To Separate or Not to Separate

Chidem Kurdas

Separately managed accounts looked like the way to avoid unexpected suspensions of redemption as happened in the 2008 crisis, as well as rip-offs. Separate accounts, unlike shares in a fund, remain in the investor’s control. But there are downsides, both for  managers and their clients. You hear more about the negatives now.

John Phinney Jr., chief operating officer of Apollo Capital Markets, says managed accounts have unintended consequences—well-intended investors create inconsistencies, for instance imposing restrictions that cause the account to drift from the fund’s strategy. Hence returns in a separate account can diverge from the returns the manager makes in the fund.

He and other commentators spoke a couple of weeks ago at a conference organized by GlobeOp, the fund administrator.

No manager wants to deal with managed accounts but this is a way to access capital, says Matt Auriemma, head of operational risk management at UBP Asset Management.

Some funds of funds and institutions will invest only if a  manager agrees to a separate account. The manager has permission to trade from the account but not to take the money out.

For investors in a fund, separate accounts for other clients raise concerns that those clients might get preferential treatment. “We spend endless time to understand how managed accounts are structured and whether we can be disadvantaged by them,” says Lorrie Landis, managing director of credit investments at Tulane University.

Some managers do not allow separate accounts while others require a large minimum investment for an account, such as over $100 million.

“We don’t do managed accounts because we want to treat all investors equally,” says Suzanne Murphy, head of strategic development at credit fund manager Claren Road Asset Management. She points out that the client with a separate account can fire the manager at moment’s notice—hence the account holder has a different level of liquidity from investors in the pooled fund.

Despite the costs and unintended consequences, certain investors want separate  accounts. One allocator argues that the inequality issue is overblown; clients accept share classes with different liquidity conditions and fees, why not separate accounts?

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