Dedicated Managed Accounts (DMAs) are investment portfolios managed on behalf of a single allocator where the portfolio assets are owned and controlled by the allocator but segregated from its balance sheet as opposed to being pooled with other investors in a commingled fund. In recent months, discussions within the Stockholm finance community have increasingly pointed to local hedge funds receiving more allocations through the DMA structure, which offers allocators greater customization, control, and transparency.
While this approach is gaining traction in the Nordics, it has long been a preferred model for the Caisse de dépôt et placement du Québec (CDPQ), Canada’s second largest pension fund and a leading global investor. CDPQ manages its hedge fund exposure through DMAs on the Innocap platform, which has over $85 billion in assets and is the largest dedicated managed account platform globally. CDPQ hasn’t always used this structure.
Mario Therrien, Head of Investment Funds and External Management at CDPQ, launched the organization’s hedge fund investment program in the late 1990s and early 2000s. “Our first investments back then were in fund of funds,” recalls Therrien. “We built our teams around that model, gradually developing the full craft, from manager selection to operational due diligence and every piece in between.” Today, CDPQ executes a growing proportion of its hedge fund investments through a Dedicated Managed Account (DMA) structure.
“DMAs are the engine that allows you to truly promote robust standards, whether it’s transparency, governance, or control, which we consider to be the three pillars of strong institutional practices.”
Mario Therrien, Head of Investment Funds and External Management at CDPQ.
According to Therrien, the DMA model rests on three key pillars: customization, control, and transparency. “DMAs are the engine that allows you to truly promote robust standards, whether it’s transparency, governance, or control, which we consider to be the three pillars of strong institutional practices,” says Therrien, who has long championed improved industry standards, including through his role as former chairman of the Standards Board for Alternative Investments (SBAI). “For us, DMAs are the mechanism that makes all of this possible.”
The Three Pillars Driving Growth in the DMA Model
Explaining the DMA structure, François Rivard, CEO of Innocap and a long-time business partner of Therrien and CDPQ, describes it as akin to a single-investor fund managed on the Innocap platform. “We take care of all the infrastructure and operational plumbing,” says Rivard. “CDPQ, as the allocator, selects one or more asset managers to invest the assets of the DMAs, which then benefits from customization, control, transparency, and capital efficiency.”
Allocators are increasingly turning to DMAs as a superior way to access hedge funds, according to Rivard, largely due to the high degree of customization they offer. “You can tailor your risk, your exposure, your strategy – you can customize the fund to align with your specific objectives,” he explains. “Allocators become term makers, not term takers.” This customization is done in close collaboration with asset managers. “Maybe you want a market-neutral fund, or a long/short equity fund with a directional tilt or you don’t want exposure to TMT because you’re already heavily allocated there,” says Rivard. “Or maybe you want to dial up the risk, exclude certain positions or markets, or comply with specific restrictions like bans on tobacco or investments in certain countries, which are common in pension mandates. That’s all possible within a dedicated managed account,” he elaborates. “This is the first key aspect of DMAs: customization.”
“You can tailor your risk, your exposure, your strategy – you can customize the fund to align with your specific objectives. Allocators become term makers, not term takers.”
François Rivard, CEO of Innocap.
The second key benefit of DMAs is control over the assets. “You have control over these assets, meaning if something goes wrong within the vehicle, you have the ability to act,” says Rivard. “You can sweep cash on a regular basis, limit how much is left with counterparties, and manage your exposure to risk more effectively. Because it’s your own investment vehicle, designed to your specifications, you maintain full control,” he elaborates. This combination of customization and control leads to something critically important for asset allocators using DMAs: transparency.
“Because you have both control and customization, you gain full transparency into what’s happening in the portfolio on a daily basis,” explains Rivard. “That transparency gives you the ability to respond in real time. If something is happening, you’re not in the dark, you have the control to act on it.” With full visibility into exposures and positions, allocators can make more precise allocation decisions, whether that means increasing or scaling back positions, or reallocating capital between strategies. “You’re not relying on last month’s data or quarterly reports. You’re working with near real-time information – typically on a T+1 basis – within your dedicated managed account,” according to Rivard. “Customization, control, and transparency – those are the three pillars.”
A Fourth Pillar: Capital Efficiency
In addition to the three pillars, Rivard points to a fourth driver that has been driving much of the recent growth in dedicated managed account (DMA) platforms: capital efficiency. “Capital efficiency has become a major pillar fueling the expansion of dedicated managed account platforms,” says Rivard. “There’s been a growing recognition among asset allocators that, by investing through a DMA, they gain the ability to notionally fund their exposure, meaning they don’t need to fully fund the account upfront,” he explains.
Traditionally, if an investor wanted to allocate $100 million to a hedge fund, they would need to transfer the entire amount to the fund. With notional funding, however, the investor might only need to commit, say, $60 million to the DMA platform to gain exposure to the full $100 million strategy. In addition, multi-manager funds can use both notional funding and cross-margining to achieve enhanced levels of capital efficiency.
“Capital efficiency has become a major pillar fueling the expansion of dedicated managed account platforms.”
François Rivard, CEO of Innocap.
This is possible because hedge funds typically do not deploy all the capital they receive. A large portion often remains idle or is held as margin. “As you notionally fund your DMA, you retain capital outside the structure that can be redeployed elsewhere,” explains Rivard. “You can reinvest it into another fund, return it to the treasury, or use it to further diversify your portfolio – whatever best serves your objectives,” he adds. Innocap helps unlock additional liquidity by not requiring full funding of strategies. “That liquidity can be a source of real alpha – alpha that’s generated not just by the underlying investment, but by efficient capital allocation,” says Rivard. “By avoiding the trap of leaving excessive amounts of idle cash in structures, allocators can materially enhance the overall performance of their portfolios.”
Capital Stickiness and Emerging Managers
As an allocator with years of experience investing through both traditional fund structures and DMAs, Mario emphasizes the importance of fully committing to the DMA model to reap its benefits. “Before transferring investments into a DMA, you really need to understand and commit to the advantages it offers,” he says.“When you take a step back and start thinking it through – moving from commingled structures to DMAs – the benefits become clear.” While launching a DMA program involves numerous details and moving parts initially, Therrien asserts that once the commitment is made, DMAs are the solution. “DMAs are the answer. They’ve been the answer for us.”
While some managers express concerns that DMAs typically involve less sticky capital – capital that institutional investors can easily call back compared to the more committed capital in fund strategies – Mario Therrien of CDPQ argues that this is not how allocators think. “Investing with a new manager is a significant decision for us. There’s a substantial amount of time spent tailoring, co-designing, and building the partnership,” Therrien explains. “When we’re confident in the team, the manager, the return stream, and their skill set, bringing a manager onto the platform often a sign that we’re looking at a long-term commitment.”
“When we’re confident in the team, the manager, the return stream, and their skill set, bringing a manager onto the platform often a sign that we’re looking at a long-term commitment.”
Mario Therrien, Head of Investment Funds and External Management at CDPQ.
DMAs also enable larger institutional allocators to invest in younger, emerging managers with smaller assets under management. “For us, the only way we could get comfortable taking manager selection risk with emerging managers was by bringing them onto a platform,” says Therrien. “We created a framework with guardrails and our investment committee was satisfied knowing that these guardrails were in place.” Therrien emphasizes that while young managers are often highly talented, they often encounter operational challenges. “You need to provide them with the right structure and infrastructure so they can thrive and focus solely on generating alpha,” he concludes.
This article is part of HedgeNordic’s “Nordic Hedge Fund Industry Report.”
