Managed accounts: the differences from investment funds in a changing market

While each enable capital to be deployed across a range of asset classes, the choice between these structures is no longer purely structural. It reflects broader considerations including investor preferences for different governance structures, regulatory positioning under AIFMD and MiFID, and the growing demand for transparency, cost efficiency and control of the investment portfolio.

Below, we explore the practical drivers informing structure selection and how these considerations are shaping current market practice in Ireland and across the EU. 

Main features

A managed account is a mandate established for a single investor who retains direct or beneficial ownership of the underlying investment portfolio. The investment strategy, restrictions and reporting are tailored to the investor’s requirements. A managed account is established under an investment agreement negotiated between the investor and the manager. The investment portfolio is held in a custody account in the investor’s name. 

An investment fund is a collective investment vehicle that aggregates capital from multiple investors in a single vehicle. Investors hold shares or partnership interests in the fund, rather than direct ownership of the underlying assets, and participate in a common investment strategy. 

Ownership and control

An important distinction between the two structures is the ownership of the investment portfolio. In a managed account, the investor benefits from full transparency and a high degree of control over the portfolio, including the ability to impose investment restrictions and guidelines. In an investment fund, control is exercised at the level of the fund, with all investors subject to the same governing documentation and the same investment mandate. In practice, managed accounts are often used where investors seek to exert ongoing influence over portfolio construction, liquidity management tools or concentration limits, which may be more difficult to achieve within a collective investment vehicle without creating operational issues or issues regarding the fair treatment of investors. 

While many elements of customisation can be incorporated within investment funds, such as through side letters, these are generally more restricted than in a managed account. This distinction is often a big factor in structure selection, particularly where investors require ongoing transparency or influence over portfolio composition. 

Management and governance

Investment funds operate within established governance frameworks, typically including constitutional documents, defined investor rights and, where applicable, independent oversight. Governance frameworks are also governed by regulatory requirements, including AIFMD oversight, depositary obligations and valuation frameworks. These requirements impose structure on the terms of investment but can reduce flexibility in accommodating investor-specific requirements. 

By contrast, managed accounts are governed by the contractual arrangements agreed between the investor and the manager. This affords a higher degree of flexibility; however, it also places greater emphasis on bilateral negotiation and ongoing oversight, often requiring greater internal resource on the part of the investor. 

Advantages and considerations

Managed accounts offer a high degree of flexibility and transparency. Investors can tailor mandates to reflect specific investment, regulatory or ESG requirements, and benefit from direct visibility over portfolio holdings. This level of control can be attractive where investors have specific portfolio constraints or reporting requirements. However, this flexibility is accompanied by increased operational complexity. Each managed account requires dedicated reporting, compliance and operational infrastructure, which may result in higher costs and resource requirements. 

Investment funds benefit from economies of scale, with costs and operational processes shared across investors. They are particularly effective where managers require scalable distribution, alignment across investors and operational standardisation, particularly in cross-border strategies. Consequently, investment funds are widely used where reduction of costs, operational efficiency, scalability and ease of access are essential. 

Costs

Cost considerations will influence structure selection. A managed account typically incurs bespoke costs to be borne by the investor, whereas an investment fund spreads its costs across its entire investor base. In a managed account, the investor incurs all costs of managing the account. Those costs include those associated with custom reporting, safekeeping and custody charges, and compliance oversight. Those costs can lead to higher level of overall expense for the managed account. 

By contrast, an investment fund’s operational costs, such as administration, depositary, audit and governance expenses, are shared pro rata among investors, which should deliver economies of scale and potentially lower costs per investor. Generally, investment funds are more cost efficient for smaller investors. By amortising fixed costs across a broad base of participants, a fund can significantly reduce the cost of entry to given strategy. 

Use cases

Managed accounts are typically used by large institutional investors, such as pension funds, sovereign wealth funds and insurance companies, where customisation, allocation size and internal resources justify a bespoke structure and ongoing oversight.

Investment funds are the predominant structure for a broader investor base and for investors seeking diversified exposure with lower operational burdens. In practice, this has led to a degree of divergence. A managed account may be best suited to institutional investors with dedicated requirements in relation to investment exposure, risk controls or bespoke reporting. 

Regulatory considerations 

In an Irish and EU context, an investment structure is required to be managed as an alternative investment fund (AIFs) and therefore subject to the AIFMD if it involves the raising of capital from multiple investors that is managed in accordance with a defined investment policy. 

A single-investor managed account falls outside the definition of an AIF, as it does not involve the pooling of capital on behalf of investors. The manager will instead provide portfolio management services under regulatory authorisation, under MiFID or AIFMD. 

For cross-border marketing or provision of managed account services within the European Economic Area (EEA), MiFID II establishes a regime for the freedom to provide investment services, under which an investment firm authorised in one member state may provide services in another without needing separate host-country authorisation. This is subject only to compliance with the applicable home-state regulator’s notification or approval process, per article 34 of MiFID II, and provided that the services are within the scope of the firm’s existing authorisation. By contrast, outside the EEA in non-MiFID jurisdictions, local licensing requirements or available exemptions may need to be addressed, as the MiFID passporting framework does not apply beyond the EEA. 

Both structures are subject to regulatory oversight, albeit through different frameworks. Investment funds are particularly effective where managers require scalable distribution, alignment across investors and operational standardisation, particularly in cross-border strategies. 

Current market practice

Managed accounts have grown in prominence in recent years, driven by investors’ demand for greater transparency, control and exposure to unique investments and strategies. A significant number of investment firms offer managed accounts alongside investment funds. 

Market practice reflects a nuanced approach, with some investors reassessing the operational complexity associated with managed accounts, particularly where allocations are smaller or internal resources are limited, and weighing the benefits of control, customisation and transparency against the operational efficiency, scalability and cost advantages of pooled structures, in light of factors such as investor profile, allocation size, regulatory considerations and internal operational capacity. 

In practice, the choice between the two is driven by a balance between the benefits of control and customisation on the one hand, and operational efficiency and scalability on the other.