Customisation: Perspective on trading
By Louise Guillemette and Poseidon Retsinas, both Legal Counsel at Innocap Investment Management
The managed account space is evolving from the traditional standardised and commingled offering toward customisation for single investors. Innocap offers its investors dedicated investment vehicles of multiple types, across multiple jurisdictions, featuring multiple fund administrators and service providers.
As part of this customisation, Innocap focuses on matching the brokers, clearers and counterparties (“BCCs”) used by the hedge fund manager (“Trading Customisation”). The goal is to create a trading environment that allows the manager to effectively implement its strategy. Meanwhile, agreements with BCCs (“Trading Agreements”) are negotiated by Innocap’s in-house attorneys with the investor’s best interest in mind.
Reducing negative bias of managers
The traditional, standardised and commingled managed account offering may struggle to attract highly in demand managers. In such a non-customised environment, the manager may be forced into using the managed account’s preferred BCCs or the investor’s account at particular BCCs, which has significant trading and operational impacts.
For instance, the manager may be forced to split trades (i.e. instead of placing one block trade with one counterparty and then allocating across funds, a manager would need to place separate trades across different counterparties). Moreover, managers prefer to use the same BCCs as their flagship fund since it reduces the potential for operational errors and eliminates the need to create additional operational structures/relationships.
Furthermore, by making the same BCCs available to the manager, the manager can implement its strategy more faithfully and in a cost efficient manner. The same products and pricing available to the flagship fund can be available to the managed account.
Questions investors should be asking…
- Does Trading Customisation come at the expense of time to market?
- How many BCCs does their platform have relationships with? Are these BCCs vetted and monitored on an ongoing basis by legal and risk?
- Are the legal terms negotiated by in-house attorneys, or is this task outsourced? If outsourced, how are the costs passed down to the investor? What terms does external counsel focus on when negotiating Trading Agreements?
- What is the content of the negotiated terms? How should the terms differ from those obtained by the manager for its flagship fund?
For 10 years, Innocap’s in-house attorneys have been negotiating Trading Agreements (Prime Brokerage, ISDA, Futures, OTC Clearing, Repo, etc). Innocap has built relationships with most major BCCs across the United States and Europe. These relationships facilitate Trading Customisation and allow for timely implementation of new funds with sound legal terms.
Innocap’s attorneys negotiate terms that seek to protect the interests of the investor. Special attention is taken in relation to segregation of assets, liability of sub-custodians, rehypothecation, margin requirements, events of default and termination. Trading Agreements are drafted to permit termination of a manager without resulting in immediate close-out.
Innocap’s in-house attorneys work closely with Innocap’s risk and operations personnel, thereby creating synergies and cost savings that may not exist when legal work is outsourced. The practical experience gained by having lawyers sit alongside risk and operations helps in focusing legal negotiations on the terms that matter most.
Louise Guillemette, Legal Counsel, joined Innocap in 2008. She was previously in-house counsel in the Treasury and Financial Markets group of Hydro-Québec which also managed the Hydro-Québec Pension Fund, and a manager with two Canadian chartered banks where she specialized in finance and derivatives. She holds an MBA in Finance and Accounting from McGill University and a law degree from Université de Montréal.
Poseidon Retsinas, Legal Counsel, joined Innocap in 2010. He was previously an associate in the Finance and Capital Markets Group at Clifford Chance LLP in London where he specialized in derivatives. Poseidon is a member of the Quebec Bar and holds an MSc in Law and Accounting from The London School of Economics and law degrees (B.C.L./LL.B) from McGill University.