Guest Contributer: Joseph Amarante, Senior Vice President of Professional Services, NorthPoint
Hedge fund managers often seek additional AUM by providing access to their investment strategies through the on-boarding of separately managed accounts (SMAs). In this scenario, a manager allocates assets, usually pari passu, between the fund’s internal investment vehicles and an investor’s managed account. Additionally, the investor may impose investment guidelines including asset eligibility constraints and concentration limit rules to their separately managed account – this usually results in anticipated variations between the various internal and SMA vehicles and also requires a greater level of monitoring, due diligence, and compliance on an investment manager’s part.
In addition to closely following other audit processes, managers need to implement investment/portfolio management and operational processes that ensure proper fund allocation, avoid unforeseen “cherry picking”, and provide a detailed audit trail. The investor deserves to have a level of comfort that the manager will institute a timely monitoring paradigm to adhere to their unique portfolio rules (especially in the instance of market value and exposure-based limitations), delivery of position and trade information to investor third parties, and other investor-specific processes that may far exceed the functionality limits of many off-the-shelf products due to the wide array of unique requirements that each specific investor may demand. Managers who suffer from this functionality limitation could have potential SMA investors re-evaluate their investment strategy – and this could mean a reduction or complete loss of the potential investment.
But, all is not lost. Many of the vendor provided systems that managers utilize, while lacking in the robustness of functionality to directly address this challenge, actually have the necessary data to accomplish this function. Partnering with an organization or with individuals that understand these workflows, complex investor rules and covenants, and vendor data accessibility requirements, will enable managers to achieve a replicable SMA on-boarding process that is key in capturing and maintaining these investments.