Capital efficiency, a key benefit of Dedicated Managed Accounts (DMAs), was a major focus of Innocap’s recent Thought Leadership Summit in New York. Innocap’s Xavier Urli, Head of Investment, led a panel discussion on this topic with Mario Therrien, Head of Investment Funds and External Management at Caisse de dépôt et placement du Québec (CDPQ) and Alejandro Goldberg, Co-Founder & Partner at Valence8.

As the panelists noted, aggregating portfolios into a single structure delivers significant efficiencies. Multi-manager DMAs, in particular, provide many different levers that can be used to better manage risk and improve capital efficiency.

Cross margining and netting

Netting across managers with counterparties reduces required margin, allowing the same risk to be managed with less capital. Dividing risk among the managers in a multi-manager DMA structure also reduces the need to hold excess capital with each manager. As a result, allocators can more effectively manage liquidity.

This is particularly valuable in volatile markets. Being able to hold and use cash dynamically and offset the performance of one manager with another allows allocators to stay in the market and harvest the opportunities that arise from volatility.

Notional funding

Notional funding enables allocators to achieve their desired level of exposure without fully funding the investment with cash. Based on our experience, we estimate that notional funding alone can deliver significant incremental alpha per year. Capital efficiency gains are amplified when notional funding is combined with the more diverse pool of collateral and ability to cross-margin that is available in a multi-manager DMA structure.

Using Innocap to implement a capital efficiency DMA program also reduces the operational burden on allocators – even for complex strategies. The benefits of operational alpha extend far beyond reducing the cost and time associated with managing a portfolio. Partnering with Innocap enables internal teams to shift their focus from daily execution to strategy in two ways:

• Outsourcing onboarding, operations, back office and technology allows institutional allocators to focus on manager selection, deal making and portfolio construction.
• The data provided by Innocap’s Dedicated Managed Account Platform (DMAP) through its proprietary technology allows allocators to evaluate manager performance at a more detailed level, gaining a deeper understanding of whether managers are delivering expected alpha.

Beyond capital and operational efficiency, DMAs also give allocators more flexibility in bringing on earlier stage, or emerging managers, creating deeper relationships with managers, and negotiating highly customized terms. Together, this compelling set of benefits explains the steep and steady rise in DMA adoption.