Managed Accounts Reduce Risk - Report

Stephen Harris

3 February 2006

The use of managed accounts is a very efficient way to mitigate operational risks, according to a new study by French business school, EDHEC. The study, called "Mitigating Hedge Funds’ Operational Risks: Benefits and limitations of managed account platforms", shows that managed account reduce risk when accompanied by appropriate risk monitoring and adequate structuring of the relationship with the hedge fund manager. This is especially the case when the size of the investments does not allow for a dedicated operational due diligence and risk monitoring team to be set up. The benefits of managed accounts clearly outweigh their cost and limitations, said EDHEC. Operational risks mitigated through the use of managed accounts include: misappropriation; misrepresentation and incorrect pricing; and trading outside of the operating mandate. These risks were present in 85 per cent of the hedge fund collapses analysed by the study. Governance was identified by the study, specifically the absence of independent oversight, as the most important element to be considered prior to investing in hedge funds.