The Asset Management Industry:


Nov 18, 2013 (4 years and 5 months ago)


The Asset Management Industry:
Structure and Evolution

Two Organization Forms

Contract directly with a management and advisory

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


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

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
Fund NAV=
Total Fund Shares Outstanding

End Versus Open
Investment Companies

Differ in the way each operates after the initial
public offering

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

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
fund and the pure no
load fund

load fund

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

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

Hedge Fund Strategies

based strategies

short equity

Equity market neutral

based Strategies

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

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

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


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

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?


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

6. Maintain ethical standards of behavior at all times.