Rising interest-rates and slumping fund-of-fund returns are driving a dealer race to offer leveraged exposure to single-name or sector-specific hedge funds, in an attempt to win back structured fund investors. The buzz at last week's Marcus Evans conference on Structured Products in New York was the challenge of writing derivatives on single hedge funds will give way to a chase to create--or buy--managed accounts. These boost dealers' ability to risk-manage derivatives on the accounts by providing better transparency and liquidity.
Managed accounts could solve a problem for dealers: to leverage or write protection on these funds, they need to be able to hedge exposure to them and some of the highest-returning hedge funds are also the most volatile, or have the most restrictions on lock-up periods and access, making hedging difficult.
"Many industry providers are looking to either build, buy or rent a managed account platform," said Cornelia Spiegel, senior v.p. in equities product development and structuring at Lehman Brothers, speaking at the conference. Asked directly by delegate Scott Berniker, v.p. at MSCI Barra, if Lehman is looking to make such a purchase or create managed accounts, Spiegel responded, "I think we are certainly looking into that kind of platform."
The first such acquisition took place about 18 months ago when SG Corporate & Investment Banking snared Bank of America's fund-linked business (DW, 1/18). In Europe, fund derivatives came about as an offshoot from equity derivative businesses, and firms including SG and Deutsche Bank have been running managed accounts for some time. In the U.S., however, where there has been less investor demand for capital protected investments, the managed accounts business is much less established.
For firms like Lehman, which has not had much presence in this space before, building a business from scratch will be tough, said one delegate in an aside to DW. Renting access to managed accounts from a third-party firm or index provider is also not straight forward. Some, such as HFR Asset Management, enter exclusive agreements with dealers preventing other firms from competing on certain HFR-linked products, and last week index provider Standard & Poor's announced it was closing its Hedge Fund Index backed by PlusFunds managed accounts because the group was not providing "necessary data." Spiegel noted one alternative may be for firms with strong prime-brokerage arms to set up managed account arrangements with clients.