By David Young, President, Gemini Alternative Funds, LLC
Allocations to alternative investment strategies have continued to evolve as asset owners – in particular pensions, endowments and family offices – have become more knowledgeable about, and comfortable with, these strategies.
Direct investments into hedge funds, funds of hedge funds and alternative mutual funds are not meeting the increasingly complex needs of today’s institutional investors, where flexibility, tailored reporting, transparency and cost efficiency are key factors.
Today, asset owners are searching for the appropriate structure and relationships that will provide them with the services and controls that meet their individual, committee and board requirements. The need for more control and governance, reduced fees, increased transparency and flexibility is only expected to increase over time.
Acquiring and managing quality staff, staying abreast of technological demands and creating an infrastructure that maintains a strong control environment can add significant costs to the investment process. Maintaining a state of the art operational infrastructure requires every day focus on staff education and development, technology capabilities and advancements and continued testing of process and controls to mitigate non-market risks. These requirements are highly specialized and significantly removed from the investment process of research and trade execution.
Investing in alternative strategies through individual managed accounts may be an ideal solution for asset owners; however, it also presents them with significant operational and administrative burdens. In fact, it would be prohibitively expensive and highly impractical for most asset owners to create the internal operational expertise and infrastructure to effectively administer and manage a portfolio of managed accounts.
Service providers need to provide asset owners with the flexibility that they require. Oversight has dramatically changed and asset owners need depth and breadth of information to meet their own expanding reporting requirements.
Historically, an administrator might be viewed as an alternative in providing many of the requirements needed by asset owners. However, increased demands such as operational due diligence, cash management, risk management/monitoring, guideline monitoring and potentially strategy rebalancing are needs and services that may not be part of an administrator’s service offering.
Managed account platforms (MAPs) have been created to provide many of the services required by asset owners. MAPs are a logical evolution of the investment process, providing users with tremendous depth and breadth of services as well as confidence in the investment structure.
Asset owners have the ability to negotiate fees with advisors, maintain strong governance, utilize risk and guideline monitoring tools, have complete transparency of data and process, and receive timely and effective reporting. These attributes have become ™must haves∫ for today’s asset owner, and the requirements will only grow over time. MAP operators need to be flexible enough to meet today’s requirements and have the ability to adapt to more changes.
Investments in alternatives have witnessed a unique evolutionary process. Long gone are the days of investing in an advisor and getting a ROR back every 30 days. Investors now require the investment to provide governance, transparency and ultimately complete control back to the asset owner.
MAPs may be the answer for accessing advisors in a structure that provides a potential solution for the needs of today’s investor.