Many investment managers and asset owners are struggling with a new reality and working to restructure portfolios, all while trying to shrug off a 10-year bull market euphoria-induced hangover. For the last decade, it seemed like the U.S. equities market knew no limits, with active managers struggling to even come close to meeting their benchmarks. Allocations to alternatives became less of a concern with each passing stock market record. Strong economic fundamentals – record low unemployment, wage growth, strong housing markets – continued to boost certainty that the party was not ending anytime soon.
What 2020 has shown us is that managers must prepare for the unexpected. Six months ago, or even three months ago, no one would have expected a global pandemic to turn a bull market on its head. Now as we fight through a market that at times has seen losses top 25%, asset owners are taking stock and reevaluating previously paltry allocations to actively managed alternatives and seeking further portfolio diversification.
As these large investors look to diversify greater portions of their portfolios with alternative strategies, many should evaluate efficiencies that can be generated through a managed account solution.
A Solution with Benefits
Managed account solutions have applicability across a wide spectrum of asset classes and for many allocators, can provide a consolidated reporting and risk management solution across an entire portfolio. Additionally, the service makes sense for managers or asset owners allocating to alternatives for a few key reasons outlined below:
- Money – The most obvious reason is inherent in the name. It’s a managed account, meaning that the asset owner can typically invest with a manager as a separate account client, versus an investment directly into the fund. This allows investors to negotiate more favorable fees and lowers overall operating expenses, which can equal a significant savings.
- Control and Liquidity – Hedge funds aren’t known for providing great access to liquidity. Investing through a managed account may provide the investor with greater availability of their capital.
- Risk and Transparency – As a large separate account investor, the asset owner or their representative can have a granular view into the underlying portfolio, make modifications to the strategy parameters, and receive more frequent performance reporting.
Managed accounts provide operational efficiency. To garner the true benefits of the structure and data, an asset owner needs a partner that is focused on the operational requirements of managed accounts. Investment advisers focus on investment decisions and choices, while managed accounts require operational excellence.
Operational and Structural Alpha
As an institution known for its fund and financial product administration capabilities, Ultimus has created a service that provides for the aforementioned advantages, and others for asset owners. Our Dedicated Managed Account (DMA) solution implements a structure and service that will allow investors or their consultants to easily and seamlessly shift portfolios back to larger alternatives allocations. While doing this, the DMA solution provides the additional advantages of significant cost savings, better reporting, better visibility, more control, and improved liquidity. The solution has the potential to provide operational, structural, and incremental alpha for the portfolio.