Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 45)

Bringing structure to hedge fund investing H edge fund seeding platforms like Próxima sets its own entry rules, the platform can ofAlfa Investments help investors choose fer a lower entry hurdle than most of its benchthe best managers from the throng of hedge mark funds: $100,000 for eligible collective funds launched each year. At the other end of investment schemes offered to the public and the spectrum, Société Générale Group’s Lyxor $250,000 for other qualiﬁed investors. For its 85-basis-point fee, the plat form Asset Management and Morgan Stanley’s LiquidFunds Program deliver third-party ap- guarantees adherence to Société Générale’s proval to institutions wary of investing even in standards. It also ensures that the structured established hedge funds. By re-creating such products it creates — based on the underlying funds to the same speciﬁcations under institu- managers’ benchmark funds — are solvent. tional umbrellas, these two platforms Lyxor are also crafting building blocks that could become the basis for hedge fund chairman derivatives. Alain Dubois: Alain Dubois, chairman of ParisManaging based Ly xor, explains that French risk for wary bank Société Générale founded his investors firm in 1998 because European risk departments had become afraid of hedge funds. “Many Swiss banks lost fortunes on options via structured products based on Long-Term Capital Management,” says Dubois, who joined Lyxor in 2000 after specializing in structured products at Commerzbank of Frankfurt and Paris-based Lazard Frères et Cie. “The challenge was to create a new form that could guarantee a very high level of transparency and restore confidence, yet still deliver the high returns.” The Lyxor Managed Account Platform has re-created 170 accounts, which are managed almost entirely from inside Lyxor famously denied Greenwich, Connecticut– the organization, the exception being the “trad- based Amaranth Advisors’ application being advisers,” who approximate the investment cause the fund wouldn’t meet its transparency strategies of their original, external benchmark requirements. From that perspective, the managed achedge funds. The platform manages $36 billion in alternative investments across a wide range count platform achieves its goal: to assuage of strategies, with its benchmark funds drawn institutional fears about hedge funds and stop from many of the world’s best-known hedge the next LTCM or Amaranth from being the underlying security that loses money for Société fund management companies. All of the managed accounts are limited li- Générale’s biggest banking clients. “What we ability companies, registered and regulated by have done is make investing in hedge funds the Jersey Financial Services Commission and safer than it once was,” Dubois says. Morgan Stanley unveiled its London-based deposited with an independent prime broker. Lyxor sets strict investment guidelines and risk LiquidFunds Program last summer with similar limits for its trading advisers. The platform also ambitions, while charging less than half the releases weekly liquidity and net asset value fees that Lyxor does. Like Lyxor, LiquidFunds calculations, an improvement over the monthly aims to standardize the returns of a select and quarterly updates for regular investors in group of hedge funds, impose tough corporate governance conditions and a disciplined its benchmark funds. Lyxor standardizes subscription and re- vet ting process, and lay the foundation for demption procedures, with a single settlement structured products that appeal to a broader schedule across the managed accounts to en- clientele than direct hedge fund investments courage their use as underlying investments do. The difference is that LiquidFunds employs for structured products. And because Lyxor less infrastructure. Instead of internalizing its managed accounts, LiquidFunds makes platform participants responsible for running their own funds. The program provides a template for creating a managed account that complies with Morgan Stanley’s governance rules and meets its hurdles for prime broker, auditor, administrator, due diligence, transparency and investment infrastructure standards. All of the managed accounts are Cayman Islands–listed and open to a minimum $500,000 investment in equal share classes without capacity restrictions. LiquidFunds, which outsources due diligence to Greenwich Alternative Investments of Greenwich, Connecticut, and the risk analytics and daily reporting function to New York– and London-based GlobeOp Risk Services, charges only 35 basis points. Morgan S tanley has pledged $ 2 0 0 million to equally seed the ﬁ rst 15 managed funds on the LiquidFunds platform, which it plans to grow to about 60 funds. All of the funds are at least three years old, with assets under management ranging from $100 million to $2 billion. For Morgan Stanley and Société Générale, the potential profit from selling structured products was a key motive for investing in their respective platforms. “Our greatest contribution is that we help regular funds to distribute to a wider audience and become the basis for structured products that can inevitably reach even more investors,” says Marc Thévenin-Biguet, a Morgan Stanley Investment Management vice president responsible for LiquidFunds. Charles-Edouard Vareine is another MSIM vice president spearheading LiquidFunds. He says that because the accounts are structured identically, “we are already developing a host of applications to use them as the basis for new products, such as capital-guaranteed funds, or tax-efficient products, or to be Basel II– compliant, or be part of investable indexes.” The market for derivatives based on hedge funds is still young. “It is difficult enough to build derivatives based on asset class and performance for commodities or indexes,” says Terry Marsh, president and CEO of Quantal International, a Berkeley, California–based consulting ﬁrm for ﬁnancial institutions. “With a manager, it adds another order of complexity and difﬁculty.” — J.L. Photo by Herve Bruhat/Rapho/Eyedea for Alpha DECEMBER 2007/JANUARY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 45

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.