Understanding Asset Management

Asset Management

• Asset management is the professional handling of different securities and assets, aiming to fulfill specific investment objectives for investors.
• Asset management involves securities like shares, bonds, real estate, etc.
• Asset management companies provide a variety of traditional and alternative strategies
• Three main types of investors are
  • Retail Investors
  • High Net Worth Investors
  • Institutional Investors
• Retail investors trade in smaller amounts than institutional investors (mutual funds, pensions, university endowments).
• Institutional investors manage large asset pools for government and corporate pension funds, endowments, and foundations, representing approximately 75% of assets under management in Europe & US.
• High Net Worth Investors are individuals or families with high net worth, typically defined as having $1 million in liquid financial assets.
• Asset Mgmt Division offers portfolio management, mutual funds, and hedge funds

Portfolio Management

• Portfolio management is the group of financial assets like shares, stocks, bonds, debt instruments, and mutual funds
• Portfolio Management is planned to stabilize the risk of non-performance of various pools of investment
• Management involves coordinating activities following well-defined policies to achieve pre-defined objectives.
• Portfolio management guides investors to select securities to provide returns for risk levels and mitigate risks, addressed by top-level managers.
• Portfolio Management example: Recommending a portfolio with Government Bonds, Bank's Fixed Deposits, Shares and Mutual Funds

Mutual Funds

• A mutual fund is a vehicle to mobilize money from investors, to invest in different markets and in different securities
• Through investment in a mutual fund, a small investor can avail of professional fund management services when offered by an asset management company
• Mutual funds pool money from numerous investors for investment in securities like stocks, bonds, and money market instruments.
• Professional money managers handle these funds, producing capital gains and income for the fund's investors.
• Mutual fund portfolios are structured to match investment objectives outlined in the offer document.

Benefits of Mutual Funds

• Mutual funds are managed by qualified professionals with a research team for continuously analyses performance and prospects of different investment options
• Mutual funds offer a variety of schemes that will suit individual needs throughout differing lifetimes
• Diversification lowers risk by spreading investments across various bonds and securities.
• Tax Efficiency is achieved where investments held over 12 months qualify for "long-term" capital gains benefits. Dividends are also tax-free.
• Liquidity is provided where investments can be redeemed anytime as a whole or in part, subject to exit loads.

Types of Mutual Funds

• Based on Structure: open-ended funds vs close-ended funds
• Based on Investment Objective, the types are equity funds, balanced funds and debt funds

Structure of Mutual Funds

• Structure consists of Unit Holders, Sponsors, Board of Trustees, AMC (Asset management company), Transfer Agent, Custodian and SEBI
• SEBI Mutual Fund requires a mutual fund custodian, sponsor, trustee, asset management company, registrar and transfer agent, and fund manager

Hedge Fund Operations

• Hedge funds aim to eliminate or reduce market risk, profiting regardless of market movements through asset class selection, including derivatives, with long and short positions.
• Structure: Hedge Funds cannot be marketed to private individuals because they are risky and unauthorized
• High Investment Entry Level: Most hedge funds need £50,000 investments; some exceed £1 million
• Investment Flexibility: Hedge funds can invest in any assets because lack of regulation.
• Gearing: Many hedge funds use derivatives to potentially enhance returns with borrowed funds
• Liquidity: Imposes an initial specified 'lock-in' period of 1-3 months before investors are allowed to sell investments on.
• Cost: Performance-related fees are levied which the investor pays if certain performance levels are met.

Types of Hedge Funds

• Stand Alone Fund
• Side by Side Funds
• Master-Feeder
• Fund of Funds
• Stand Alone Fund is when the investor invests in the same entity where the investment decision take place
• Side by Side Funds is when 2 funds – one offshore and one onshore, are maintained together at different trading expense.
• Master-Feeder structure is when the Investors place their money into the master fund through feeder funds into a master fund that actually invests in the market
• Fund of Funds : These funds invest solely their money in other different fund and don't invest in the actual market

Aspects of Hedge Fund Operations

• Fund Administration includes activities in support of a collective investment scheme
• Fund administration stay in contact with advisor / manager / PB, reviews fund formation and registration documents, performs corporate secretarial and director services, maintains financial records, is responsible for NAV calculation
• Fund accounting includes transaction booking, reconciliation, valuation & pricing, and financial reporting
• Maintaining fund accounting records, reconciliation, balance sheet preparation, calculates NAV, researches corporate actions

Fees

• Managment fee is a charge from an investment manager for managing an investment fund
• Performance fee : The payments made to Fund manager for positive generating returns

Subscription

• Investor → Feeder → Master Prime Broker

Redemption

• Prime Broker → Master → Feeder → Investor

Net Asset Value

• NAV is the price of each unit purchased into a mutual fund
• The formula use to calculat NAV: Total Market Value of Assets / Total Number of Units
• NAV of each fund is calculated daily based on the closing market prices and is published on the AMC's and AMFI's website

Trade Life Cycle Management

• Trade Life Cycle is executed at best price and settled at lowest cost
• Helps underpin Securities Post-Trade Processing, and ensuring Safety, Soundness & Risk Mitigation
• Efficient Transfer of Securities Ownership and Settlement
• The reason to trade is to speculate, accumulate and hedge
• A trade lifecycle is a process that a trade/transaction goes through in an organization, including:
  • Front Office: Sales & Trading/Revenue Generation
  • Middle Office: Support for FO
  • Back Office: Trade processing
• TLC has its own pre-trade and post-trade events
• Front office acts as interface between traders and support functions: booking and processing trades, resolution and escalation, liaison with other departments, and reporting requirements.
• Front Office provides Client Acquisition Services and Investment Banking Services
• The middle office responsibilities are trade capture and comfirmation, position, P&L control etc
• Back office is responsible for settlement, monitoring cash settlement, and reconciliation
• Main TLC types are Over-the-counter and Exchange Traded
• OTC TLC contains all products traded over-the-counter with vanilla and customized products but has a low STP degree
• Exchange Traded TLC is for products in centralized exchanges including only vanilla products with equities commodities ets and a very hight STP degree
• Trading Activities: Trade Execution and Trade Capture (Front office)
• Operational Activities: Trade Capture , Trade Enrichment, Transaction Reporting, Trade Settlement and the role of the custodian

Trade Execution and Capture

• An order is a request to buy or sell securities, and is given by the investors
• Order features are buy or sell, a specific quantity, and a specific security
• Order features in relation to price are limit and at best
• Further order features are stop-loss, fill or kill and good till cancelled

Trade Execution and Capture Steps

1 The institutional client decides to buy or sell a specific security, and contacts STOs via the relevant salesperson. 2 The STO's salesperson records the client order (manual or electronic). 3 The order details are forwarded to the relevant trader/market maker. 4 The trader assesses the order and executes the trade(market maker must execute trade within published rate) 5 Trader/maker responds to the salesperson the order placement . 6 The salesperson records the execution detail, closing the open order. 7 The salesperson contacts the client on the order

• Quote-driven Markets: In markets where market makers quote prices to attract a counterparty.
  • E.g. NASDAQ(US), SEAQ(UK)
• Order-driven Markets: In markets where orders from sellers are compared with buyers electronically, E.g. Xetra (Germany) and SETS (UK).
• Electronic Communications Networks: ECNs operate electronically with orders placed directly with organizations like Euro-MTS and Brokertec.

Trade Capture front office responsibilities

• Ensure all trades are formally recorded to their books
• Update trading position for the specific security
• Update average price of the current trading position
• Basic components of trade execution and capture that are recorder by the trader : Trading book, Trade date/time, quantity and security, valuation
• To prevent data loss, fronting trading systems must perform a validation that all components are stored before assigning a trade reference
• The deal capture system validates all the necessary trade economics before assigning a trade reference number
• Subsequent data events refer to the trade with a reference number

Trade Enrichment

• Enrichment involves selecting, calculating, and attaching relevant info to aid in completing actions after trade details are captured
• Automatic STP enrichment is performed through data defaulting, where relevant information is auto-filled from static data.
• Trade enrichment factors are calculation of cash values, select custodians, transmitting method of transaction
• Calculation of cash Values is through the operations by Security Group per counterparty Type

Selection of Custodian

• Selection of Custodian occur by Trading Company / Transaction Type
• Different custodians may be used by each of the companies, even for the same security group
• Counterparty Trade Confirmation Requirements requires whether a trade confirmation should be sent to the counterparty
  • Transmission of trade confirmations to other STOs is primarily used as an attempt of the STO to confirm that the business is being carried out

Trade Validation

• final check of data to reduce erroneous info leaving the org

• Trade validation actions involve issuing a trade confirmation and settle instructions

• Straight-through processing enables electronic trade process via capital market and payments transaction

• An STP flow refers to the process where the steps are performed by systems with no errors and no manual interventions

• 'STP' became an internationally recognized term, with organizations including STOs, Registrars, Institutional investors etc having a role to play

• Key parts of the trade lifecycle that could be automated and handled on an STP basis:

• Trade Execution and capture, Trade enrichment ,Trade reporting

Fundamental Risks

• In the case of buying:
• Direct Risk is when the market value rises from a transaction or when buying for a reduced profit is guaranteed unless
• Indirect when losing services etc
• Tradings Error occur at the time of execution trading
• Trade Enrichment Error the calculation of trade cash values is incorrect etc
• Trade Recording Error the trade has been captured with components that differ from those executed Trade Validation components for for Trade Book, Trade Time, Operation are Trade Date etc

Trade Agreement

• Trade agreement is achieved by STO by communicating to the correct parties
• By confirming to their understanding the details of sell or buy routes such as:
  • Agreement: is achieving the agreement of trade detail between STOs and its counterparty
• Settlement is achieving settlement instruction and the appropriate cash
• For each executed trade, the STO remains at risk of its incorrect trading , and therefore ensure the details match the traders.
• Trades such that they are validated immediately for a number of reasons:
  • The counter party is only the counter party within the capture by only the STO
• The quantity, price , net settlements are as per the parties

Trade Agreement Methods

To achieve this can vary according to local regulations and practices and trade types , but the aim to minimise risk , by

• Transmitting and confirming to counter parties
• Reciving trade confirmations from trade parties
• Use trade matching features.
• Seek trade affirmation

Outgoing Trade Confirmations

• Trade confirmation is a statement of the terms of a transaction, issued by an STO to its counterparty(an institutional client or another STO)
• The transmission of trade confirmations includes all or any is normally includes -The need and content to provide a high-quality service to institutional clients. -The method and no of transmissions -The language of trade
• Transmission of trade confirmations to STOs is an attempt of the STO to confirm that a correct trade details,

Trade Matching with STOs

• An action to determine what degree trade agreement has been reached , and the automation of trade messaging includes the consideration that it issues validate accordingly.
• Process including and checking automation through trax software to determine what to send (through or not to )

Steps on messaging with trax

1 Both counterparties must be already registered with a ISMA with 2 : That Both counterparties send their details for the approval to the software -3 : The Ttrax system then checks for the approval of the above details -4 : The status is then recorded for both parties

Automation with Institutions

Automation takes messages and are automated depending on their type

• Trade Affirmation with Institutional Investors occurs when all STO is in place and knows fund requirements or trade volumes of that counterparty

Unique trade identifiers

These actions ensure precise accountability and data from a particular trade

• The actions are only made after all parties have had a chance too have a correct line of communication, all actions are completed with the ISDA schema , and have all appropriate documentation
• The overall aim to minimise any financial , risks and to make data as clear and translatable as appropriate.

Transaction reporting

• Transaction reporting operates due to market regulatory needs and in a non biased order and as such encompasses a number of operations , all in compliance. -The rules and regulations are based upon to ensure investor protection and guarding from the marketplace.
• Once all the information is at hand trade executions must be reported to the regulator within a set parameters, often after said task reporting will be received

Transaction reporting can be achieved by:

• A computerized stock to exchange from details already received
• Member of those details
• In transmission that are usually dependent per how local regulation occurred from the member
• All such reports need all details known including operation , valve ,quantity etc

Transaction Reporting In the Uk

• Those that comply are all UK related, and those that comply by various routes dependent on types of trading , the main types that come to such trading are Equity's and euro bonds (in the main

Settlement Instructions

• The term Is a measure of how trade payments of securities and cash are sent from seller to buyer.
• it is initiated through relevant communication to all parties.
• Each set settlement is then issued with secure methods including custodians

When instructions have been transmitted and made, it should look at three various issues

• 1 set will issue instruction of its own , with regards to who is buying and selling, and their own clients requirements in order.
• All accounts and details required must match what is expected or a resolution
• The next important steps are to be aware of and fully understood by all aspects to ensure
  • To reduce any components not withstanding it
• Where errors have been found a solution/s should have been provided to follow these sets to action , the best action will need to be followed and acted on.
• This should all be checked and to enable where it can that there are no errors on all types, in all forms and where possible

Modern methods of settling all instructions include.

• Automatic settlement through systems and processes
• Standardised format of communication between all parties
• High speed of all systems is expected and is to have a secure environment

Setting all transactions to automated settings all needs

• 1, Trade to be sent with in the various systems , when it is from either Manual or electronic means
• 2, The details will be cross verified to establish any further details that will be required , like additional static info to use
• 3. Trade by the trade it will set further details depending on what actioned will be undertaken