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Market Sense and Nonsense: How the Markets Really Work (and How They Don't) by Joel Greenblatt, Jack D. Schwager

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Chapter 16

Managed Accounts: An Investor-Friendly Alternative to Funds

Suppose you can buy the exact car of your choice at two different dealers. Both dealers will charge the same price. Dealer A has an unknown reputation and offers nothing extra. Dealer B has a stellar reputation, will give you a model with optional side air bags at no extra cost, and will also add a free extended guarantee for all parts and labor. This choice seems like a no-brainer, but in the world of hedge fund investments, the vast majority of investors are choosing the equivalent of Dealer A (read hedge funds) over Dealer B (read managed accounts). In the aftermath of the 2008 financial meltdown, when a large number of funds invoked redemption gates1 or implemented side pockets2 or both, an increasing number of investors are discovering the advantages of Dealer B. This trend is likely to continue.

The Essential Difference between Managed Accounts and Funds

Managed accounts allow parallel investments to counterpart hedge funds, while at the same time avoiding many of the negative investment features of the typical hedge fund structure. The key difference between a managed account and a fund can be summarized as follows:

  • In a fund, the investor owns shares in a fund fully controlled by the manager.
  • In a managed account, the investor (or the investor’s proxy) has control of the account and grants limited power of attorney to the manager to execute trades.

A portfolio of managed accounts is quite similar to ...

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