Hedge fund managers are increasingly embracing single-investor funds as a way of satisfying investors' demands for managed accounts but without taking on the extra administrative and investment requirements that come with them.
"Managers that may not have that separate account infrastructure in place can satisfy an investor's desire with [single-investor funds]," Mitch Nichter, a partner in the investment management practice at Paul, Hastings, Janofsky & Walker told AIN. He said there has been a recent uptick in interest in the structure. Steven Nadel, partner at Seward & Kissel, told AIN he is seeing a similar trend.
"Investors have been scared off by pooled products," noted Nichter, and many have flocked to managed accounts, attracted by their transparency and liquidity (totalalternatives.com, June 20, 2008). Single-investor funds are still tailored to an investor's individual investment strategy, but there is significantly more control in the hands of the hedge fund manager, as the assets are in custody of the fund, rather than under custody of the investor in a managed account. These funds also are separate from other money.
There are many benefits to the fund manager, Nadel noted. From a tax standpoint, a single-investor fund allows for shifting performance fees from the limited partner to the general partner, making that fee changeover appear on taxes as a long-term gain. In managed accounts all fees from the account are taxed at the highest ordinary income tax rate.
Some managers are also putting in time or performance provisions that open the fund to other investors or move a separately-managed account into one of the firm's hedge funds. "For a manager it's much more efficient from an investment perspective as well as from an administrative perspective to manage one large pool of assets rather than many smaller pools," Nichter explained.
Steve Simmons, a managing director at Lighthouse Prime Services, told AIN he has heard of provisions being placed on managed accounts, but noted that what may be at work is the hubris of some managers who don't fully understand the power shift from hedge fund to investor. "There are 8,000-plus funds out there on any given day," he explained. "The industry is not going to miss 2,000 of them."
--Corrie Driebusch
This article was originally published in Alternative Investment News.