Articles in this issue:
Top 10 Areas of Operational Risk for the Buy-side
Holly H. Miller and Philip Lawton, Stone House Consulting LLC, New York
The Hedge Fund of Tomorrow, Building and Enduring Firm (Part 2)
BNY Mellon and Casey Quirk & Associates
Looking for an Independent Director
Geoff Ruddick, International Management Services Ltd.
Hedge Funds and the Securities and Investment Act
Robert Briant and Anton Goldstein, Conyers Dill & Pearman, BVI
Evolving Hedge Fund Regulation in Korea
Jean Lee and Jae-Hak Kim, Kim and Chang, Korea
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Forthcoming events ~ dates for your diary! Jan 25: Liability Driven Investment Europe, The Netherlands For further information about these, and other events throughout the year, please |
Career opportunities ~ make your move! Strategy & Transactions Manager, UK - salary: GBP70-90K For further information about these, and other career opportunities across the industry, |
Special Report: The AIMF Directive
Preqin, London, New York and Singapore
The first draft of the AIFM Directive was presented by the European Commission in April 2009. Its purpose is to
subject private equity and hedge funds to greater scrutiny and to protect investors in these funds. The Directive
will form a regulatory framework for collective investment undertakings, other than those covered by UCITS,
and will apply to fund managers residing within the EU along with funds domiciled or marketed in the area.
The Commission estimates that 30% of hedge fund managers, managing almost 90% of the assets of EUdomiciled
hedge funds, and almost half of the managers of other non-UCITS funds will be affected by the
Directive. The legislation will also impact some alternative investment fund managers managing infrastructure,
real estate, commodity, investment trusts and non-UCITS retail funds.
Industry professionals had three main concerns when the first draft was presented. Firstly, the Directive stated
that portfolio companies would have to disclose commercially-sensitive information; secondly, it set high capital
adequacy requirements; and thirdly, the measure that caused the most anxiety, non-EU fund managers would
have to register with each individual European member state if they were to market to investors in the country.
Some issues proved to be less potentially harmful than initially anticipated. For example, portfolio companies
are not required to disclose more information than is already necessary in the majority of member states.
However, concern remained over fears that a European lock-in/lock-out would be created.
Portfolio Construction Technique: Overlay/Underlay Alternatives Blend
Ranjan Bhaduri, AlphaMetrix Alternative Investment Advisors, Chicago
Managed futures, a.k.a. CTAs, are a diverse collection of active trading strategies which specialise in liquid,
transparent, exchange-traded futures, options, and foreign exchange.
Some institutional investors will consider investing in hedge funds, yet shy away from investing in managed
futures. However, the term ‘hedge fund’ in itself does not mean much, or rather means too much, as there
are programs along the entire actively managed investment continuum, from mutual funds to private equity
funds that call themselves hedge funds. CTAs may be thought of a liquid sub-set of the hedge funds universe,
whose trading domain is exchange-traded instruments of futures, options and deep foreign exchange markets.
The strategies, styles, and techniques invoked among different CTAs are very diverse. While there does not
appear to be a cogent rationale for the exclusion of CTAs versus hedge funds in their investment mandates,
institutional investors still remain wary of the managed futures space. It is further perplexing that these
biases exist given that managed futures utilise plain vanilla derivatives and exchange-traded instruments
as their building blocks, and these are well-understood in both the literature and industry (see, for instance,
Hull or Labusewski, et al).
Some CTAs have, from a marketing perspective, positioned themselves away from managed futures, and
labeled themselves as hedge funds, in order to attract more assets.1
Measuring Performance in Active Allocation among Multiple Benchmarks
Eric Stanhope Hirschberg, Orion Investment Management, Bermuda
While it’s tempting to say ‘absolutely nothing’, benchmarks have a meaningful role in the allocation process.
How relevant a benchmark is to the investor really comes down to the context in which the benchmark is derived.
My personal preference is to view a benchmark as a tool to understand the alternative to an allocation. In this
way the ’usefulness’ of a choice can be measured against the alternative of not choosing or, for that matter,
making an alternative choice. This is a local perspective, in so much as your choices and risk tolerance are
not uniform to an entire investment population. For that, I need to accept the nearest correlating passive and
investable asset as the benchmark. And while this approach is fine for a strategy that maintains a significant
correlation to a passive investable benchmark, how should I view the myriad strategies in which the manager
or asset allocator tells us his expertise is to opportunistically invest?
Consider the manager who is actively making choices to allocate or re-allocate between a number of
possible strategies or benchmarks, based on some criterion which he holds as his proprietary domain. Below,
I demonstrate a methodology that allows you to break down a manager’s or asset allocator’s strategy into
a series of choice components, with a corresponding framework for valuing the various choices made over
the investment horizon.
Measurement as a function of rational choice
The Demystification of the BVI Financial Services Industry: The new Financing and Money Services Act, 2009
The BVI Financing and Money Services Act, 2009 (the ‘Act’) came into force on March 31, 2010. The Act
introduces a new regulatory regime for the licensing, registration and supervision of individuals and businesses
who carry on ‘financing business’ and ‘money services business’ in or from within the British Virgin Islands (BVI)
together with criminal offences for breach or non-compliance. The primary focus of the legislation is on business
activities being conducted within the BVI or with BVI residents. Therefore, international business activities that
do not conduct business in or within the BVI but through BVI companies or other entities will not be affected.
The introduction of the Act is yet another example of the BVI’s strengthening commitment in establishing
a legislative and regulatory framework on par with international best standards in the combat of money
laundering and terrorist financing purposes. The Act is intended to adhere to Recommendation 23 of the
Financial Action Task Force’s (FATF) 40 Recommendations on combating money laundering. FATF is an intergovernmental
body whose purpose is the development and promotion of national and international policies
to combat money laundering as well as terrorist financing. Under Recommendation 23, businesses ‘providing
a service of money or value transfer, or of money or currency changing should be licensed or registered, and
subject to effective systems for monitoring and ensuring compliance with national requirements to combat
money laundering and terrorist financing.’