The popularity and use of managed accounts and managed investments has grown substantially in recent years, as investors look to have their funds managed by professional money managers. Having your account in the hands of some of the world’s top performing traders can be incredibly rewarding, however just as it is important to mitigate risks in trading itself, selecting the right money manager is just as critical.
Drashta Capital has spent years seeking the best performing money managers and traders globally to include in our own investment offering. Having had countless “learning experiences” with a range of managed account providers and traders, the purpose of this article is to steer you through the world of managed accounts without having to experience many of the ups and downs, minimising the risk in your investments. Here are the 10 questions we think every investor should ask their managed investment provider as a starting point.
1. Are you regulated?
It is alarming how many people and groups offer money management services without being regulated. While an investment licence in a reputable jurisdiction (UK, US, Australia, Europe) is not a guarantee of performance, it certainly displays credibility and accountability. Anyone can set up a website in a few minutes or promote their services online, but these groups can disappear without a trace just as quickly. Going through the regulatory process shows that a firm is serious and is in it for the long run.
2. What are the risk parameters on the investment?
People invest to make returns and grow their capital, not to take risk, however it is a natural part of any investment and the first thing that we look at. Knowing and understanding what the downside is on any investment provides a foundation on which returns can be built. Knowing whether a -3% loss in a single day for instance is within the risk parameters is critical to knowing whether the manager is sticking to their risk management or exceeding the limits, which is a strong warning sign of further potential risks.
3. How do you manage risk?
Knowing that the maximum drawdown or risk limit is a start but how is this enforced in practice? Getting an understanding of how the risk is minimised on your account is critical and provides you with the comfort of knowing how robust the overall approach is.
4. Where are the funds traded?
Many people underestimate the importance of trading through an optimal venue. We have observed profitable strategies become unprofitable strategies, simply by trading at a lower quality broker. Beyond the face value and the pricing shown, unfortunately there are a lot of dirty tricks that retail brokers can play as well which can deteriorate investment performance significantly. In a lot of these cases, the broker and money manager profit from the situation, but this is almost always at the expense of the investor. Only trade your funds with the most reputable brokers as trading anywhere else puts you at a disadvantage before the trading even starts. If an investment manager insists upon trading at a low quality broker, we see this as a red flag and begs the question as to why they are choosing higher trading prices with lower quality service, at your expense.
5. What is the liquidity of the investment?
With most managed accounts the funds are fully controlled by the investors, however we have heard of cases where the money managers have control of the funds and refused to return them. Always ensure that you have full control over the funds and if there is a lock-in period or minimum investment period, that you are comfortable with this.
6. How transparent is the investment?
How regularly will you receive updates of the performance of your managed account? While real time tracking isn’t imperative, daily updates are desirable so you can keep track of performance. If you are comfortable with your investment manager, you should not need to check the performance more often than once a month however the fact that a manager will allow this level of transparency is a positive sign.
7. What is the fee structure?
Ensure you are comfortable with the fees being charged and if there is anything unclear, ask the money manager to clarify. The ideal situation is if a third party (usually the broker) can oversee the fee transfer process or if it is automatic, as this simplifies the process substantially and prevents any potential disputes.
8. What are the projected returns?
While the previous returns are the first thing a money manager will typically show you, it is up to you to determine what the returns may be going forward. In the same way that you would buy shares or stock in a company based on its future prospects, you allocate capital to money managers based on the returns you believe they will generate in the future. That being said, past performance can be very informative and with increasing track record length, demonstrates how the manager performed and adapted to a range of market conditions. Knowing what performance to expect compared to the risk you are taking provides you with a benchmark to assess the investment both initially and on an ongoing basis.
9. In what markets does the investment perform best/worst?
Understanding the strategy and how it generates returns is crucial for long term outperformance. If for instance the money manager has a single strategy that capitalises on calm, range bound markets, they are not someone you would put your money in times of increased market volatility. Knowing this also provides telling signs as to whether a strategy’s recent strong returns were perhaps a result of specific market conditions which have now changed and as such, similar performance is not to be expected unless things revert to those conditions.
10. How can you verify your performance history?
Posting figures on a website or sending through a performance table can be informative but unless it can be substantiated, it does not carry much weight. Request additional documentation such as statements or other forms of verification that you can acquire to ensure these figures represent live performance.
While positive and informative responses to all the questions by no means ensures you will achieve the projected investment returns, as we have found ourselves, it certainly skews the odds in your favour.
Milti Chryssavgis is the Head of Investment Solutions at Drashta Capital, a regulated investment management firm based in Sydney, Australia. Drashta works alongside some of the best performing traders and money managers globally, offering qualified investors access to a portfolio of their strategies, helping them to avoid the common pitfalls of the managed investment space and achieve their investment objectives. Click here for more on Drashta