This feature originally appeared in the November 2009 edition of AsianInvestor magazine. To subscribe to our premium content, please email Stephen Tang or call +852 2122 5239.

The fashion in Chinese asset management this past quarter has been multi-client segregated account business. Known locally as yi dui duo, roughly meaning 'from one to many', this new business model is intended to provide more 'sticky' assets under management.

It is the next evolution to develop distribution channels outside of the bank-dominated retail market, following institutional mandates (pioneered by the National Council for Social Security Fund in 2002), enterprise annuities (2005) and single-client segregated mandates for wealthy individuals or corporations (2008).

Not only do all of these business models help fund companies broaden business lines, but they allow them to provide more advanced investment strategies than would be allowed in a conventional, open-ended mutual fund.

Under yi dui duo, segregated accounts can now build structures to accept up to 200 clients. These resemble hedge funds, with a general partnership and clients serving as limited partners. The minimum investment to multiple-client accounts is Rmb50 million ($7.3 million), half that required for a single-client account,

Within multi-client accounts, fund managers are able to include up to five products or strategies, which the Chinese Securities Regulatory Commission (CSRC) is willing to approve all at once, in contrast to the long process (it can last months or years) for vetting retail product designs.

Another attraction for fund houses is multi-client accounts allow flexibility in fees, which can be negotiated directly with clients. These can include performance incentives, something that the funds industry has long hankered after.

The mutual funds industry has been lucrative but it is highly regulated and stressful. Fund executives have wanted to be able to do more innovative work, and get paid for it. Instead they have seen many talented portfolio managers leave the regulated industry to set up grey-market investment clubs. The CSRC's response is yi dui duo.

And because these are private arrangements, the fees will go directly into fund houses' pockets, with no middlemen or rebates for distributors. Custodians can be selected for performance or lower cost, rather than as a sop to win a bank's shelf space.

That's the theory. In reality, fund houses are not ready to wean themselves from relying on bank distributors with their national branch networks. And the big banks are also happy to promote multi-client accounts; it's just another way to drum up AUM.

ICBC, the biggest distributor of mutual funds, has also become an early promoter of accounts, as a niche offering for its wealthier customers and a way to build its own wealth-management service.

This is an excerpt; the full article is in the November edition of AsianInvestor magazine. Subscribers can also access magazine content online. To subscribe please contact Stephen Tang on +852 2122 5239.