The recent charges at SAC Capital (“U.S. charges SAC Capital with insider trading crimes“) once again serve as a reminder that insider trading and other egregious practices are commonplace in the asset management world. Investors should reject firms that persistently transgress the rules, and look to structures that separate the money managers from taking on the fiduciary function that is the responsibility of the investor.

Recent revelations suggest that industry malpractice is rife. At a recent cap intro lunch in Singapore, we were reminded by one of the leading hedge fund consultants of the continued practice of charging travel and research related costs to funds, when these should be paid out of the manager’s fees in the normal course. Apparently, this is still a common occurrence.

The FT recently reported that investment managers are regularly paying investment banks for access to company management, typically through soft dollars.

And, rehypothecation of assets and stock lending, the dirty words of the post crisis self examination the industry went through, is also still commonplace. Whilst a clear abrogation of the fiduciary role an investment manager takes on when he accepts client capital to manage, it is defended as a necessary evil to keep down the costs of the prime brokerage function. What ever happened to good old fashioned transaction based fee income?

Perhaps the biggest risk in portfolio management relate to the way the returns are being derived. The risks being taken with investors’ capital are rarely perceptible from the level of disclosure typical in the offshore fund management world, whether alternative or long-only. One of the leading prime brokers in Asia recently confided to me that it is not uncommon to find a supposedly simple China equity portfolio is in fact loaded with non-China related investments, many of which fall completely outside the ambit of the manager’s proclaimed area of expertise. Whilst, others who purport to run equity portfolios, are taking large bets on pre-IPO or derivative based trades that skew the risk profile of the fund dramatically, without the complicity of their investors in these bets.

The demand for greater disclosure is today one of the most positive outcomes of the global financial crisis, with investors increasingly looking for the investment management function to be separated from the fiduciary role, where the duty is first and foremost to the investor.

I am often asked why managed accounts are relevant in the long only realm of the asset management universe. The answer is simply, today investors are looking to become more informed with respect to how alpha is generated, and what risk is being taken to deliver it.

A common mistake is for investors to fall under the spell of an investment bank however. This is not the solution, notwithstanding that their managed accounts fees are already typically 50 to 100 basis points incremental to the fund’s fees. This is akin to throwing the lamb to the wolves, as the banks are only to happy to manage custody, admin, balance sheet, brokerage and stock lending, whilst making a fee at every turn. Whatismore, this does nothing to alleviate counterparty risk, indeed it exacerbates it.

The alternative is to work with a platform that serves the interests of the investor, and that doesn’t conflict with his interests. Close scrutiny of our clients’ portfolios permits us at Milltrust to ensure that excessive risk is not being taken, and that the investment process is following the prescribed mandate. Our investors enjoy the safety of a non-investment bank-owned managed account set-up, offering significantly enhanced transparency and liquidity provisions that enable one to relieve the investment manager of his duties if he is persistently in breach of the terms of business.

All this sounds costly, but we have included these benefits as part and parcel of the total management fee, which never exceeds that of the equivalent offshore fund.

At Milltrust, we have peeled back the onion to deliver a low cost, conflict free solution for institutional investors to access the world’s top asset management talent in the emerging markets. We believe we are setting a precedent, and investors will increasingly demand this in the future.

Finally, if two decades in the hedge fund world have taught me one thing it is that returns alone are meaningless. All performance must be seen in the context of risk adjusted-returns. During the financial crisis, ironically, it was not my hedge fund investments that caused me the most pain, but the emerging markets investments I made in Russia and China, where in some cases I am still waiting for the return of my capital. Today, we are wholly cognizant of the positions that our managers are building within our funds, and the implicit risk of these investments, as we have the benefit of managed account transparency. With it comes the power, unheard of to now, to fire any investment manager who acts contrary in the interest of the client.