The Asset Management Industry:

butterbeansarmManagement

Nov 18, 2013 (3 years and 11 months ago)

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The Asset Management Industry:
Structure and Evolution


Two Organization Forms


Contract directly with a management and advisory
firm


Commingling of investment capital of several clients
in an investment company


Differences between These Two Forms


Private management and advisory firms develop a
personal relationship with clients


A Investment company offers a general solution

The Asset Management Industry:
Structure and Evolution


Contract directly with a management and
advisory firm


relationship with client


assets under management (AUM)


separate accounts


customized


The Asset Management Industry:
Structure and Evolution


Commingling of investment capital of
several clients in an investment company


invest a pool of funds belonging to many
individuals in a single portfolio of securities


issue new shares representing the proportional
ownership of the fund.


Private Management and
Advisory Firms


Much Smaller


Focus on a particular niche of the market


Investment Strategy


Each client’s assets are held in a separate
account.


The security portfolio are likely to be guided
by the firm’s overall investment philosophy.

Organization and Management of
Investment Companies


Major duties


Investment research


Management of the portfolio


Administrative duties


Issue securities


Handle redemptions and dividends


Start funds with different characteristics to
achieve economics of scale


Valuating Investment
Company Shares



The NAV for an investment company is
analogous to the share price of a
corporation’s common stock.


The NAV of the fund shares will increase
as the value of the underlying assets (the
fund security portfolio) increases.







Total Market Value of Fund Portfolio Fund
Expenses
Fund NAV=
Total Fund Shares Outstanding

Closed
-
End Versus Open
-
End
Investment Companies


Differ in the way each operates after the initial
public offering


Closed
-
end investment company


Stock trades on secondary market


Net asset value (NAV) is computed twice daily, but
market price determined by supply and demand


Many Funds sell at discounts to NAV


Open
-
end investment companies


Mutual funds


Sell and redeem shares at NAV

Load versus No
-
Load Open
-
End Fund


The offering price for a share of a load fund
equals the NAV of the share plus a sale charge.


A no
-
load fund imposes no initial sales charge so
it sells shares at the NAV.


Several variations exist between the full
-
load
fund and the pure no
-
load fund


Low
-
load fund


12b
-
1 plan


Funds have contingent, deferred sales loads

Fund Management Fees


Charge annual management fees to compensate
professional managers of the fund


Management fees are a major factor driving the
creation of new funds.

Investment Company Portfolio
Objectives


Four broad fund objective categories


Common stock funds


Hybrid funds


Bond funds


Money market fund

Hedge Funds


Form a portfolio that combines both long and
short position in the equity market with the use
of financial leverage to enhance return


Better able to produce superior returns than
traditional investment structures, such as mutual
funds

Hedge Fund Strategies


Equity
-
based strategies


Long
-
short equity


Equity market neutral


Arbitrage
-
based Strategies


Fixed
-
income arbitrage


Convertible arbitrage


Merger (risk) arbitrage


Opportunistic Strategies


High yield and distressed


Global macro


Managed futures


Special situations


Multiple strategies


Fund of funds

Risk Arbitrage Investing


Take equity positions in companies that are the target of
a merger or takeover attempt


Require managers to compare their own subjective
judgment about the success of the proposed takeover
with the success probability implied by the market price
of the target firm’s stock following the announcement of
the prospective deal


If the manager thinks the takeover is more likely to
occur than the market does, he or she will buy target
firm shares.


The manager might short sell the target firm shares if he
or she thinks the proposed deal is less likely to be
completed

Hedge Fund Performance


Not all hedge funds are the same when it comes
to their risk and return profiles


The returns to these strategies show a high
degree of variability on a year
-
to year basis, in
both an absolute and a relative sense.

Ethics and Regulation in the Professional
Asset Management Industry


Agency problem


Regulation in the asset management industry


Principal securities laws that govern investment
companies


The Investment Company Act of 1940


The Securities Act of 1933


The Securities Exchange Act of 1934


The Investment Advisers Act of 1940


Regulatory agencies


U.S. Department of Labor


NASDR


U.S. Commodity and Futures Trading Commission


U.S. Internal Revenue Service

Ethics and Regulation in the Professional
Asset Management Industry


Standards for Ethical Behavior


The CFA Institute Code of Ethics


The CFA Institute Standards of Professional
Conduct


The CFA Institute’ Centre for Financial
Market Integrity


Asset Manager Code of Professional Conduct


Ethics and Regulation in the Professional
Asset Management Industry


Examples of Ethical Conflicts


Incentive Compensation Schemes


Soft Dollar Arrangements


Marketing Investment Management Services


What Do You Want from a
Professional Asset Manger?

1.

Help determine your investment objectives and develop a portfolio
that is consistent with them.

2. Diversify your portfolio to eliminate unsystematic risk.

3. Maintain your portfolio diversification and your desired risk class
while allowing flexibility so you could shift between alternative
investment instruments as desired.

4. Attempt to achieve a risk
-
adjusted performance level that is superior to
that of your relevant benchmark.

5. Administer the account, keep records of costs and transactions,
provide timely information for tax purposes, and reinvest dividends if
desired.

6. Maintain ethical standards of behavior at all times.