Lyxor Managed Account Platform head of research Stefan Keller talks to Pensions Age about the benefits of investing in hedge funds through a managed account platform for institutional investors

Could you provide an overview of Lyxor’s managed account platform?
The Managed Account Platform (MAP) at Lyxor is one of the largest in the world. The MAP is one of the two historic businesses of Lyxor Asset Management. The company was founded in 1998 when the managed account was also set up. If you put the MAP into a broader context, in particular Lyxor’s key values such as transparency and innovation, we can say that the MAP epitomises our company’s key values. Our 14-year track-record gives us a competitive advantage because since the beginning we have continued to invest in the platform. You need resources to be able to continue to develop, both in systems and people. This means that the managed account business has always been and will continue to be a key driver for Lyxor’s development.

We at Lyxor have not only the flexibility but also the security. That means the segregation of accounts, higher transparency, advanced risk monitoring and independent reporting. In terms of counterparty risk and open architecture, this has been Lyxor’s standard for many years. What we see today is that our standards have become industry standards. To some extent we realise business wise how right we were setting up the MAP 14 years ago but we’ve certainly found that the industry has gone through a reality check. And the reality check of the managed account business model passed the test.

We have strengthened our open architecture and our multi prime model. We have been working on counterparty risk and mitigation on specific cash management in order to secure the assets for our investors. Lyxor’s standards became the industry standards and this has been reflected in the official certification of our processes (Certification ISAE 34-02). What has been done is to write a list of guidelines and processes for the manager on the managed account platform to be continually checked, risk monitored and risk managed, which has been audited by an independent auditor. We are ourselves an asset manager and therefore an institution, and we act as an institution. This means that institutional investors have the same DNA as Lyxor and therefore we have basically the same goal when we think about hedge fund investment.

What are the benefits of using a MAP to invest in hedge funds in today’s economic landscape?
If you look at today’s financial landscape, you see that bond yields sit at historical lows, economic growth is nowhere to be seen and equities aren’t cheap. So the result is a desperate search for yield in credit assets and for alpha in liquid alternative investments. In addition what we see, especially with our institutional client base, is a desire for more flexibility to manage their allocation, and especially to manage these allocations more dynamically.

So this means institutions have realised that the assets under management (AuM) are not only about asset management but also about liability management. European pension funds are therefore keen to increase their hedge fund allocations.

The world is going through tough times. In this financial landscape, Lyxor sees opportunities: our customised investment solutions, including dedicated MAPs, are perfectly aligned with what large institutions need. This has triggered significant inflows in recent quarters to our managed account business.

How has Lyxor been evolving its MAP to ensure it continuously meets investors’ needs?
When you run a MAP, you delegate the portfolio management to a trading advisor in a segregated account. As it is a Lyxor fund, we as an institution have full transparency on portfolios, meaning a view on more than 60,000 single positions. Handling this, requires resources, which means machines, systems but even more important, people. People who are able and who have the experience to analyse the exposures, the risk levels, the concentration and the diversification of each single position. This transparency is key to an institution. I think what we’ve done over the last two years is we have pioneered work, which is why Lyxor MAP really stands for our key values such as transparency and innovation. We have been continuously investing into systems and into people in order to bring to our investors a next generation website where they can access on a weekly or even daily basis exposures and risk aggregator indicators/measures. What matters here for an institutional investor is to align its overall balance sheet to its investments on the managed account platform.

Lyxor is also flexible to meet the changes in investors’ expectations. Over the last couple of years there has been an increased focus on the issue of transparency. You’ve seen a search for a better alignment of the interests between hedge funds and end-investors. There is a broader scope of areas of risks, of which counterparty risks, trading limits, diversification are all addressed in our managed account set up. This is where experience matters, where investors look for a proven model. They feel comfortable because Lyxor’s MAP has been through many different reality checks over the last 14 years. Assets on the platform are protected and we speak about an open architecture model, with 11 prime brokers, three independent administrators and 15 authorised OTC counterparties. So when it comes to running an open architecture model experience matters.

Do investors have any preconceptions about investing in a MAP?
Not any more. A couple of years ago MAPs were seen as second best in the investment universe. At one point in time people and institutions preferred direct investment over managed account investment, due to negative selection bias. Simply speaking, not all managers wanted to be on a MAP. This has changed over the last couple of years, partly due to increased regulation. Hedge fund managers are therefore more willing to come onto a MAP. At Lyxor, we offer the entire spectrum of hedge fund strategies in a managed account format, including credit arbitrage and multi strategy funds. Investors realise and acknowledge that Lyxor offers best in class managers on our platform. Even more so, what has been negative selection bias, has shifted into a positive selection because a hedge fund manager on Lyxor’s MAP, given our track record, is seen as a manager who has nothing to hide. So investors are actually very comfortable when they see that the hedge fund is on our MAP because it simply means that the manager complies to our risk guidelines, our risk management and our transparency.

What developments have you seen occurring within the map industry?
Providing dedicated, customised MAPs for large institutional investors is clearly an expanding business. This is probably the most pronounced trend in hedge fund investment in the last five years. What clearly matters is selecting hedge fund managers, service providers and counterparties, it’s a full time job. And we enjoy inflows simply because the Lyxor map is a solution that both optimises the advantages of selecting individual strategies, while also simplifying the tangle of exposures that this approach entails. The benefits for institutional investors are tailor-made solutions, transparency to integrate their hedge and investment, and the global allocation of assets. Certainly the risk management and leveraging benefits from Lyxor’s experience but also our size to access hedge fund managers and our ability to negotiate better standards. When we talk about negotiating better standards, by partnering with an institution we can negotiate with service providers, and sometimes with the managers themselves, in order to get lower fees. Lyxor has now some funds where we offer the managed account set up for exactly the same price as the standard fee charged by the benchmark, simply by negotiating with a manager.

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