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About the course
The goal of the course is to equip participants with a structured analytic framework for the analysis of both regulated and alternative investment funds and asset managers.
Key Learning Outcomes:
- The risk profile of a fund’s structure, investment strategy, leverage and liquidity
- The financial analytic tools required to benchmark the performance and risk profile of a fund and hedge fund
- The due diligence required for evaluating the fund manager's expertise, investment process, risk management and controls
- Early warning signals of fund manager problems
- Evaluate the structural risks and rewards of exposures to funds
This section differentiates funds by their structural, legal and jurisdictional features.
- Types of fund – mutual funds (incl. UCITS and SICAVs), pension funds, managed accounts, closed-end funds and investment trusts, private equity, tracker and exchange traded funds (ETFs), fund of funds, umbrellas, master feeders, REITs and hedge funds
- Structure and legal status of funds and managed accounts; partnerships, companies, segregated accounts
- Fee structures: upfront and performance; high water marks
- Absolute vs. benchmarked returns
- Alpha vs. beta; portable alpha
- Minimising correlations
The goal of this section is to differentiate the investment and trading practices, products used and risk profile of different funds and hedge fund strategies.
- Investment strategies: risk profile of strategy and policies
- Traditional strategies: fixed income (money market, bond, municipals) equity and specialist funds; growth, value and balanced strategies
- Techniques to optimise risk adjusted returns: leverage, derivatives and short selling
- Fund policies, practices and restrictions
- Risk profile of different strategies
- Directional Strategies
- Global macro
- Long / short equity
- Managed futures
- Dedicated short funds
- Emerging Markets
- Relative value strategies
- Equity market neutral
- Fixed income arbitrage
- Convertible arbitrage
- Event driven: distressed
- Event driven: risk arbitrage
- Fund of Funds
- Exercise: risk profiles of different fund strategies and the products used to achieve the strategy
The aim of this section is to introduce a structured approach to analysis.
- Purpose of transaction and sources of payback: who is the counterparty? What assets or derivatives are being financed? How will the transaction be settled or the repaid at maturity?
- Risk analysis: operating environment, financial fundamentals and management
- Structure: risks and mitigants of the transaction
- Fund ratings: rating agencies, Morningstar and other ratings
- Information sources: prospectus, financial & portfolio statements
The aim of this section is to review macro, competitive and regulatory drivers of the hedge-fund/fund management industry.
Macro and competitive drivers
- Competitive drivers in sub-sectors of the industry - institutional, retail, wealth management
Regulation and supervision
- Regulation and supervision by region
- Mutual funds - investment and leverage limits, disclosure
- Fund manager regulation; capital adequacy, licensing, business practices
- Jurisdiction: offshore registrations, listings, fund manager domicile
- Impact of recent and proposed regulation:
- Dodd-Frank Act in the US
- Proposed Alternative Investment Fund Directive in the European Union
The aim of this section is to benchmark key performance indicators for different types of fund to identify both strong and weak performers.
- "S": Size - reviewing size, diversification and market position of fund
- "M": Market risk - volatility measures e.g. standard deviation, VaR
- "A": Asset quality - liquidity and valuation of assets, haircuts
- "L": Liquidity - redemption risk on open-end funds, benefits of capital locks, back up credit lines
- "L": Leverage - use of financial and derivative leverage; funded status for pension funds, gross and net leverage calculations
- "P": Performance - bench marking performance - NAVmeasures, information, Sharpe and Sortino ratios; peak to trough drawdown
- HSBC Scorecard - size and leverage stategy weightings
- Illustration case study: assessing a fund using SMALLP approach
The aim of this section is to evaluate the roles and responsibilities of key parties to a fund with a focus on the fund manager.
- Roles and responsibilities of various parties: manager, trustee, directors, administrator, custodian etc.
- Due diligence fund manager: business structure, independence and controls, investment process, risk management, communication
- Exposure types to a fund manager: block trading, risk management, leverage
- Fund manager as liquidity and capital provider to a fund
- Purpose payback: why do fund managers borrow and how do they service debt
- Risk profiles of different business models
- Financial analysis: performance measurement; cash-flow analysis; balance sheet strength
- Illustration case study: assessing a fund manager
Early Warning Signals:
- Early warning signals of credit issues
- Summary of major failures & causes and common themes
- Illustration case study: early warning signals of credit deterioration
This section looks at how to assess the structure of exposures to a fund/hedge fund.
- Assessing the appropriateness of the structure in terms of amount, maturity etc
- Ranking: establishing and maintaining a senior position
- Collateralisation of trading transactions
- Safeguards: collateral, unsecured thresholds, covenants, break clauses and other
- Managing the default process
- Exercise: structuring exposures to different types of fund to reduce risks
Who should attend
Commercial and investment banking professionals responsible for credit risk management and origination. The course is also appropriate for a wider audience of risk managers, consultants, bankers, regulators and other professionals who need to understand the key risk issues of the asset management industry.