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The rise of Actively Managed Certificates - Enabling asset and wealth managers to create their own bespoke investment strategies.

Actively Managed Certificates (AMCs) have risen in popularity in recent years as their unique nature enables asset managers to design a bespoke investment strategy with far greater flexibility than traditional structured products or investment funds.

 

Supported by a legal and regulatory framework, AMCs allow investors to achieve their specific investment objectives, providing a return linked to an underlying asset or an index provided by an asset allocator.

 

What are AMCs?

 

Actively managed certificates are structured products with a difference. Usual structured products are pre-packaged market-linked investments which use derivatives to gain a specific type of exposure to an asset or basket of assets. AMCs differ as they can replicate an index provided by a third party advisor, or match an asset allocation linked to any type of asset, including shares, bonds, derivatives, currencies, investment funds, indices or other types of securities. They can also be linked with real estate, private equity, participations, future cash flows or intellectual property. They deliver payoffs which are directly linked to the underlying asset but tracks it in a way that facilitates customised risk-return objectives.

 

Usual structured products are fixed-term investments where the composition of the underlying asset does not change. AMCs differ as the underlying assets or index can be rebalanced periodically to track, follow or replicate asset allocation provided by an asset manager. The payoff received by the investor can be actively changed at any time by the asset manager.

 

Key advantages

 

This unique setup gives great flexibility and enables an asset manager to develop, engineer and test its investment strategies in a very cost effective manner compared to other investment vehicles. The cost advantages enable smaller asset managers to establish strategies with low barriers to entry and at the same rate as larger institutions.

 

Setup is also extremely efficient. The process, from initial enquiry with a service provider such as Creatrust to establishment of the actively managed certificate, usually takes around two to four weeks depending on the type of strategy and the broker that is appointed.

 

The structure is based on the securitisation legislation. An AMCs is structured as a debt instrument issued by a Special Purpose Vehicle (SPV) based in Luxembourg, similar to a traditional securitisation vehicle but with the flexibility to replicate a portfolio, a strategy, a basket or simply a specific asset. Establishing such an SPV typically enables the asset or wealth manager to bring a new strategy to market very quickly through the AMC route.

 

 

 

Who are they for?

 

Actively managed certificates are vehicles which are accessible for investment by individual HNW investors, well-informed investors, other investment funds, family offices, and institutional, professional or accredited investors.  Wealth managers and family offices may use AMCs as a portfolio diversification tactic while asset managers and private equity firms often use them to replicate a portfolio or a specific allocation.

 

Actively managed certificates are popular among asset managers (hedge funds, long only, emerging managers) in particular as they have an internal structure which enables them to easily manage and take advantage of the product. They may, for example, issue an AMC linked to their portfolio or a specific allocation, or launch a fund plus an AMC structured as a note linked to that fund’s units. Reasons for doing this vary but commonly include hedging, tax and risk mitigation.

 

Managers often choose actively managed certificates when launching smaller or new strategies as a bank may consider an issuance of £15-20m, for example, as too small to support. There are no maximum or minimum limits to AMC size, though strategies above €500m typically target bank support for issuance. The requests that Creatrust most often receives are in the €5-100m range, in line with managers which don’t require authorisation under the scope of the AIFMD.

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Regulatory requirements

 

Actively managed certificates are subject to the general rules for structured products, which are usually only distributed to professional investors. AMCs require a simplified memorandum or prospectus which set out the strategy’s basic parameters. These include:

  • The asset manager and the roles of related parties

  • Fees and compensation

  • Description of the strategy

  • Criteria for the selection of strategy components

  • Benchmarking to a relevant universe

  • Criteria for distributing income payments

  • Leverage applicable on the strategy

  • Details of where information on the strategy, including its composition and performance, can be accessed

 

The prospectus needs to identify the actively managed certificate as being a replication of an allocation or an index provided by a third party. Otherwise the manager would then typically setup a discretionary managed account or a traditional collective investment scheme, given the latter is subject to higher regulatory obligations. A general disclaimer must be included which is clear on this distinction and any potentially applicable regulations, particularly for innovative strategies where elements of the product may fall under the scope of additional rules.

 

The prospectus needs to identify the actively managed certificate as being a replication of an allocation or an index provided by a third party. Otherwise the manager would then typically setup a discretionary managed account or a traditional collective investment scheme, given the latter is subject to higher regulatory obligations. A general disclaimer must be included which is clear on this distinction and any potentially applicable regulations, particularly for innovative strategies where elements of the product may fall under the scope of additional rules.

 

Outlook

 

Over the past year we have seen a significant increase in the number of emerging managers or well established wealth managers approaching Creatrust to establish an actively managed certificate. The AMC appeals to these groups for the ease at which they can flexibly replicate an existing asset or index, or create their own bespoke portfolio. We expect demand to rise dramatically over the next few years as the increasing dominance of passive investing drives the need for complementary nimble, innovative and cost effective active strategies targeting specific investment outcomes.

 

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