A Guide to Fund Management
By: Daniel Broby (author)Paperback
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This book gathers together accepted industry best practice for structure, operations and procedures. With A Guide to Fund Management you the reader can spend less time rummaging through industry white papers and more time on the strategic direction of the firm adding more value to your clients. The fund management industry manages and administers investment assets on behalf of their clients. In 2010 some US$62 trillion of assets were under management, generating fee revenues of over US$500bn illustrating how large and important this financial industry segment is. In order to capture the revenue opportunity senior officers in 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. To capture revenue opportunities, senior executives in fund management companies have to apply best practice and understand operational issues. This is not as easy as it sounds.
Executives have numerous calls on their time and their core focus should always be investment performance. This guide allows senior executives to manage their time as effectively as possible and maximise its effectiveness.
Daniel Broby 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."
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
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