Separately Managed Accounts: Part II

Once expectations have been set and a good TMA is in place the next step is to begin working with a (hopefully your) prime broker to get the account up and running. In this Part II of the blog we will talk about the nuts and bolts of opening an account including executing on the TMA to working with prime brokers and allocating bulk trades via your executing brokers.

If your fund is not a new launch you may have forgotten all the things you had to put in place to fulfill the operational requirements of the fund. Hopefully you kept good notes because you now have to do it all over again for the new managed account including replicating ISDA’s, broker agreements, FX arrangements, client specific ID’s if needed in foreign jurisdictions, etc, etc. If the managed account is on the small size you may also run into the prime broker’s reluctance to open ISDA’s and other arrangements on the same terms as your core fund.

One of the key compliance issues is your policy on trading practices and potentially using bulk trades with allocations to each fund/account. When dealing with bulk trades and allocations there needs to be a policy in place to insure that neither the managed account nor the fund is receiving preferential treatment on trades. What will be your policy regarding bring the account back into balance with your core fund if you have agreed to run the managed account pari passu? Mid-month liquidity can wreck havoc on your trader depending on your and your client’s expectations. Additionally, if the prime broker of the managed account is not the same as your core fund you now have the challenge of (hopefully seamlessly) allocating trades. Depending on your investment and trading style you may be able to get away with using a simple trading system however if you use multiple executing brokers and deal with securities globally you may need to look at additional in-house capabilities such as OASYS.

Daily reconciling of the account for cash and positions also remains your responsibility. You’ll probably have a new administrator to work with so be prepared to deal with their unfamiliarity with your account and practices. You’ll typically be expected to either prepare the invoice yourself for management and incentive fees or at least be able to verify that the numbers your client provides are accurate. If you are not setup with an internal portfolio and partnership accounting package then now may be a good time to consider one. Software in the sub-$20k range is now available to handle these requirements. Remember the administrator on the managed account is not your vendor and you therefore have much less control and flexibility over them than the one you use for your fund.

In summary, while having a managed account is an added layer of complexity to your firm but if you are prepared it can be great asset and if you do a good job can it set you apart from your peer firms.

Duncan Huyler, CFO, 360 Global Capital