Separate accounts way forward, says hedge fund industry legend

Oct 19, 2011 by Charles Gubert

Hedge fund managers will inevitably have to create separate accounts or structures that afford investors the same rights as separate accounts if they are to retain business, hedge fund industry veteran Frank Meyer has said.

Separate accounts are tailored offerings for investors, which enable greater transparency and allow clients to maintain control over assets. The financial crisis and Bernard Madoff’s massive fraud led to a chorus of larger investors demanding separate accounts in 2008 and 2009.

“There will be a major effort to eliminate structural weaknesses in the existing hedge fund model,” said Meyer, co-founder of Galaxie Financial Group and the investor who seeded Kenneth Griffin’s Citadel.

“Larger investors will often be able to get a separate account but the smaller investors might not be as fortunate. I believe there will be a development of new structures whereby all investors will get the protection of separate accounts even if they are in a pooled vehicle,” he said.

Pooling assets is popular among managers as it helps create economies of scale, reduces the administrative burden, lowers operational and transaction costs and simplifies risk management. However, Meyer believed these benefits associated with pooled accounts could be maintained.

“I do envisage deep pocketed investors working with fund administrators and getting much more control over the accounts. I could even see some administrators being taken over by large institutions,” he acknowledged.