Hedge funds accede to demand for segregated accounts

Hedge fund managed accounts are growing in popularity as investors demand more transparency and increased automation has brought down the cost of administering them, according to JP Morgan.

Within the private equity and hedge fund sectors in Asia “we’re seeing a lot of growth in separately managed accounts [and] single-investor type funds”, says Adam Wallace, head of hedge fund services, Asia-Pacific, for JP Morgan Worldwide Securities Services. “There’s a huge amount of growth in that space.” 

As a result of the competitive fundraising environment, the required threshold for setting up a segregated account with an Asian hedge fund manager has come down, notes Wallace.

While the threshold amounts vary according to the complexity of the strategy, US-based asset management firm SEI Investments has found that the minimum for managed account mandates, previously as high as $100 million, are now being established with as little as $10 million.

Advances in automation in recent years has helped to bring down the cost of running segregated accounts, according to Elliott Brown, global product executive for hedge fund services for JP Morgan Worldwide Securities Services. “In general, the more straight-through processes you’ve got, and the more automated your end-to-end system is, the lower the [operational] cost per fund.”

The increase in segregated accounts is being driven by investor demand for transparency, says Brown. The 2008 financial crisis triggered heavy hedge fund redemptions globally, which led fund managers to sell securities within their portfolios to pay off exiting investors. The remaining investors found that as portfolio positions were being sold, capital gains were being generated.

“The idea of a segregated account is that you get more transparency, and you also have much greater control over when the account gets liquidated or when capital gains are generated on the account,” says Brown.

Heightened investor demand for transparency has also led private equity firms, in Asia and worldwide, to outsource more administrative functions to third parties. A recent example is US-based Cerberus Capital Management, which last month mandated JP Morgan to provide fund administration and related securities services for its hedge and private equity funds, which have more than $23 billion in assets.

Cerberus, which has portfolio assets worldwide, including Asia, is being serviced by JP Morgan through its unified global platform, says Brown. “We can service clients simultaneously, and in multiple regions, because everybody’s accessing the same platform.”