However, financial risks such as leverage are not the biggest issue for hedge fund investors, according to Antoine Broquereau, who as head of structuring and Alternative Investment Solutions at Société Générale Corpo­rate & Investment Banking, is in charge of Lyxor.  In fact, according to Broquereau, most hedge fund debacles are caused by non-financial risks, particularly opera­tional risks arising from the unregulated nature of hedge funds.  “One of the main issues is that hedge funds are often referred to as ‘black boxes’ due to the lack of regula­tion or transparency.

Using the man­aged account is a way to cope with that because you hand over the operational risk management function to a third party who makes sure that settlements are correctly done, that the net asset value is computed correctly without relying on the manager as a source of pricing, that the position is reconciled between the auditor, manager, prime brokers and Lyxor,” Broquereau says. “You are effectively multiplying the number of ‘actors’ in the chain to make sure that independence from the manager is guaranteed.

The transpar­ency tells you what the manager is doing, whether he is leveraged, whether he is using all the limits given to him, and whether he is changing the strategy,” he notes. Fraudulent activities, the dangers of which were highlighted by the Bernard Madoff case, have made it even more pertinent that investors are able to monitor their exposures closely, understand the strategy of the manager, and are able to get access to underly­ing funds managers on a regular basis, Broquereau argues.  “In the Madoff case, there were a lot of links between the manager, the prime broker and administrator of the fund.

By breaking up such links through the use of a managed account, you make sure there is no conflict of interest between the different activities,” Broquereau says. The additional risk controls meant the Lyxor funds dodged a bullet not only on Madoff, but on the collapse of major prime brokers Bear Sterns and Lehman Brothers. As the credit spreads for each bank ratcheted up in the days before their demise, Lyxor withdrew accounts with them accordingly.  

The man responsible for market­ing Lyxor’s managed account-based hedge funds-of-funds in Australia, Paul Stevenson, admits the managed account structure creates extra work for individual hedge funds, and a hurdle for potential investors facing stricter fee budgets. Managers have also expressed con­cerns that running managed accounts alongside their traditional unit trusts creates a privileged class of investors, in that the managed account owner can withdraw their funds whenever they want, potentially increasing illiquidity for those trust investors exposed to the same positions. However, the fact that managers aren’t willing to go on the record saying anything disparaging about managed ac­counts is a sign of their new supremacy among wary institutional investors.