Segregated Account

By definition it is an investment fund that can have several legal structures with the goal of grouping assets and investors’ money together following the strategy defined in the legal documents. The main advantages of investing in a fund are professional management, diversification (since the asset based is larger), and economies of scale.

The main disadvantages are
  1. the level of information given by the managers tends to be limited and 
  2. the liquidity terms of the funds are not always in line with the one required by the investors.

This can come from several sources: either large investors may have the power to ask for more attractive liquidity terms, or investors do not require the assets invested for longer periods of time but they want to negotiate lower fee structures.

Another element that may intervene is that the strategy may not perfectly fit with the one the investor is looking at and in some cases the manager can easily adapt the strategy by reducing the size of the positions, hedging some part of the market risk, or increasing leverage.

Finally, some investors require receiving a copy of the portfolio even if the strategy is relatively illiquid and the manager prefers not to diffuse it. All these adaptations can easily be done through a segregated account (also known as a separated account).

In a managed account, the managers create a separate account with the assets of the corresponding client. The underlying strategy remains usually close to the one of the corresponding fund (in some cases it can be a clone), but the liquidity terms, fee structure, and transparency are generally different.

Large institutions tend to use segregated account when they invest a significant amount with managers. Minimum sizes for segregated accounts are from $5 million up to $50 million, with an average being approximately $20–$25 million.

Segregated accounts can be prepared for almost any strategy but they are often created in the case of quantitative strategies that are easily adapted to particular investor needs. Segregated accounts are also used by hedge fund platforms.

These platforms were developed less than 10 years ago by hedge fund selectors covering all the hedge fund strategies. These companies analyze the hedge fund universe and negotiate capacity with the funds they prefer while recommending to their clients to invest in the managed accounts the firm has negotiated.

The advantages of such platforms are that
  1. investors may have access to managers that do not accept "new" investors, 
  2. the platform may of er more attractive liquidity terms than the fund managed by the same team, and 
  3. the selector may have higher transparency, enabling him to provide full risk management reports to the underlying investors.
These platforms are also usually tax efficient and enable asset allocation changes. Their main drawback is the added level of fees and investors do not have access to the final underlying portfolio.

Segregated Account
Segregated Account