By Solomon Teague
Deutsche Bank’s majority market share of investment into alpha FX strategies via structured products could be under threat after the launch of Citigroup’s CitiFX Access and Morgan Stanley’s FX Gateway.
Deutsche has the most established of the platforms, which provide access to the world of currency hedge funds to investors with little expertise.
dbSelect has a market share of around 70%, according to its own estimates, covering some 70 FX funds. Investors can request additional funds.
The platform has now passed the $5 billion mark, with more than 60% of that capital invested into pure FX funds of all strategies.
CitiFX Access offers an actively managed index exposure to around 35 managers, in conjunction with third-party index providers, such as BarclayHedge and Parker Global Strategies, as well as fund of funds Quaesta Capital. These 35 funds, Citigroup claims, account for more than 50% of assets under management in currency funds, across different strategies.
FX Gateway is more exclusive, with only a handful of managers available, and an expectation that up to 15 will eventually be included. Morgan Stanley wants to include premium-quality managers – for example C-View, The Cambridge Strategy, Harmonic Capital and FDO Partners. Index products are also available for investors looking for a general currency exposure.
For investors, choosing between the platforms comes down to what they want. Citigroup and Morgan Stanley argue that their more limited range simplifies selection, while Deutsche argues its wide range of relationships means it can offer advice where needed.
Nicholas Thomet, CitiFX’s global head of value-added product development, says: “The index product is ideally suited for investors who do not have the necessary experience in the FX market to construct their own portfolio of managers. Because the portfolio construction is managed by third parties, Citigroup is able to offer unconflicted advice to clients as to which product might be best suited to their specific portfolio.”
Meanwhile, James Rogers, head of the Gateway Platform at Morgan Stanley, says because FX Gateway fund performance is presented with the same volatility level, comparing managers has also been simplified.
The platforms offer daily liquidity, which is advantageous for investing in funds directly. And exposure can be leveraged: for an investment of $20 million, for example, an investor might need to pay Deutsche only $5 million.
There is little doubt that for the sophisticated investor, direct exposure is the cheapest bet. But the platforms all claim fees advantages.
“Deutsche negotiates the most favourable fees we can obtain from our managers and we pass on these savings directly to investors,” says Effie Datson, product head of dbSelect. “The platform offers further savings via access to Deutsche’s FX hedging, inter-bank dealer status and administration capabilities, which also enhance returns to investors.”
Citigroup also believes its indices offer investors the best-value FX exposure “in line with hedge fund standards”, says Thomet – meaning 2% and 20% for management and performance, respectively. However, one observer noted FX manager fees are lower than other hedge funds on average.
Manager fees are a drag on performance on the index products, admitted Thomet, but there will be no discrepancy between the Parker and BarclayHedge indices and Citi’s investable versions, with the index providers only publishing figures that take the fee deduction into account.
In addition, Citigroup has negotiated a higher volatility threshold for the index, up to 8% to 10%, which should offset the fee drag.
Despite the platforms’ protestations, the fee issue remains a sticking point for some. Guy Saintfiet, UK head of liquid alternatives at consultancy Aon Hewitt, says: “Our clients tend not to use managed account platforms for their active currency investments as the extra layer of fees makes it prohibitively expensive for them.”
Although the banks describe their platforms as institutional products, Saintfiet believes their appeal is predominantly to high net-worth clients.
It is, he argues, cheaper to cut out the middleman, investing directly into offshore funds or into segregated accounts. “We have good relationships with many good managers and we can negotiate preferential terms for clients in terms of fees and liquidity,” says Saintfiet.
Yet clearly, the success of the platforms suggests some investors are willing to pay for the extra security of having a global bank as a counterparty. “This is especially so following the negative publicity surrounding things like Madoff,” says Diane Miller at consultant Mercer, which works closely with dbSelect and FX Gateway, conducting due diligence. “If they take the platform route, there may be an extra fee but for that they get the added security of a third party. It is easier to trade in and out of managers, and they get daily liquidity,” says Miller.
Datson at dbSelect adds: “While the very biggest investors might have the infrastructure to monitor positions and conduct ongoing oversight of managers, few, if any, will be able to match our capabilities.”
All three platforms report that even professional funds of funds are gravitating towards them.