Managers are innovating to provide institutional investors with access to hedge funds

AMCs (Active Managed Certificates), index funds or ETFs (Exchange Traded Funds) are new solutions that allow institutional investors to adopt alternative strategies, if they cannot invest in this type of fund due to regulatory restrictions.

Interest rate trends and uncertainty on the equity markets mean that institutional investors are favouring alternatives to traditional “vanilla” investments (equities and bonds) and real assets (private equity, infrastructure, real estate, private debt, etc.). They are now also favouring liquid strategies, similar to what hedge funds do.

In Europe, some institutional investors are reluctant to invest in alternative funds due to high costs and regulatory restrictions. To reduce the cost of capital, methods such as the use of internal models or financial structures such as Active Managed Certificates (AMCs) are sometimes used.

AMCs, which were introduced in Switzerland in 2007, are diversified portfolios that are managed in collaboration with investors and are typically used for hedge fund strategies such as short positions, derivatives and so-called “exotic” assets.

“These certificates can be invested in almost any type of assets as long as they are liquid,” confirms François Beugin, Partner at Eight Advisory. “Managers can invest in equities, derivatives or even crypto assets and assets linked to wine or art. In return, a debt linked to these assets is issued.”

The end investor subscribes to this bond and benefits from the lower cost of capital compared to the underlying asset. Another special feature of this product is its format. “The creation of this type of certificate involves simplified procedures as no public money is involved, as it is generally aimed at a very limited number of investors”, continues François Beugin.

The growth of these products has been very dynamic in recent years. “It is difficult to obtain precise information on these products, which are marketed to a limited number of investors and are less regulated, but experts estimate that growth has been strong over the last three years and that assets under management currently total around $1 trillion worldwide”, specifies François Beugin.

Originally favoured by high-net-worth private clients in Switzerland, these products have recently spread to the institutional sector in Europe, including France. “They are attractive to insurance companies both for the management of their euro funds and for unit-linked contracts (UL)”, notes François Beugin. “In the case of UL contracts, Luxembourg-based life insurance contracts are in particular even more meaningful through the possible customization.”

Read the full article (French) by Sandra Sebag published in Option Finance on 12 July 2024.