Managed Accounts Give Investors Real Options

Investors deserve instant access and transparency

Originally published in the February 2010 issue

In the world of money management, investors have options and sometimes those options are not always very clear. The relationship that exists in managed money is a direct one between the investor and the money manager. Being an investor and trader myself, it is easy to identify the perspectives that exist in the client/manager relationship. One is from the money managers’ perspective and the other is from the investors’ perspective. What’s certain is that the client should always be the boss. A better way of explaining this is comparing it to the structure of a professional sports team. The owner of the franchise is the boss or in this situation the investor and the coach is the decision maker or the money manager. But when it comes to investing and managing risk the dynamics become a bit more complicated and at times political.

I started out trading for individuals and as performance grew my interests to manage more money grew, too. The growth of technology and the capability of brokerage firms to offer sophisticated back office support has increased interest in managed accounts. Managing multiple accounts for investors is only possible with sophisticated technology. It allows a manager to trade once while allowing the back office systems to allocate trades to multiple client accounts in real-time. Without such technology managers would find it difficult to piece out a trade to all of their clients. As a managed account money manager I know that technology has had just as much of an impact as trading skill in providing clients with attractive performance.

If, for example, I want to be long euro against the dollar and I have 100 clients, I can buy X amount of euros in one transaction and the back office will split that trade to all clients based on the amount of capital they have invested. This makes it much easier to enter and exit the market. Hedge funds have their own administrator or hire one for a fee. With managed accounts, there are no fees to the manager. Trading and back office are kept as separate components in a properly structured asset management business.

Access to money important
Over the past decade we have witnessed exponential growth in the number of hedge funds operating from around the globe. But when an unexpected event occurs or the global bankingsystem goes into a frenzy investors suddenly begin to realise that their funds are not sufficiently liquid and in many cases they don’t even know what they are actually invested in. The recent credit crisis brought to the attention of investors that access to money and visibility into the nature of their investment is just as important as performance. Personally, I know if I need my money I wanted it yesterday. If my money is invested and I need it I will have to accept the fact there can be a loss incurred for exciting early.
Typically, a managed account should provide instant access to client funds along with giving investors transparency to what they are actually invested in. By no means do I want to suggest that hedge funds have lost their purpose. My point is that investors deserve to know what they are invested in and have access to their funds if needed. It goes without saying that hedge funds have lock up periods for legitimate reasons as hedge fund managers make investment decisions for a specific time frame. But if an investor wants out their wish should be granted and not questioned.

For many managed account programmes, the client/investor will open a traditional brokerage account in their own name and grant power of attorney to the money manager. This clearly separates the interests of the broker, the client and the money manager. Client funds are held in the name of the client and only clients can deposit or withdraw funds as needed.

Another benefit is that clients have a secure online
capability to monitor all open positions in real time. Some trading managers may believe that allowing investors to monitor investments in real time is a royal pain in the rear. But this attitude obscures who the money really belongs to and ignores the fact that allowing investors to monitor real-time transactions will heighten the focus on the manager’s ability to perform.

Managed accounts allow monitoring

My company manages money for high net worth clients around the globe and in order for us to attract funds we have to understand what investors are looking for when they invest their money. For example I have a good client in Canada from whom I’ve learned over the years that his biggest concern is to preserve capital and have instant access to the funds he has invested. The client understands traditional market risk but has no tolerance for not knowing what his money is invested in or not being able to access his money if he needs it in a hurry. With a managed account, he enjoys having internet access to monitor my real time performance when he so wishes. To some money managers this could be a challenge as a client could potentially interfere with trading strategies or interfere before a strategy has had time to work. I don’t find it an issue since it keeps me on my toes at all times knowing I am performing in front of a live audience.

Another client I work with had a bad experience with managed funds. Owing to a personal matter he needed money fast. At the time, the fund manager told him that he would need to wait until the end of the quarter to receive his funds. This didn’t sit well with him and from that point on he has only make investments in programmes that offered daily liquidity. Over the past 12 months, however, this client hasn’t once interfered with any of our trading strategies and hasn’t redeemed any of his allocation. For him, having piece of mind is just as important as making money.

I admit that being on stage can be challenging. A relatively new client from the Middle East (whom we’ve not met) was referred by another investor. Our first transaction was to buy gold. Soon after the price of gold shot up and he began forwarding me emails from other traders forecasting the price to move lower. I explained our research to him and underlined how that we appreciated his interests. After further rises in the price of gold (and further emails about how the price was going lower) we booked a great profit. Since then he never questions our trades, even the ones that lose money. There will always be times when a strategy works against us and clients begin second guessing what we are doing. In sum, we all know that investor emotions can be a minefield but that just goes with territory of being a fund manager.

But one thing is certain: both hedge funds and managed accounts cater to investors seeking above average returns. The question is whether investors prefer visibility and access to their investment allocations. Hedge fund managers and managed account operators are both decision making traders seeking to provide their clients with a return on investment. In the right hands, allowing clients to be more involved is a good thing; in the wrong hands, it can also be a recipe for disaster.

Through First Lenox, Robert Paulson operates a managed account programme in Geneva catering to investors worldwide. He specializes in forex trading, management and advisory as well as gold and silver.

Through First Lenox, Robert Paulson operates a managed account programme in Geneva catering to investors worldwide. He specializes in forex trading, management and advisory as well as gold and silver.