dbalternatives: Deutsche Bank

Winner: Best overall platform; Shortlisted: Best managed account platform

Many investors who were burned during 2008 have been reluctant to return to hedge funds until now.

Individuals and institutions which were previously in hedge funds are starting to allocate to them again. Many of these investors are using managed accounts to invest in order to give them a greater level of control over their money, according to Martin Fothergill, a managing director at Deutsche Bank.

He believes investors re-entering hedge funds will be a key source of growth for Deutsche Bank's dbalternatives platform in future.

That is not the only driver for the use of managed accounts. "Institutional clients are being driven by regulations and their own requirements to provide transparency or to have transparency into their investments. When I say transparency, it's not just into the positions but knowing the processes, having information about how the valuation procedures take place, how NAVs are calculated and things like that. From an institutional perspective there is a shift towards investors requiring more knowledge and control over their hedge fund investments," says Fothergill.

The dbalternatives platform offers a range of investments, including managed accounts, alternative Ucits and hedge fund exchange traded funds (ETFs). There are currently 98 funds on the platform. Of these, 84 are managed accounts, 13 are Ucits funds that are sub-funds of Luxembourg Sicavs and the last is the Discovery Fund, a Cayman-domiciled seeding fund.

This is the latest addition to the platform. It will be launched in the first quarter of 2013 in partnership with FRM. "It is a joint venture with what is now Man FRM. They will be responsible for sourcing and selecting managers for the fund. Deutsche Bank provides the fund structure and the managed account part and will also distribute the underlying managers once they have been seeded," Fothergill explains.

Fothergill believes the fund is interesting because it brings together Deutsche Bank and FRM, two big names in the hedge funds industry. With such backing, he says, any emerging manager seeded by the platform will have a strong stamp of approval. The fund will give investors a share in the manager's revenue in addition to performance of the fund. Average seed investments will be $50 million.

The strategy range available on dbalternatives is extensive and includes credit long/short, distressed debt, high-yield, convertible arbitrage, equity long/short, merger arbitrage, event driven, managed futures, global macro and currency.

Deutsche Bank recently rebuilt its reporting systems to price and risk-manage more complex securities. "We are trying to make sure the managed account structure doesn't limit what investors can invest in, within reason. There comes a point where instruments are too illiquid and can't be priced." The platform can now handle the majority of hedge fund strategies and Deutsche Bank is hoping to add its first catastrophe bond fund to the platform in the first quarter of 2013.

Investors using the platform fall into two categories: half are private banks, family offices and distributors while the other half are institutional investors.

Different investors have differing needs but it is not as simple as dividing them by investor type or geography. "You can divide it up on different criteria. One of them is liquidity. For example, our most liquid product that we offer is our hedge fund ETF, which has intra-day liquidity. We have some managed accounts and Ucits funds which are daily and weekly [liquidity] and then we have some managed accounts which are monthly," explains Fothergill. Some investors need a high level of liquidity while others are more strategic long-term investors who value transparency above liquidity.

Another differentiator among investors is the need for regulated products. "An extra complication is that some clients can only buy Ucits for some portfolios. So they will buy Ucits for those portfolios and managed accounts for other portfolios. Then they will also buy offshore funds," says Fothergill. "Particularly with our larger clients we find that different pockets of capital or different funds, even from the same investor, will invest in different products." This is the main reason why the platform has developed since its launch in 2002 to encompass different structures and types of products.

Having a diverse investor base as well as a range of structures means future growth for the platform is not expected to come exclusively from any one vehicle.

Reflecting the evolutionary nature of the fund of hedge funds business, dbalternatives is also looking at bespoke transactions as another business area where there is growing interest. These will either come in the form of funds of one for a particular investor using Deutsche's existing infrastructure or setting up an entirely bespoke platform, which it has done for some of its fund of hedge funds clients. So far it has done four of these types of deal and expects more in future.

Alternative Ucits funds are also experiencing strong demand from investors, particularly from European investors as well as Asian and Latin American, according to Fothergill.

He is unfazed by the introduction of the EU alternative investment fund managers (AIFM) directive, believing it could provide opportunities for the platform. He is hesitant, however, to predict what the opportunities might be before the EU releases details of the implementation of the directive.

For investors, regulation continues to provide challenges. While Basel III and Solvency II capital requirements will have an impact on institutions, there are also single-country regulations that impact those putting money in hedge funds.

"Some of the Scandinavian countries have had directives as to how they can invest in hedge funds so they have requirements as well. They are not as restrictive as something like Solvency [II] but they still have guidelines from their regulators about how they need to invest and the kinds of controls and information they need to have."

Deutsche has been working with its clients to help them with the issues they face as regulations are implemented, for example coming up with solutions for Solvency II. In some cases this involves structuring protected portfolios with triggers so an investor knows what the maximum loss could be. This should lower investor's capital requirements under new regulations.

Whatever rule changes institutional investors are facing, Fothergill thinks the platform can provide benefits. "There is a great advantage in using a platform from the point of pure transparency, aggregation of risk information, delivery of risk information and in some cases having an intermediary between the manager and the investor or the investor's regulator," he says. He thinks managed account platforms are a convenient way of achieving all of these things.

"But that is just one part of it," he continues. "For example, having knowledge and confidence of the valuation process is very difficult if an investor has 30 offshore hedge funds all with different valuation processes. A platform works very well from that perspective. Then you have the other attributes such as the mitigation against fraud risk, which is very important for many investors. Also there is enhanced liquidity that Deutsche and most other platforms offer as well. As you start putting together these four or five key components it does become a very compelling [offering] to institutional investors."

One of Fothergill's ambitions for the platform is to find ways to help investors to better integrate hedge funds into their portfolios, particularly for those that invest through managed accounts. "We have done a lot of work on that side. That is partly linked to the regulatory aspects. Hedge funds can no longer be that sort of black box in a client's portfolio so this is where we think there is a lot of traction and development for the future, helping investors back into the hedge funds arena and helping them maintain their hedge funds investment as the regulatory environment gets more challenging for them."

On the simplest level, says Fothergill, investors need to report exposures as though they are part of their overall portfolio.

Helping investors achieve better integration is where Deutsche is spending a lot of time and resources. Fothergill says it will be an important growth area.

Fothergill is upbeat about the future of the platform and predicts increases in both the institutional and the private banking and family office sides of the platform's business. However, he admits this can quickly change and in six months' time it could well be a different picture for the industry.

Platform facts
Name of platform: dbalternatives
Management company: Deutsche Bank
Contact details: [e-mail]
Assets under management: $10 billion (at December 1, 2012)
Launched: September 2002
Strategies covered: Hedge fund managed accounts: credit long/short, distressed debt, high-yield, convertible arbitrage, equity long/short, equity market neutral, merger arbitrage, event driven, managed futures, global macro, currency, quantitative equity, volatility arbitrage and fixed income arbitrage; Alternative Ucits: Equity long/short, managed futures, event driven, global macro and multi manager/strategy
Number of funds on platform: 84 hedge fund managed accounts (55 are publicly available for investors and 29 are private/funds of one); 13 alternative Ucits funds, as sub-funds of Luxembourg Sicavs; one hedge fund seeding fund - dbalternatives Discovery Fund, a Cayman fund with fixed-term structure for hedge fund seeding; one fund of illiquid hedge funds, Aggregator Solutions
Service providers: multiple administrators and prime brokers
Redemption terms: liquidity ranged from daily and weekly to monthly

2011
Winner: Best overall platform
Winner: Best managed account platform