2. 2
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“
The EDGE among
hedge fund managers
is getting blurred and much
harder to quantify, leading
to an increased need to
conduct comprehensive
DUE DILIGENCE to find
managers who will earn
their fees.
“
- Ted Logan,
Managing Director, BlackRock
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GREAT RETURNS!
WHAT DO INVESTORS
From their managers
WANT?
Transparency
Better Understanding
of the Investment Risk
Sustainable Edge
- SEI Global Survey, “6 Ways Hedge Funds Need to Adapt Now”
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“
And no longer can managers simply ‘show and tell.’ Now
investors want proof; they also want to ‘look under the hood’
to the funds’ inner workings and judge for themselves.
“
- SEI 2013 Global Survey, “6 Ways Hedge Funds Need to Adapt Now”
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CHANCES ARE THEY DO!
Total equity options volumes has
increased by 40x in the last twenty years.
In 2012, over 4 billion contracts traded up
from nearly 100 million contracts in 1995.
During this time, Institutional
investors, including Hedge Funds, have
made options an integral part of their
investment process.
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8. 8
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1 IN 4
DON’T
UNDERSTAND THE RISK
MANAGERS ARE TAKING
DO MANAGERS
FULLY UNDERSTAND
THE PRODUCTS
THEY’RE USING?
“
Survey found that only
half of all investors say
they fully understand risk
exposure of the HFs in which
they invest, and one in four say
they do not understand it at all.
“
- SEI 2013 Global Survey, “6 Ways
Hedge Funds Need to Adapt Now”
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INSTANT
MESSENGER
Felix Frey 9:03 am
there’s a huge cost with options execution
Investment Bank Employee 9:04 am
is that just by not exacting the best price?
Felix Frey 9:04 am
Right, they’re paying too much or selling at the wrong price
Investment Bank Employee 9:04 am
the Felix Frey price
Felix Frey 9:04 am
Yes!
Investment Bank Employee 9:05 am
there’s only one Felix Frey price, nobody
gets that other than Felix Frey
Felix Frey 9:05 am
LOL! but in essence yes
Investment Bank Employee 9:05 am
i think a lot of it probably is that many buyside traders
don’t necessarily know what the "right" best price is
Felix Frey 9:06 am
well that’s the problem, what the message will be, and its a cost
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Investment Bank Employee 3:04 pm
I miss '06 when deep call rolls would trade
bid-offer b/c every fund made 30%/year
INSTANT
MESSENGER
IS THAT A
VEILED THREAT?
……
Felix Frey 3:04 pm
LOL… and had guys with no clue trading their flow.
altho I know some still do
Investment Bank Employee 3:06 pm
some meaning most
Investment Bank Employee 11:23 am
but arguably dilutive to you if you get
other funds to achieve better prices?
like if the street wants to make a certain
amount then improved pricing for others
could come at your expense, in theory
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BUT MUCH
LESS THAN THE
INVISIBLE
COST!
- Gene A. Gohlke, SEC Associate Director of OCIE
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“
“
Conflicts of interest — they are everywhere in the
advisory business. The astute adviser recognizes this fact
and creates a culture of compliance within the firm.
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“
Hedge fund managers have found
that management fees – originally
designed to cover basic operating costs –
have become a major profit center as firms’
assets have grown significantly larger... The
25 highest-earning hedge fund managers
earned a combined $14.4 Billion last
year (2011).
“
- Institutional Investor’s Alpha “The Rich List”
A QUALIFIED OPTIONS
TRADER IS A NET WIN!
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“
The due diligence
around business
structure, compliance, re
gulatory
requirements, operation
al frameworks
– all those things are
more important today
than they used
to be. - Michael Green
“
MAYBE
IT’S NOT
SO GREY?
CEO, International
American Century Investments
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“
As a fiduciary, an adviser has
an obligation to obtain ‘best
execution’ of clients' transactions.
In meeting this obligation, an
adviser must execute securities
transactions for clients in such a
manner that the clients' total cost
or proceeds in each transaction is
the most favorable under the
circumstances.
“
- SEC “General Information on the
Regulation of Investment Advisors”
Options
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“
Few managers would be surprised that nearly one-third of the
institutions queried in SEI’s 2012 survey reported making their
due diligence processes more robust over the last two years.
“
- SEI 2013 Global Survey, “6 Ways Hedge Funds Need to Adapt Now”
HF MGR
DUE
DILIGENCE
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WHO HAS THE EXPERIENCE
NEEDED?
“
Hedge funds investing in superior
people management outperform
their peers, registering higher average
investment returns than those firms
that put less emphasis on these
factors.
“
- Citi Prime Finance, “Exploring the Concept
and Characteristics of ‘People Alpha’”
A POSITION VOLATILITY
TRADER
AT AN INVESTMENT BANK
A HEDGE FUND/BANK VOLATILITY
TRADER
AN EXCHANGE OPTIONS MARKET
MAKER
AN OPTIONS SALES TRADER
A STOCK TRADER WHO TOOK AN OPTIONS
CLASS
A STOCK TRADER WHO READ AN OPTIONS
BOOK
WHEN YOUR MANAGER EXECUTES AN OPTION IT SHOULD BE:
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… this differentiator will become
more of a focus in evaluating firms.
“
“
- Citi Prime Finance, “Exploring the Concept
and Characteristics of ‘People Alpha’”
“
Investment in human capital and
proper segregation of duties were
ranked as the top two operational
recommendations for start-up
and emerging managers.
“
- Deutsche Bank’s Hedge Fund Consulting Group’s
Second Annual Operational Due Diligence Survey
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“
Instead of saying ‘we trust your judgment,’ investors want
attribution and analysis. Rather than ticking off items on a
checklist, as many were doing a few years ago, they are
triangulating qualitative and quantitative assessments.
“
- SEI 2013 Global Survey, “6 Ways Hedge Funds Need to Adapt Now”
DATA CAN’T CAPTURE
EVERYTHING. MAKE SURE
THE PEOPLE ARE RIGHT.
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