06 August 2010

A Guide to Fund Management

A Guide to Fund Management
By Daniel Broby
Book Size: A4
ISBN-10: 1-906348-18-9
ISBN-13: 978-1-906348-18-2
Format: Paperback
Price: £265, US$519 or EUR399

In 2010, the fund management industry had some US$62 trillion of assets under management, generating fee revenue of over US$500bn. In order to capture the revenue opportunity fund management companies have to apply best practice and understand operational issues. This is not as easy as it sounds. They have numerous calls on their time and their core focus should always be investment performance. It was to address the resultant time optimisation dilemma that this guide was compiled.

A Guide to Fund Management is bang up to date, which is something that immediately makes it more relevant than the multitude of papers and operational notes that you are confronted with. It aims to offer one stop shopping on how to run a firm, addressing such issues as:
  1. The different approaches to fund management
  2. Revenue models
  3. Complex regulation
  4. Legal structures
  5. Best practices and how to implement them
  6. Performance generation and persistence
  7. Clear and concise operational descriptions and functions
  8. How to make the firm client centric
  9. Product development
  10. The threat and opportunities from alternatives to mainstream asset management
In addressing these issues, this guide should assist directors, executive committee, finance committee, investment committee, asset managers, and consultants in effectively managing, monitoring, and evaluating the operations of a fund manager.

A Guide to Fund Management gathers together accepted industry best practice, structure, operations and procedures. As a result, you can spend less time rummaging through industry white papers and more time on the strategic direction of your firm.

It is written in a way that will help you maintain the consistency of the investment processes, something which is necessary to produce good long-term performance and hence success.

TABLE OF CONTENTS

Preface
About the Author
Introduction
Definitions

1 The Business Model
Introduction
How the fund management industry evolved
The drivers of growth
The threats to growth
The profit dynamics
The cost dynamics
The productivity dynamics
Overcoming the downward pressure on fees
Taking advantage of the economies of scale
Delivering ‘value added’ to clients
Implementing structured decision making
Developing strong distribution capabilities
Starting up a new fund management venture
Conclusion

2 The Industry
Introduction
Recent evolution
Growth markets
The Alpha industry
Active return
The Beta Industry
Systemic return
The Asset Class Spectrum
Examples of different house styles
Segregated funds
Comingled, Pooled or Collective funds
Industry codes and standards
Asset Manager Code of Professional Conduct
Research Objectivity Standards
Trade Management Guidelines

3 The client spectrum
Introduction
Targeting the right segment
Overview of Institutional investors
Pension funds
Investment goals
Endowments and Foundations
Investment goals
Insurance companies
Investment goals
Private Investors
Investment goals
Safeguarding client assets
Conclusion

4 Legal and regulatory landscape
Introduction
Rules versus principles based compliance
Regulatory trade-offs
Self regulation versus government regulation
How to operate and maintain adequate compliance functions and procedures
Understanding the key regulatory concepts
Integrity
Skill, care and diligence
Fiduciary responsibility
Prudence
Market conduct
Money laundering
Chinese Walls
Fit and Proper
The geographic differences in regulation
US
UK
Europe
Far East
Offshore domiciles
Compliance, operations and procedure manuals
What should be included in an operations manual?
The importance of adequate capital
Conclusion

5 Investment process and philosophy
Introduction
Stating the investment Philosophy
Defining an investment process
The Investment Policy Checklist
Understanding the mathematical relationship between risk and return (CAPM)
Alternatives to CAPM
Active or passive management?
Accommodating style tilts and factors
Implementation of the investment process
Incorporation of models into the investment process
How to Index an investment fund
Conclusion

6 Skills and Structure in the front office (Portfolio construction and support)
Introduction
Setting a vision
Team or star manager approach
Avoiding groupthink
Incorporating the process driven value proposition into daily activities
Top-down
Bottom-up
Quantitative analysis
Qualitative analysis
What systems are required by the front office?
Front office systems providers
What Skills does a portfolio manager require?
Training
Ethics and Standards of Professional Conduct
How the chain of command works in practice
Personality type
Competence
Composition and role of the trading team
Conclusion

7 Skills and structure in the middle office (Risk and oversight)
Introduction
Integrating the structure of the middle office with the rest of the firm
Risk oversight policy implementation
Middle office Risk and Performance systems
Monitoring style drift
Staff, Skills and Shared Values
Responsibility for operational risk
Responsibility for business continuity risk
Preparing a Business Continuity Plan
Counterparty risk
Portfolio Risk Control
Backtesting and stress-testing portfolios
Using factor models and optimization software
Undertaking competitor and peer group analysis
Monitoring fund leverage
Conclusion

8 Skill and structure in the back office (Operations and support)
Introduction
Having robust systems and database
Handling derivative instruments
Handing day to day fund accounting
Ensuring efficient pre and post trade processing
Trade processing vendors
Implementing Straight-Through Processing (STP)
Establishing a records retention policy
Integrating the accounts function
Outsourcing
Fund administrators
Prime brokerage
Adapting to accommodate short selling and securities lending
Back-office personnel issues
Conclusion

9 Job functions
Introduction
How to write internal and external job descriptions
Criteria for 'good' and 'bad' remuneration policies
How to decide on compensation
Performance-related compensation
The Chief Executive Officer
Transitioning to a New Chief Executive
The Chief Operating Officer
The Chief Financial Officer
The Chief Investment Officer
The Head of Trading
The Head of Technology
The Compliance Officer
The Risk manager
The Marketing manager
The relationship manager
Head of Performance
Establishing and employee review process
Maintaining an employee handbook
How to build a team spirit
Conclusion

10 Client acquisition
Introduction
Business development as a means to win new clients
Basic Foundations of client relationships
Communicating the right message
The role of Investment Consultants
Answering Request for Proposals
Writing Fact Sheets
Equity fact sheets
Debt fact sheets
Lead management and the importance of monitoring client contact
Marketing analytics
How to undertake systematic brand management
Building reputation
Addressing poor performance from a communications perspective
Having a public relations strategy
Employing third party marketeers
Drafting investment mandates
Adding constraints to an investment mandate
The internets role in client acquisition.
How to ensure efficient ‘Client on-boarding’
Conclusion

11 Client retention
Introduction
Communicating with clients
Communicating with Consultants
Using open architecture as a distribution channel
Understanding core-satellite asset allocation and its implications for client retention
The ‘Know your client’ requirement
Handling tracking error and investment constraints
Understand and surpassing expectations
Obtaining feedback from existing clients
Fostering good press and media relations
Goals and Objectives when dealing with the media
Crisis management when things go wrong
Managing client functions
Preparing performance reviews and client visits
How to treat the competition
Buying a fund management company7
Due diligence: Organization and Good Standing
Due diligence: Financial Information
Due diligence: Physical Assets
Due diligence: Employees and Employee Benefits
Due diligence: Mandates and funds
Due diligence: Taxes
Due diligence: Material Contracts
Due diligence: Open Ended Funds and Closed Ended Funds
Due diligence: Customer Information
Due diligence: Litigation
Due diligence: Incidentals
Conclusion

12 Performance reporting and valuation
Introduction
Choosing appropriate benchmarks
Understanding attribution analysis
The Brinson Hood Beebower Model
Building a Reporting interface
Fair reporting
Accurate reporting
Timely reporting
Utilising factor models in reporting
Value at Risk as a tool to understand risk
The performance report format
The asset allocation report format
The transaction report format
Pricing and valuation
Global Investment Performance Standards
Soft Dollar Standards
Conclusion

13 Product design
Introduction
Building the Product
Composition and structure of the product team
Establishing a timeline for product intorduction
Determining fee levels for new products
When to use performance fees.
Choosing the legal structure for new products
Open ended
Closed ended
Master feeder funds
Multi-Class Funds
Taking taxation into consideration
Design considerations
When to incorporate leverage
Handling the liquidity of the underlying instruments
Taking capacity into account
Clearly stating fees
What to put in the ‘Prospectus’
Recent product innovations
How to structure solutions for clients
Wrap funds
Offshore products
How to design Index Funds
How to address investment fund board independence
Conclusion

14 Alternatives
Introduction
Socially Responsible Investment (SRI)
Shari'ah Compliant Investment
The use of leverage
The use of derivatives
Structured products
Hedge funds
Counterparty credit risk exposure
Trading practices of hedge funds
Hedge fund fees
Commitment Period (lock-ups)
The use of side letters
Selecting a Maximum Fund Size
Imposing redemption terms (gates)
Types of hedge fund
Convertible Arbitrage funds
Distressed Securities funds
Fixed Income Arbitrage funds
Long/Short funds
Macro funds
Risk/Merger Arbitrage funds
Private Equity
The role of Limited Partnerships
Property
Closed-ended funds
Open-ended funds
Investment trusts
Conclusion

References

AUTHOR BIOGRAPHY

As a senior figure in the asset management industry, Daniel Broby is a champion of capital markets. His focus on high level principals, integrity and best practice underlie his professional success.

Daniel built his career on the back of a strong grounding in finance theory. He has an MPhil in economics and an MSc in investment analysis. He was elected an individual member of the London Stock Exchange in 1990; is a Fellow of Chartered Institute of Securities and Investment; a Fellow of CFA UK; and a Visiting Fellow at Durham University. He was presented with the CFA Institute’s Society Leader Award in 2006.
Daniel has had a number of ‘C’ level positions at the largest asset managers in Scandinavia and Russia. These include chief executive officer, chief investment officer and chief portfolio manager. His career, however, has revolved around the London market. He was a board member of CFA UK, and it predecessor, for over 10 years.

Daniel’s focus has always been active asset management. His success in investment performance was recognised by Morningstar who rated the flagship fund he managed for eight years with five stars

Daniel has pioneered a number of investment solutions. He introduced the first regulated hedge fund and pioneered structured products in the Danish market. He has launched various investment funds, including a number focused on frontier markets such as Africa.

Daniel has written two highly recognised books on the profession and numerous articles for industry journals. He was commissioned by the Financial Times to write The Changing Face of European Fund Management.

Daniel has also contributed to the body of financial knowledge by writing A Guide to Equity Index Construction for Risk Books. Securities & Investment Review observed that it ″explores in intricate detail the various workings of modern portfolio theory, choosing a benchmark, measuring risk and sampling and selection procedures.″ Professional Investor magazine opinioned that ″rarely does a book genuinely represent a first in its field."

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