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Moody's: Hedge fund managed accounts continue to surge in the near term but some operational risks remain

Wednesday, May 26, 2010
Opalesque Industry Update -- Managed accounts have experienced extraordinary growth in the aftermath of the financial crisis and the reasons for this trend are examined in a new report published today by Moody's Investors Service. The report takes an in-depth look at this type of structure and the inherent risks involved, and assesses the future impact it may have on the hedge fund sector as a whole.

"Although managed accounts have been around for a while, they enjoyed a surge in popularity after the market upheaval of 2008 due to the benefits they offer, such as access to liquidity and ownership of assets," says Joanne Job, a Moody's Analyst and author of the report. "The financial crisis coupled with many hedge funds imposing liquidity restrictions prompted investors to look for fund offerings that gave them more control over their investments and managed accounts filled this market need."

In a managed account structure, a hedge fund manager is an investment advisor who is granted the authority to trade on the account, while the account holder has ownership and control of the assets. This arrangement provides investors with more transparency and can also, depending on the type of managed account, generally insulate them from the knock-on effects of other investors pulling out of the fund.

Estimates suggest that managed accounts through the top ten platforms have reached approximately $41bn or 2% of the total hedge fund industry assets.

The report notes that managed account adoption was limited in the past because this type of instrument is generally more costly than direct hedge-fund investments and can pose operational complexities. As the market continues to normalize, these limiting factors could again become more important and reduce future growth of managed accounts. Furthermore, the report highlights the variations in the different managed account structures available and details some of the operational risks and challenges faced by investors utilising these investment vehicles.

"We believe that the managed account segment will continue to grow in a pronounced way in the short term and more moderately in the medium to long term," concludes Ms. Job.

The report is titled, "Hedge Funds: Investing Through Managed Accounts" and is available on www.moodys.com/managedinvestments.


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