In addition to structured products, direct investment, Ucits wrappers and exchange traded funds (ETFs) are on offer. Deutsche Bank recently took the strategic decision to bring together its hedge fund managed account, hedge fund Ucits and hedge fund ETF platforms under the dbalternatives brand providing investors with a unified, one-stop access to hedge fund ­products.

Structured product investments typically comprise principal-protected or leveraged products based on the investor’s own selection of managers from the platform. Ucits and ETF products tend to rely on a more rules-based approach, while direct investment can be any combination of managers accessed through the platform’s Jersey master feeder trusts.

The bulk of platform assets comprise the structured, Ucits and ETF wrappers although Deutsche has seen direct investment triple over the last 12 months. There are 80 funds currently listed on the platform spanning all the major hedge fund strategies including credit, equity long/short, event driven, global macro and commodity trading advisers (CTAs).

Fothergill hopes growth will be buoyant in future as the platform offers benefits to clients as well as strong transparency standards and flexible investment ­management tools.

The entire platform is also available to US onshore investors. This has opened a new market place to the platform, allowing many European investors to access the X-markets platform for their own US clients.

Through the platform clients select their own portfolio of platform managers or an investor can use an adviser to help put the selection together. Up to eight or more years of continuous track record for dbX funds on the platform is available.

Each account is externally audited by KPMG. These measures specifically mitigate the risk of fraudulent activity such as net asset value (NAV) manipulation and Ponzi schemes, believes ­Deutsche Bank.

There is a minimum investment of $250,000 in the managed accounts on the platform with the minimum investment in the ETF set at a low €10 ($13.90).

The platform’s client base is diversified, ranging from retail and high net worth individuals through family offices and private banks, fund of funds and institutional investors such as insurance companies and pension funds. The client base is global. At present most investors are based in Europe and Asia.

Quality control
The manager selection process is, notes Fothergill, a quality control exercise. He says it normally takes between three and four months to onboard a new manager. Each account is given a range of guidelines based on liquidity, leverage, diversification and avoiding style drift. Some strategies, depending on their complexity might have up to 40 parameters, notes Fothergill. The methodologies used are all based on ­systematic guidelines.

Accounts are then monitored using the investment bank’s broader risk management tools. The idea is to have a transparent daily view that identifies quickly any style drift or breaches of investment guidelines and avoids unapproved concentration, illiquidity and leverage. Net asset values (NAVs) are calculated independently. There is also full month-end liquidity, no lock-up, no gating and no limitations on ­redemptions placed.

“The average turnover of manager is hard to qualify, given the period of turbulence that we are currently in,” says Fothergill. “But as an idea in 2010, 19 accounts were opened and seven closed. In 2008 meanwhile, 14 accounts were opened in the first half of the year and six were closed in the last half of the year.”

The platform also has a reporting hierarchy that relies on a robust and reliable information flow that is intended to be a strong part of the value proposition. All clients have weekly estimated NAVs as well as monthly reports to include performance charts, performance statistics, risk measurements such as value at risk (VaR), geographic and sector exposures, measures of gross and net exposure and monthly commentary provided by the relevant account manager. In addition similar reports are provided for multi-manager products on the platform.

“Position-level transparency is good but there is little value in presenting a list of positions, even if that information is available to us,” says Fothergill. “Instead we add value by providing NAVs, monthly manager factsheets and in-depth analytic ­performance reporting.”

Fothergill adds that weekly liquidity reports are also made available where possible in response to client demand.

According to Fothergill managed account platforms have come into their own since the financial crisis of 2008, proving their original principles of safety, structure, conformity were valid. “There are two periods in managed account history: pre and post-2008. Post-2008 all the attributes that we had been talking about; protections, triggers to disinvest, uniformity, liquidity have been proven. All our investors got their money back in 2008 and it was living proof that platforms’ purposes are well founded,” he says.

The case for managers and investors to include a platform model is compelling, believes Fothergill. Traditional hedge fund investors like funds of hedge funds, private banks, family offices and increasingly pension funds and institutional investors are all interested in the control managed accounts offer. A key trend is the creation of direct private accounts for larger investors.

Such accounts can range from one or two to a much broader offering and is, according to Fothergill, a result of large institutional investors within requesting bespoke packages in line with the amount they have to invest. “Five million is not enough to wield that kind of influence but something in the region of $100 million clearly makes exercising power and choice worthwhile,” he says.

The other side of the coin is the increasing desire by the managers to be available on a platform. This helps them gain maximum exposure to the greatest variety of potential investors, especially those only willing to invest via a platform or unwilling to make direct investments into hedge funds where other investor interests may not correspond to their own.

“Hedge fund managers saw a big reason to change post-crisis. Many really suffered from having an investor base that was too concentrated and that they risked suffering from redemption en masse. Clearly one of the key advantages of a platform is not only picking up the assets under management but also picking up a more diverse investor base,” he says.

Fothergill also points to hedge fund strategies having tended to change away from the illiquid since 2008, this making them more suitable for a platform. “Some hedge funds with large illiquid holdings in private equity and real estate, for example, have since taken the decision to trade a more liquid strategy and this makes them much more suited to the platform structure,” he says.

The platform model is expanding geographically too. “Big platforms have thus far tended to be European-based due to the way that the industry here has evolved and the historic tendency towards structured products, they lend themselves so well to a platform structure,” says Fothergill.

The platform is currently looking to expand especially in the US. Japan and other areas of Asia also hold promise. Fothergill also expects Europe to grow further with strong interest in hedge funds using a Ucits wrapper.

“Ucits wrappers harmonise perfectly with the platform structure. Both are intended to provide security and homogenous investment opportunities. In any case certain classes of investors can only invest in hedge funds via a Ucits structure,” he says.

Fothergill believes the managed account platform structure is a valid one for the long term. “Now that we are at the tail end of 2011, I see continued interest in, and more general acceptance of, platforms. Indeed, in the beginning we would need to include in a presentation the actual raison d’être of a platform structure but now this is generally known. You can assume that basic level of knowledge,” he says.

But Fothergill does not think increased acceptance of managed accounts will mean a proliferation of platforms in Europe or the US even if investor and manager demand is on an upward trajectory. “The barrier to entry for new platforms is high and the infrastructure required to operate is formidable. This combined with the fact that platforms are offering stability means that investors and hedge fund manager alike are going to go for an established offering with a proven track record,” he says.