Platforms: Same story, different continent

We recently did a blog post that delved into the ironically murky waters of UCITS funds, their regulations, and their ability to serve investors. It turns out that evaluation of UCITS performance reveals an important lesson applicable stateside as well: “platform” promotion of a program is not necessarily the best model for raising funds or investing. The finding in a white paper by Kepler:

Platforms have undeniably been more successful at recruiting managers and launching funds than raising assets.

Now, this may require some clarification. The term “platform” is used to describe a wide host of infrastructures in place across the industry. The type of platform in discussion here lines up very closely with our experience state-side, with the platforms in question essentially allowing for point and click investing, streamlining the paperwork process and, in many ways, giving investors access to higher minimum programs at a much lower initial cost. They list programs open to investments along with a series of vital stats on their performance, and investors interested can click their way into a pseudo-managed account; their investment is treated in a segregated manner, but is essentially a contribution to a pool. To the undiscerning investor, the technicalities may not matter, but there’s more there than meets the eyes.

While this may seem like a dream come true for many investors (and capital seeking managers), these platforms are far from perfect, in our opinion. These lower minimum investments are matched with additional layers of fees, less liquidity than would be seen through managed accounts, and close to no non statistical research available to investors curious about the managers in question. Given the investor-centric approach of Attain, it should come as no surprise that we advise clients with the ability to do so to choose managed accounts over these platforms.

From a manager perspective, the result we’ve seen with platforms in the U.S. has been massive influxes of capital into a handful of managers, with little benefit for the remainder of the population on a platform. The problem boils down to the fact that managers on these platforms still need to be sold to the investor, so unless you’ve got someone out there blowing your horn, you’re not going to get the notice promised by their spotlight.

Compare it to placing a product in a grocery store. Getting shelf space is not necessarily enough- producers have to invest in television ads, coupons and more to generate interest. While CTAs and funds may not get the same kind of traction from the “on sale now!” mentality associated with this kind of advertising, the idea is the same. Shelf space on a platform is insufficient.

A new white paper from Kepler, LLP– a financial industry research and marketing entity focused on UCITS funds-compiles the growth of assets under management for hedge fund managers operating under the UCITS seal via UCITS platforms, and it turns out that our European counterparts are seeing similar results from platform-based marketing. While their platforms may operate in a slightly different manner than those run by their American brethren, their general purpose of raising funds efficiently is matched with results similar to what we’ve seen on this side of the pond. As the paper states,

Despite the significant presence of these platforms, the average size of their funds still lags substantially behind the broader average (£77m for platform funds versus £247m in the wider universe). The move to go with a platform has only paid off for a select few managers so far who have been able to attract significant assets…

Platforms have undeniably been more successful at recruiting managers and launching funds than raising assets. The number of funds on platforms has risen from 43 to 78 and as a result platforms continue to play a major role in the development of the sector (with a total number of 217 funds in the Absolute Hedge single manager universe). However, the average size of the platform funds is still far below the average of the sector; £77m for platform funds versus £247m in the wider universe. Even the largest platform funds (see Fig 5 below) do not yet make it into the top 15 funds in the wider absolute hedge universe, which would require a threshold of just under £1bn in assets. Shorter UCITS track records and tracking error versus offshore strategies for most platform funds may go some way to explaining this differential which we expect will narrow in time.

Our takeaway? While platforms may have utility for some investors and managers, they’re far from the panacea they’re made out to be, especially for those emerging managers hoping the platform route will result in a drastic increase in assets under management.