10 • Global Business Magazine • October 2012 Hedge fund Managed Account Platforms (MAP) have origins in the investment banking world where they were created to support investment banks’ structured product offerings to institutional investors. Certain events related to the global financial crisis (such as the failure of Lehman Brothers, illiquid markets and the fraud at Madoff) spurred growth in these legacy MAPs, as well as new entrants, due to the desire by institutional investors for liquidity and portfolio transparency. The increasing desire by institutional investors to utilise MAPs for hedge fund portfolios, combined with the increasing number of hedge fund managers joining MAPs, has resulted in substantial growth for the industry. As we move further away from the events of 2008 and 2009, and the focus of investors and the hedge fund community shift to the new challenges of today, the focus of MAPs has moved away from just liquidity and transparency to a much more diverse and expanded set of expectations, resulting in more diverse MAP offerings from market participants. Flexibility is the key in the industry today, and the options available to institutional investors, private banking clients and hedge fund managers are wide ranging and increasing as the months go by. Many of the legacy platforms from the early 2000s (and prior) remain amongst the largest MAPs in the industry. These platforms have the advantage of long investment and operational track records, a reputation for operational excellence, and established relationships with many of the world’s leading hedge fund managers. Combined with excellent distribution capabilities offered to hedge fund managers, economies of scale and related operating efficiencies, and comprehensive services including risk monitoring, risk management reporting and support, legacy bank affiliated MAPs have an established product offering popular with institutional investors and hedge fund managers alike. Since the global financial crisis, certain platforms have seen their growth stall as a result of the affiliation with large financial institutions. Investors or fund managers have frowned upon conflicts of interest (whether perceived or real) resulting from the business structure (and/or tie-in to the structured products business of the sponsoring institution), legacy structures which may have become outdated in a rapidly changing regulatory and tax environment, or legacy information systems which lag in the support of the execution of the MAP as well as the client experience. As a result, a new generation of MAPs is starting to emerge, offering innovations that are designed to serve the current needs and expectations of institutional investors and hedge fund managers alike. The resulting MAP landscape is one of flexibility, fuelling a new round of growth of this global industry, and providing excellent options for investors and hedge fund managers to meet their needs in running managed accounts. In the global financial crisis, liquidity and transparency were key drivers of MAP growth. Today, while liquidity and transparency are still very important, enhanced transparency specifically supporting an investors risk management function (and risk reporting needs) as well as independent governance, are key drivers of innovation in the new generation of MAPs at sponsors such as HedgeMark, InfraHedge, and Guggenheim Fund Solutions. The investments being made in technology and support of investor’s risk management functions are enabling investors to have a beer grasp on the risks inherent in their hedge fund portfolios, and beer information that is also enabling the overall growth of institutional investment in hedge funds. These new entrants to the MAP landscape and the risk management support they offer are forcing legacy MAP providers to make investments in these capabilities as well, resulting in an overall beer service by the industry as a whole. In addition to risk management support, the concept of independent governance is also emerging as a important trend to institutional investors today, which is being met with solutions by the MAP industry. Certain of the new generation, MAPs contemplate the involvement of independent directors and independent oversight of the MAP operations, and certain legacy MAP providers are responding with changes to their structures to include independent oversight. Similarly, with the global investment management industry facing significant regulatory change (such as the EU’s Alternative Investments Fund Manager Directive (AIFMD) and the Dodd-Frank Act in the United States), new MAPs are being created using structures that are designed with these new regulations in mind (creating ‘AIFMD ready’ products for Europe, for example). Legacy MAP providers who may be saddled with structures that were created well before the new regulations were drafted are being forced to reconsider their structures (and in many instances create new structures or change legacy structures) to adapt to the new regulatory environment. Rather than ‘one size fits all’ MAP structures of the past, many MAP sponsors now have multiple structures included in their MAP product suite, including UCITS wrappers, products structured in Ireland or Luxembourg in contemplation of AIFMD, structures specifically intended for U.S. distribution, and traditional offshore fund structures. USA Hedge Fund Managed Account Platforms: Evolution to Flexibility HEDGE FUND MANAGED ACCOUNTS - A KPMG SPONSORED DISCUSSION