Aspen Partners' Aspen Diversified Fund recently made the switch from a fund that primarily made allocations to limited partnerships to one that now invests in managed accounts.
“We have all but three of allocations made to managed accounts,” says Aspen’s co-chief investment officer Paul Morin (left). “In LPs, you can’t lose more than your original investment so that protection is there. Theoretically, in managed accounts your exposure is much greater. That’s certainly a concern for investors. But even with that, the benefits of managed accounts can overcome that.”
Alternative strategies are complex, Morin says, and access to the underlying trades is often hard to come by. The transparency inherent in separately managed accounts gives Aspen investors a greater degree of comfort. Specific to limited partnerships, the manager has custody of the assets within the fund, which could lead to questionable behavior on the part of the manager. With managed accounts, the manager has discretion to invest the assets, but not direct access, which Morin says is a significant benefit.
He also notes in larger funds that are less liquid, influential investors might receive preferential treatment.
“Someone else could get out before you and this is especially critical in a market downturn,” he says. “What’s left to often is the toxic waste which you get stuck with. Also, expenses and costs could be high, and smaller investors get hit with a higher percentage.”
When Aspen puts together a portfolio, they look to see how each fund complements the other, specifically looking for any unusual concentrations of risk.
“The transparency SMAs afford allows us to see all of the fund’s positions in aggregate. Even if a limited partnership gave you the positions, you would still have to figure out your percentage, and it can get complicated quickly,” Morin says.
As he previously mentioned, one of the pitfalls of managed accounts is the investor could potentially lose more than their original investment, but with the proper analytics in place, Morin says, he is able to monitor the risks the managers are taking on a daily basis. In limited partnerships, that level of transparency is often not available. And he wants managers with “skin in the game,” those that invest large amounts of their own money and bring other investors along with them. In this way, trading decisions are always in the best interest of the client.
“We look for managers whose primary focus is on getting the best returns given their skill set, without limiting those returns by seeking to gather too many assets,” he concludes. “From an enterprise value standpoint, it’s good for business for them to have a large amount of asset, and we recognize that. But we don’t want them so big that it’s hard for me to be able to address the opportunities given their size. It’s a delicate balancing act; there has to be some commitment to growth in order to have continuity, but not so big that they’re inflexible and opportunities are missed.”