Hedge Funds Better for Institutions Than the Rich Says Study

> Zurich Scudder's Mutual Fund Business Moves to Chicago Zurich Scudder Investments plans to cut staff and move its U.S. mutual fund business from Boston to Chicago, according to Bloomberg. The report indicated that some account managers and support operations

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Zurich Scudder’s Mutual Fund Business Moves to Chicago
Zurich Scudder Investments plans to cut staff and move its U.S. mutual fund business from Boston to Chicago, according to Bloomberg. The report indicated that some account managers and support/operations staff would remain in Boston.3-Plansponsor.comAIM Small Cap Growth Fund To Close To New Investors
The AIM Small Cap Growth Fund will close to new investors at 3 p.m. CST on Monday, March 18, 2002. The fund was originally closed to new investors from Nov. 8, 1999, until Aug. 20, 2001 – but with the fund’s net assets now above $1 billion, the fund’s managers/directors believe closing the fund will be in the best interest of shareholders.3-Plansponsor.comToronto Firm Launches Multi-Strategy Fund
Arrow Hedge Partners, a Toronto investment firm, announced launch of the Arrow Multi-Strategy Fund. Arrow executives said in a press release that the goal of the new fund is to provide institutional and high net worth investors with a global portfolio of different investment styles, strategies and asset classes that is managed by several managers. The company said the Arrow Multi-Strategy Fund allocates to eight Arrow Single Manager Funds including:Arrow Goodwood Fund, a Canadian equity hedge fund advised by Peter Puccetti of Goodwood Inc., Toronto Arrow Capital Advance Fund, a US equity hedge fund advised by Mark Lelekacs of Capital Advance Investment Management LLC, Tampa, Florida Arrow Eagle & Dominion Fund, a US small and mid-cap equity hedge fund advised by Duncan Byatt and Andrew Trower of Eagle & Dominion Asset Management Ltd., London Arrow White Mountain Fund, a European equity hedge fund, advised by Kevin Doyle and Sarah Caygill of Doyle Caygill Capital SA, Geneva, Switzerland Arrow WF Asia Fund, an Asian equity hedge fund advised by Scobie Ward and Peter Ferry of Ward Ferry Management Ltd., Hong Kong Arrow Ascendant Capital Fund, a market neutral arbitrage fund advised by David Jarvis and Rick Kung of Ascendant Capital Management Inc., Toronto Arrow Milford Capital Fund, a high-yield US bond fund advised by Chris Currie of Milford Capital Management Inc. Arrow Epic Capital Fund, a Canadian equity hedge fund advised by David Fawcett and Tom Schenkel of Epic Capital Management Inc., of Toronto.3-Plansponsor.comHewitt Plans to Get Morningstar Reports
Participants in retirement plans run by Hewitt Associates will soon have access to mutual fund research reports by Morningstar, Inc., Morningstar announced.Morningstar said it would create custom reports on 1,000 funds including privately managed separate accounts, commingled funds, equity and fixed-income funds and company stock funds.The company said each report will include volatility measurements, Morningstar’s proprietary ranking, top 10 holdings, and portfolio characteristics. The reports will be available on Hewitt’s Your Benefits Resource Web site this summer, Morningstar said.3-Plansponsor.comInternal Managers Trump outside Pension Advisors
Pension funds with on-staff advisors end up with better investment results than those who outsource their asset management tasks, a UK study found.The study of 28 internally managed funds managing 158 billion pounds showed that the funds enjoyed lower risks, which resulted in higher average total returns. The study was undertaken by WM Company, a research firm.According to WM, the majority of the internal funds actively manage their UK equities. The funds produced a 0.3% average annual return over rolling three and five-year periods.Similar results apply for North American stocks, while European equities turned in a 0.2% average annual gain, again showing a “significantly lower dispersion of returns”, according to WM. The only area where outside managers triumphed was with Japan equities and UK bonds.The funds held an average 212 UK stocks – much more than the average portfolio managed outside, WM said.Lower Turnover Means Lower CostBut the internal funds’ activity was much lower. Average portfolio turnover was 31% for internal UK equities, compared with 53% externally. For European equities the ratios were 74% versus 85%. For UK bonds the internal rate of change was at 82% compared with 141% for external. WM said the lower portfolio turnover gives internally managed funds a strong advantage due to their lower cost base, it notes. WM also point out that internal funds have a lower risk profile with an average tracking annual error of 1.6%, which is equivalent to the 75th percentile for external funds. This puts internal funds in the lowest quartile of riskiness. Funds involved in the study represent a quarter of the UK pension market, compared with 46% 15 years ago. In 80% of these funds, six out of 10 members are either inactive workers or pensioners.3-Plansponsor.comWeak Markets Yield Strong Results for Hedge Funds
Soft markets provided fertile ground for hedge fund growth in 2001, according to the Annual Hennessee Hedge Fund Manager Survey.Industry wide, hedge fund assets enjoyed a 38% rate of growth – some $144 billion – last year, and now total $563 billion, according to the report.Hedge funds beat out the still struggling broader equity markets during 2001 with the Hennessee Hedge Fund Index turning in a 3.98% increase, net of fees. On an annualized basis, the index had an 18% return since 1987 compared to 13.6% for the S&P 500 Index, according to a news release from the Hennessee Hedge Fund Advisory Group, which publishes the survey.The latest Hennessee report also showed that:Individuals remained the largest source of capital for hedge funds, contributing 48% or $270 billion of total assets. Almost 40% of hedge fund managers said high net worth individuals and family offers were the fastest growing capital source. Fund-of-funds were the second largest source of capital, contributing 20% of assets. One industry tactic for coping with the bear market was to hold a large amount of cash and to minimize market exposure. The average fund had a 49% net market exposure in 2001. The use of margin in 2001 declined to its lowest level since the survey began in 1994 — the average long exposure decreased 8% to 83%.The 2002 Survey includes 766 hedge funds and over $141 billion in assets, equating to 25% of the assets in the hedge fund industry. The median hedge fund size in this year’s survey was approximately $94 million.3-Plansponsor.comHemisphere: The Buyer is BISYS
Hemisphere announced today that its parent company, Mutual Risk Management Ltd., has agreed to sell the business to BISYS Group, Inc, the acquisitive out-sourcing company which is best known for servicing mutual funds. It is expected that the transaction will close by March 31,2002, subject to regulatory approvals.BISYS, which recently switched its primary listing from NASDAQ to the NYSE (BISYS Completes Move to NYSE)currently services 120 mutual fund complexes in the United States and Europe, with assets under administration of over US$500 billion. In common with other mutual fund service providers such as State Street – which is understood to be close to purchasing IFS, as part of a larger move to provide a combined prime brokerage and fund administration service- BISYS found its clients increasingly expected a hedge fund capability. The institutionalisation of alternative investing, coupled with the repeal of the Ten Commandments, is encouraging fund administrators to consider buying or developing hedge fund administration operations.”Combining Hemisphere’s service offerings with BISYS’ existing fund administration capabilities will yield the broadest array of fund services currently available from a single provider,” says Tom Healy, President and CEO of Hemisphere. “BISYS views the acquisition of Hemisphere as a strategic expansion in the alternative investment arena and is fully committed to the hedge fund industry.” Healy says that the current management team at Hemisphere will continue to manage the business as a separate division within the investment services group of BISYS. Clients -the majority of them clients of the Morgan Stanley prime brokerage operation – will await developments, doubtless concerned as to whether a long-only fund administrator has the skills to adapt to their particular needs.BISYS is expected to pay $130 million. It says that by acquiring Bermuda-based Hemisphere – which it describes as the largest hedge fund administrator in Europe and the third largest globally – BISYS will expand its services into a rapidly growing market: hedge funds. BISYS is banking on the market growing in size from $500 billion of assets today to $1.7 trillion by 2008. But the company may have bought into the business at the top of the market, in the United States if not in Europe, and without the projected growth BISYS may find the margins on hedge fund administration too thin to support without volume. Hemisphere currently services funds with approximately $50 billion in assets under management from service centers in Bermuda, Boston, and Dublin. BISYS operates mutual fund services – fund administration, fund accounting, transfer agency – from London, Luxembourg, Guernsey and the Cayman Islands as well as Dublin and New York.”The hedge fund industry represents a major growth opportunity and strategy for BISYS,” says Lynn Mangum, chairman and chief executive officer of BISYS. “Acquiring Hemisphere positions BISYS as a market leader in this dynamic segment of the financial services industry, and provides a high-growth platform proven to support the requirements of some of the largest global asset managers. Combining Hemisphere’s service offerings with BISYS’ existing mutual fund administration capabilities will generate the broadest array of fund services currently available from a single provider, and will enhance BISYS’ position as the leading third-party service provider to the investment services industry.”Tom Healy, Hemisphere’s chief executive officer, added, “We have recognized BISYS as a leading provider of sophisticated fund services and a technology innovator, and we have monitored BISYS’ growth in terms of its client base, product and service offerings, and global presence. We welcome the opportunity to become a strategic component of this dynamic organization. We are excited about enhancing the services we provide to our existing clients by leveraging BISYS’ resources and industry experience, and about the significant opportunities to cross-sell additional services to our respective client bases.”Morningstar Product IDs Like Mutual Funds
Investors looking for a substitute mutual fund choice for one that’s closed to new customers or carries hefty fees may find some relief in a new online tool from Morningstar, the company said.Similar Funds, available free at Morningstar’s Web site (www.morningstar.com) helps locate another fund in the same investing style and with the same characteristics as the unavailable or undesirable one, Morningstar said. The company said Similar Funds’ screening includes an analysis of the fund’s most recent portfolio and a review of the fund’s performance for the past three years. The program develops an overall similarity score on a one to ten scale with ten being the closest match.Investors can ask for funds with a specific initial investment limit and restrict the search to only no-load options, Morningstar said. 3-Plansponsor.comAverage US Hedge Fund Dips in February
The Average U.S. Hedge Fund posted a mild -0.7% net loss in February, based on preliminary figures received by Van Hedge Fund Advisors International, Inc. After a small gain in January, the Average U.S. Hedge Fund returned an estimated -0.2% net over the first two months of 2002. By comparison, except for the blue-chip Dow Jones Industrial Index, all the major stock averages were negative for both February and the year to date. Final February and year-to-date results for the Van Hedge Fund Indices, detailing the average performance for US, Offshore, and Global hedge funds by strategy, are scheduled for release later this month.Hedge fund returns are net of fees and performance allocations.3-Plansponsor.comMorningstar Introduces New On-line Mutual Fund Research Tool
Morningstar, the Chicago-based mutual fund investment research firm, has introduced an on-line tool to help investors identify similar funds to the one they want to buy. Finding the perfect fund, only to discover it is closed to new investors or requires a large minimum sum or extracts hefty charges, is an increasing problem for retail investors. The new tool, which is available free on Morningstar.com, helps investors quickly find and research possible substitutes for such funds.”Similar Funds is more than a screening or scoring tool,” said Mark Wright, director of online tools for Morningstar.com. “It makes full use of our portfolio information resources as well as our performance and fund operations databases to highlight the similarities of funds. Essentially, it helps investors find a suitable fund that doesn’t have purchase constraints or undesirable costs or fees.”The Morningstar Similar Funds tool matches one fund to others in its investment category (such as large-cap growth or small-cap value). The scoring is based on comparisons of both portfolio and performance characteristics. The portfolio similarity score compares the attributes of the funds’ most recent portfolios, and the performance similarity score reviews monthly returns for the past three years. The two scores are combined to create an overall similarity score on a scale of one to 10, with 10 being the closest possible match. Investors can specify the maximum initial purchase amount and also opt for no-load funds, those open to new investment, and those with lower-than-average expenses.For example, Janus Worldwide has one of the best long-term records in its category, but it is closed to new investors. By simply typing “JAWWX” into the Enter Ticker box and marking the “open to new investors” box, an investor can quickly find a number of possible substitute funds, including two with similarity scores of more than 9.0. Investors can then conduct further research into which fund or funds would be a better fit by using the Morningstar Fund Compare tool, which provides a thorough, side-by-side assessment of the funds.To use the Morningstar Similar Funds tool, go to: http://screen.morningstar.com/SimilarFunds/MSF.htmlMorningstar Offers Mutual Fund Rating Prediction Tool
Morningstar, the mutual fund research firm, has improved one of the tools on its Morningstar DataLab research platform, RatingT Analysis. Now the tool will allow fund managers and consultants to perform “what if” calculations to determine how expenses, new share classes, and projected performance will the Morningstar Rating of a particular mutual fund.The Morningstar RatingT for funds, first introduced in 1985, represents historical return, risk, and cost, and describes how a fund compares with its peers. Ratings are calculated for three, five, and ten-year periods and combined and weighted to arrive at an overall rating. The Morningstar Rating is displayed as one to five stars, with five being the best.”The Morningstar Rating for funds is a starting point to help investors choose well-performing funds from thousands of alternatives within broad asset classes,” said Don Phillips, Morningstar managing director. “Now, fund companies can determine whether its four-star fund is on the cusp of becoming a three-star or five-star fund. Our new Morningstar Rating Analysis module is especially useful when anticipating a future rating for a newer fund that does not have a three-year track record or for projecting the full 10-year weighting for a nine-year-old fund.”The Morningstar RatingT Analysis Module also presents “what if” scenarios regarding the impact of expenses and loads on a mutual fund’s current Morningstar Rating for all relevant time periods. And, if a fund company creates a new share class, their analysts can input alternative front and deferred loads and redemption fees to project a hypothetical Morningstar Rating.The Morningstar RatingT Analysis module will also export the results to a portable document format (PDF) or into an ExcelT file for further analysis. Morningstar DataLab, which was launched in December 2001, offers mutual fund companies and other institutions unprecedented access to and management of Morningstar’s historical database. DataLab is the only Morningstar product that allows firms to analyze thousands of discrete data points. The application will screen and identify trends using a searchable and exportable historical database of performance, including custom time-period calculations, investment style, and portfolio information, such as complete holdings, stock statistics, and regional exposure. Morningstar DataLab is available 24 hours a day via any high-speed Internet connection in the world. Data sets are refreshed daily or monthly as appropriate, and DataLab’ s global interface will accommodate multinational data universes in the future.For more information about Morningstar DataLab and the new Rating Analysis module, visit http://datalab.morningstar.comInvestment Banking: Have the Big Swinging Dicks Swung Their Last?
Has the great investment banking game been rumbled at last? In London, New York and Tokyo – and, who knows, perhaps even in the bottomless pockets of financial Frankfurt – senior investment bankers are taking time off from plotting against senior colleagues to draw up list of junior colleagues they can fire. Outlying operations are being closed, joint ventures abandoned and all forms of marginal expenditure, from seats in the first class cabin to advertisements in Euromoney, are being slashed. For head-hunters, the environment is bad enough for some firms to consider not only skipping the retainer but a cut in the fons et origo of their enviable lifestyles: the third of first-year salary they have taken since the recruitment business was invented. Within the banks themselves, even successful businesses are subject to hiring freezes. A few months back, one well-known investment bank took the extraordinary decision to invite staff to put themselves forward for the chop. This step was taken not so much in the manner of a death-or-glory commander seeking volunteers for a suicide mission as in the manner of a sometime chairman of National Westminster Bank, who warned the staff of NatWest Markets that unless they made more money soon they would soon be fired. Unsurprisingly, people tend to make alternative arrangements. Botched executions aside, are things as bad as the investment bankers would have us believe? Certainly, the cyclical downturn has cut deep enough and persisted long enough to persuade some investment banks that they can no longer hoard talent against the ever-receding prospect of an upturn. But the true pessimists believe that an entire era of excessive profitability is drawing to a close. Never, they say, will investment bankers wake to glad, confident morning again. But investment bankers tend, as Keynes pointed out, to be more than usually suspect to errors of both optimism and pessimism. This means they pile on the overhead too quickly and lavishly in the good times, and cut it off with a chain saw in the bad times. If anything is certain, it is that the investment banks are cutting back too heavily now, and will struggle as a result to grow their businesses as rapidly as they would like when the upturn finally comes. We have been here before. The coda to Liar’s Poker is an account of the mass sackings which took place at Salomon Brothers in the immediate aftermath of Black Monday in October 1987. It is not only with hindsight that this can be seen as an example of pre-emptive pre-emption, occurring perhaps two years before it was actually necessary, if it was necessary even then. In retrospect, it marked the end of the glory years at Salomon Bothers in a much more lasting way than the Treasury bond scandal – more so even than the way that the publication of the first corporate history invariably does. (If memory serves, Salomon published one in the second half of the 1980s, but readers preferred the Michael Lewis version).Salomon, of course, is now a satrapy of Citigroup. And one reason why this period of panic may prove to be more enduring than the last downswing a decade or more ago is that shareholders in public companies prefer steady profits to the Pharaonic quality of earnings in private held investment banks. Morgan Stanley has not seemed the same since it merged with Dean Witter, let alone went public. CSFB, UBS Warburg and Deutsche Bank all belong to large financial groups where shareholder value is no longer synonymous with partner value or even employee value. (Indeed, the interests of shareholders and employees are now strictly antipathetic throughout investment banking: it is pioneering a new form of capitalism in which the employees use the shareholders’ funds to make themselves rich.) Even Goldman Sachs has now gone public. Only the employees of Lehman Brothers, having passed through the stage of ownership by a rich parent much earlier, answer primarily to themselves rather than others. As a result, the appetite for risk and volatility in investment banking is much lower than it was ten years ago. Which almost certainly means that the amplitude of the investment banking cycle will from now on be depressed.But then investment banking is not a single business. Rather, it is a collection of businesses held together more by a cultural affinity than rational management. (Predictably, and despite repeated efforts to change the structures of remuneration, even the most senior investment bankers have little or no incentive to operate in ways which maximise the return of the firm as a whole rather than their little piece of it.) At each firm, the collection is assembled differently, and the parts operate in different ways in the various financial markets of the world. So generalisation is unwise, for each of the separate businesses – broadly speaking, corporate finance, proprietary trading and fund management – is affected by a different mixture of cyclical and secular factors. The need is to divine which aspects of the current downturn in the fortunes of the investment banking industry are likely to endure, and which are likely to prove ephemeral.The cyclical influences are obvious. Companies are rebuilding their balance sheets, as they recover from an orgy of ill-starred mergers and acquisitions fuelled by excessive debt – most of them arranged by fee-hungry investment bankers. So they are not buying or borrowing – in many cases, could not – leaving M & A departments with nothing to do and new issue teams idle. The equity market has marked prices down so severely that both mergers and IPOs are on hold until stock prices start to climb upwards again. Weak equity markets have had a severe effect on the fund management businesses of the investment banks as well, since their fees are geared to stock market values. It is also harder to make money trading in a falling equity market, no matter how well the bond markets are doing in response. The one bright spot is the hedge fund industry, which is naturally booming in weak markets. Any investment bank with a prime brokerage business is benefiting heavily from the boom in alternative investing by both high net worth individuals and institutional investors. But this accounts for a piffling proportion of the institutional business on which the investment banking machines of the 1990s grew fat.In fact, the equity business is the one area of investment banking where an unmistakably secular trend is occurring. Twenty or thirty years ago, most Wall Street investment banks were brokers, not principals. Now not only have spreads narrowed, and execution services been commoditized, research is utterly devalued. No fund manager takes research and investment advice from an investment bank seriously any more – as recent efforts by two major investment banks to enhance the independence and integrity of their coverage belatedly recognises. At the top of the bull market, investment banks made the mistake of thinking they were more important than their customers. Nothing signifies this better than the IPO problems at CSFB, where investment banks effectively concluded that any investor to whom they granted access to hot IPOs owed them a favour, rather than vice-versa. (CSFB to Pay $100 million to Settle IPO Actions) While larger customers got stuffed with paper at absurdly inflated prices (based on self-interested research) many smaller customers got forgotten altogether, and will not be going back. Investment bankers were well paid for their trouble. But the question investors large and small are now asking is this: what value did they add for me? This is a more worrying and systemic threat to the prosperity of investment banking than it appears. For the power of the investment banker is illusory: he operates on the cusp between the sources of capital (the institutional investors) and the demand for it (the corporate sector). And there are signs now of a permanent alteration in the appreciation of the profession of investment banking on both sides of this divide. Institutional investors and fund managers are not only unwilling to pay investment banks for research. They are – under economic as well as regulatory and fiduciary pressure – increasingly willing to skip intermediation by investment banks altogether. More importantly, they are able to do so. The shift from price-driven to order-driven trading downgrades the value of the market-maker. Execution-only services abound. Electronic crossing networks threaten disintermediation of investment banks altogether. Even foreign exchange, already troubled by the introduction of the euro, is being reinvented by multi-bank portals such as Fxall and Atriax. It cannot be long before electronic IPO markets become not another bad memory of the Dot Com boom, but a permanent feature of the landscape. In short, investment bankers are losing the informational advantage on which their standard of living depends. As a result, they are losing control of their corporate clients.The growing confidence of institutional investors has repercussions on the other side of the divide as well. The corporate governance movement is bound to call more merger and acquisition strategies into question. Investment bankers rely heavily on managerial ego to outweigh the growing mountain of evidence that mergers destroy rather than enhance shareholder value. Whatever the benefits of hostile takeovers in aligning the interests of managers and shareholders – and they are real – this is a long-term threat to M & A departments everywhere. Moreover, company managements which have long tolerated the exorbitant costs associated with investment banking advice – in much the same way as they commission consultants to confirm their judgments – are already turning to lower cost, independent alternatives. Investment banks are losing the trust of their clients. All of which means that the investment bank of the future must become little more than a glorified hedge fund, earning most of its keep by proprietary trading. Since the more successful sales-traders, fund managers and research analysts are already leaving in droves to set up their own hedge funds, perhaps even that option is gradually being closed. Anybody running an investment bank today would be well-advised to take a long, hard look not just at the top and bottom lines and the expense ratio, but at the corporate culture and individual personalities bred by the investment banking boom of recent years. If that was Hubris, this could be Nemesis.
*******************************************************************************************************************1The article describes the potential extinction of the Anglo Saxon investment banking system and the revival of the good old universal bank providing 360 degree coverage, perhaps less efficiently but definitely in a more agreeable cultural environment. Maybe this is the big chance for those investment banks (whatever they may look like in the future) which are owned by and sitting under the umbrella of the earnings of the giant commercial and retail banks from Continental Europe – UBS Warburg, Deutsche Bank, Dresdner Kleinwort Wasserstein, BNP, ABN AMRO etc – to really shine. Could this also potentially mean that, perhaps ten years from now, the Continental Europeans will so dominate the business that Frankfurt, Paris and Zurich overtake London as the centre of the global investment banking business?Michael WaltherMid-Size Plan Returns Shrink in 2001
Median returns for mid-size defined benefit pension funds in the Independent Consultants Cooperative (ICC) Universe last year were lower than in 2000, according to Deutsche Bank’s Performance Analytics group.The group, part of the Bank’s Global Securities Services unit, reports that in 2001 the median returns for mid-size plans were: -1.5% for public plans -2.8% for corporate plans -1.1% for Taft-Hartley plansMidsize plans have total assets between $50 million and $500 million. The estimates are based on the master trust data within the Independent Consultants Cooperative portfolio return and holdings database, the ICC Universe, which includes over 13,900 portfolios, in all asset classes, with an aggregate market value of $780 billion. The portfolios are owned by approximately 1,300 plan sponsors. Sixteen consulting firms belong to the ICC.Deutsche Bank includes its trust and custody portfolios in the ICC Universe and administers the service.3-Plansponsor.comAIB To Sack Senior Management
Allied Irish Banks is expected to dismiss senior managers this week at its scandal-hit US unit Allfirst, where rogue trader John Rusnak ran up losses of nearly $700 million, according to reports in The Business newspaper. Allfirst Chairman Frank Bramble as well as the Maryland bank’s chief executive, Susan Keating, will resign, according to the paper. Rusnak’s immediate bosses, Bob Wray and David Cronin, the head of Allfirst’s treasury team, were also expected to be fired.3-Plansponsor.comBBH Renames 59 Wall Street Funds
Brown Brothers Harriman has renamed the 59 Wall Street Funds the BBH Funds, effective February 28, 2002 – coincident with the impending relocation of the BBH headquarters at 59 Wall Street to new premises later this year.3-Plansponsor.comMellon Makes Offer to Royal & Sun Alliance
Mellon Financial has made an indicative offer for the investment management arm of UK insurer Royal & Sun Alliance, The Business newspaper reported on Sunday. The report said Mellon was interested in Royal & Sun’s portfolio of institutional money within the firm’s 36 billion pound ($51.18 billion) asset management operation. GE Capital, SG Asset Management and Aberdeen Asset Management were also believed to be interested in the business.3-Plansponsor.comMoney Managers to Reveal Transaction Costs
UK pension plan trustees will soon find out exactly how their collective 12 in trading costs breaks down – including the portion spent on soft commissions, as the asset management industry prepares to reveal the true costs of managing pension money.Under the Investment Management Association (IMA)’s draft Pension Fund Disclosure code, the industry’s attempt to become more transparent following government criticism, money managers would provide pension plan trustees with a report detailing the costs of investing institutional money in the equity markets, according to the Financial Times. The IMA’s draft code, scheduled for unveiling this week at a National Association of Pension Funds (NAPF) conference, expects fund managers to provide a general statement of costs coupled with a detailed breakdown of the costs. The break down of costs will include, among other things:fund managers’ fees custody fees brokers commissions, and government stamp dutyFund managers who refuse to sign up to the new code, which require that they report these costs to their clients twice annually, risk losing new mandates, cautions Ken Ayers, chairman of the joint IMA-NAPF working party that drafted the code.Soft on Soft CommissionsIf fund managers are making their costs more transparent, the issue of soft commissions is bound to come up. This practice, which pension funds pay for in the long run, involves brokers providing fund managers with research services, in return for their trades.According to a recent poll by the Financial Times, 18 out of 40 fund managers, still use soft commission subsidies with their brokers, while a further nine continue the practice for UK retail investors or clients outside the UK.3-Plansponsor.comCovisint Defies Death of Dot Com Platforms
While dozens of web-based trading, auction and crossing platforms in the securities industry are either dead or dying, their automobile industry equivalent keeps motoring. Covisint – the automobile parts procurement platform created by DaimlerChrysler, Ford, General Motors, Nissan, Renault, Commerce One, Oracle and PSA Peugeot Citroen – announced today that it had launched version 2.0 of Covisint Supplier Connection, its web-based EDI solution for electronic exchange of supply chain documents, including forecasts, shipping schedules and advance ship notices (ASNs).Supplier Connection 2.0 overcomes differences between European and North American ASNs. It also supports different document formats, including ANSI x 12, EDIFACT and Odette, and allows customers to print bar code labels for packaging and shipping. “This latest release of Supplier Connection underscores Covisint’s commitment to provide products that can truly connect the global automotive supply chain,” said Shawn Thomas, supply chain product manager, Covisint. “Automotive companies now have an affordable alternative to EDI, and those companies with legacy EDI investments can leverage Covisint for communication to a greater number of trading partners.”3″Bringing DvP to B2B”, Global Custodian IT 2001Congress Checks Global Crossing for Enronitis
Global Crossing, the global telecommunications network which sought protection from its creditors on January 28, said today that it has received a request from the United States House Energy and Commerce Committee for financial records and documents. This has sparked concern that Congressmen are investigating the beleaguered company, to which SWIFT out-sourced network provision last year, for Enron-style accounting methods.Global Crossing said that it is reviewing the Congressional request and intends to provide the committee with the documents it needs. John Legere, chief executive officer of Global Crossing, stated: “As we continue to move Global Crossing ahead, we look forward to working with the Committee in connection with this request.”The committee’s original request is available on the House Energy and Commerce Committee’s Web site at: http://energycommerce.house.gov/107/news/03122002_513.htmSmart Software To Help Prevent Money Laundering
A UK company is aiming to help pull the rug from underneath financial crime following the introduction of smart software, which helps financial institutions to prevent money laundering. STB Systems Limited, a specialist in regulatory and compliance systems, today introduces “STB-Detector”, an advanced system that snoops through computer data to unearth evidence of money laundering activity and at the same time helps account officers ensure they are not doing business with criminals in the first place.Estimates suggest that $0.5 – $1.5 trillion is laundered annually – money that ends up in the hands of criminals. Added to this, the new Anti-Terrorism, Crime and Security Bill means that financial institutions are further required to be on the lookout. A group of some 80 financial institutions will attend a full launch event at the Barbican, London on 19 March 2002.The new system, which is already being installed at institutions in the USA, is the first to combine several key controls in one package, specifically including applying very detailed account opening controls, secondly tracking and profiling of all account activity – not just wire transfers, (which is all that has been traditionally carried out in the past) and thirdly managing review and follow-up workflows of suspicious or poorly documented transactions. Finally, and crucially, the software is the first designed to pull information from a diversity of existing systems, meaning that installation is simple and that institutions installing the system are not required to create a complex “data warehouse”.This announcement comes just a short period after the introduction of the USA Patriot Act designed to tighten the net on the financial activities of terrorists, and after the huge increase in focus not just in the USA but internationally on terrorist finances arising following the September 11 attacks, all generally aimed to put an end to financial counterfeiting, smuggling, and money laundering.The arrival of STB’s product, which is ready to implement, having been in development well before 911, means that financial institutions can immediately be seen to be ahead of the serious increase in regulatory pressure being applied right now in 2002.At its heart, STB-Detector contains a comprehensive set of rules that describe money laundering activity and which can be updated continuously. The software can probe into different data throughout a financial institution, looking for activity that matches the rules. Alerts are issued to prompt compliance managers to investigate and reconcile or report to the authorities. The open database nature of the system also allows clients to manage customer documents, identifications, recorded interviews and other verifications on line without stepping over to the filing cabinet.”STB is well versed in compliance reporting, being market leaders and one of just five companies to be recognised by the Bank of England for electronic reporting of regulatory data” said Michael J Thomas, Managing Director of STB Systems Limited. “We have created the most ideal system for our current and future customers, being affordable, scalable, and easily installable.We are here to help financial institutions comply with their obligations cost-effectively, and this is what STB-Detector will do. We hope STB can help make a real difference in the fight against financial crime and the movement of terrorist funds.”
According to a Reuters report, the GPIF has set the following asset allocation targets:

 

2002/03

2001/02

Domestic Bonds

51 pct

52 pct

Foreign Bonds 

8 pct

6 pct

Convertible Bonds

N/A

N/A

Domestic Stocks

24 pct

26 pct

Foreign Stocks

14 pct 

14 pct

Short-term Assets

3 pct 

2 pct


The following are the details of asset allocations for end March 2001 andend-December 2001 (figures in 100 million yen):

 

End-March 2001 

End-Dec 2001

Domestic Bonds

154,099 (59.38%) 

144,371 (54.92%)

Foreign Bonds

10,599  (4.08%)

13,078  (4.97%)

Convertible Bonds

3,427 (1.32%)

N/A

Domestic Stocks

62,755 (24.18%) 

61,897 (23.55%)

Foreign Stocks

33,252 (12.81%)

38,404 (14.61%)

Short-term Assets

5,998 (2.31%)

5,127 (1.95%)

Total   

259,530              

262,877


The GPIF aims for annual returns of 4.5 percent.CSFB Hurts Most in Year Credit Suisse is Hammered on All Fronts
Net operating profits at Credit Suisse were down 45 percent in 2002 to CHF 4 billion. Net profit was CHF 1.6 billion, down 73 percent on the previous year. The unchanged dividend of CHF 2 is uncovered by earnings of CHF 1.33.Much of the damage was done at Credit Suisse First Boston (CSFB), which reported a net loss of CHF 1.6 billion (USD 961 million) versus a net profit of CHF 2.4 billion (USD 1.4 billion) in 2000, after taking account of exceptional items of CHF 1.1 billion. The exceptionals consist chiefly of paying for John Mack’s $1 billion cost-cutting exercises and the settlement with the SEC and NASDR to close their investigations into IPO allocation practices. (“CSFB to Pay $100 million to Settle IPO Actions”)11Losing nearly $1 billion at CSFB is hard to disguise, but the Swiss bank says it now has a platform whose costs (down 32 per cent on the previous year) are more in line with revenues (down 24 per cent on the previous year). “At Credit Suisse First Boston, we made significant progress in enhancing the firm’s competitiveness in key financial markets worldwide, although our short-term results were negatively impacted by the difficult markets and some of the measures we took to reduce our cost base,” says Lukas Mhlemann, Chairman and Chief Executive Officer of Credit Suisse Group. “At the same time, Credit Suisse First Boston exceeded initial cost reduction targets and succeeded in improving efficiencies during the year.”CSAM was had a better year. Net new assets amounted to CHF 66.4 billion, up 4.8 percent. Operating profits nevertheless fell 5 per cent to CHF 322 million in 2001. At year-end, discretionary assets under management stood at CHF 364.2 billion and total assets under management increased by 4.4 percent to CHF 508.8 billion.Profits were also down at Credit Suisse Financial Services, by 24 per cent to CHF 1.4 billion. This reflected lower investment returns in insurance, and lavish expenditure on a pan-European wealth management business, which robbed operating oprofits of around CHF 300 million. Total assets under management increased slightly to CHF 274.2 billion in 2001.Profits at Credit Suisse Banking were down 4 percent to CHF 632 million. Costs are not under control either, the operating cost/income ratio rising from 64.1 per cent in 2000 to 69.4 percent in 2001 as securities and wealth management earnings plunged. Net new assets amounted to CHF 2.8 billion for the full year.At Credit Suisse Personal Finance, continued investment in building a presence in Italy, Germany and Spain racked up a net operating loss of CHF 383 million in 2001, well ahead of the net operating loss of CHF 222 million the previous year. Assets under management climbed 14 per cent during the year to CHF 6.6 billion.Operating profits fell 28 percent at Winterthur Insurance, to CHF 536 million,mainly thanks to falling investment income and the transaction costsof disposing of Winterthur International. Opearting profits at Winterthur Life & Pensions fell 5 per cent to CHF 578 million. Net new assets for 2001 totaled CHF 3.9 billion, versus CHF 2.7 billion in 2000, as a result of organic growth in asset gathering.Credit Suisse Private Banking posted a net operating profit of CHF 2.3 billion in 2001, 11 percent down on the previous year. Assets under management rose by 2.8 per cent to CHF 469.1 billion in 2001, thanks to 33.0 billion in net new assets.”Clearly, the global economic climate made 2001 a challenging year for the Group, as well as for the entire financial services industry,” concludes Muhlemann.”However, our company’s fundamentals remain strong and our asset gathering and asset management businesses achieved solid profitability and growth. We are confident that we will maintain our strong positions in all our core businesses within their respective markets. We’re moving aggressively to bring down costs in all our operations and believe that they are well positioned to achieve further growth as economic conditions improve around the world.”Group resultsFull year results 2001Credit Suisse Group reported a net operating profit of CHF 4.0 billion for 2001, excluding exceptional items at Credit Suisse First Boston of CHF 1.1 billion (USD 646 million) and the amortization of acquired intangible assets and goodwill. This corresponded to a decline of 45% versus the previous year. Net profit for 2001 was down 73% to CHF 1.6 billion. Operating earnings per share stood at CHF 3.33, compared with CHF 6.50 the previous year. Earnings per share amounted to CHF 1.33, down 74% on 2000.Net new assets totaled CHF 66.4 billion in 2001, representing growth of 4.8% of assets under management. Credit Suisse Financial Services contributed CHF 7.9 billion of total net new assets, Credit Suisse Private Banking CHF 33.0 billion, Credit Suisse Asset Management CHF 9.2 billion and Credit Suisse First Boston CHF 16.3 billion. The Group’s total assets under management stood at CHF 1,425.5 billion as of December 31, 2001, up 2.4% on the year-end 2000 figure.Operating income increased 5% to stand at CHF 39.2 billion in 2001, as unfavorable market conditions were more than offset by the increased business volume resulting from the acquisition of DLJ. At the same time, the higher cost base following the acquisition of DLJ led to a 20% increase in operating expenses, to CHF 30.3 billion. Credit Suisse Group has implemented extensive cost reduction measures. Per capita incentive compensation decreased by an average of 49% at Credit Suisse First Boston.Operating return on equity stood at 10.0% compared with 21.5% in 2000, while return on equity was 4.1%, versus 17.7% in 2000. Consolidated shareholders’ equity stood at CHF 38.9 billion as of December 31, 2001, of which BIS tier 1 capital represented CHF 21.2 billion. The consolidated BIS tier 1 ratio stood at 9.5% at end-2001 and the BIS tier 1 ratio for the banking business was 8.8%. Both the banking and insurance businesses remain adequately capitalized.Fourth quarter results 2001In the fourth quarter 2001, Credit Suisse Group reported a net operating profit of CHF 616 million, excluding the exceptional items at Credit Suisse First Boston and the amortization of acquired intangible assets and goodwill. This compares with a net operating profit of CHF 21 million in the previous quarter and CHF 1.9 billion in the fourth quarter 2000. As previously announced, the Group reported a net loss of CHF 830 million for the fourth quarter after taking into account the exceptional items and the amortization of acquired intangible assets and goodwill. This compared with a net loss of CHF 299 million in the third quarter and a net profit of CHF 590 million in the corresponding period of 2000.Net new assets in the fourth quarter were CHF 17.9 billion or 1.4% of assets under management, demonstrating continued asset gathering momentum. Operating income stood at CHF 8.2 billion for the fourth quarter, corresponding to a decline of 6% on the previous quarter and of 23% on the corresponding period of 2000. Fourth quarter operating expenses were down 5% to CHF 6.9 billion and personnel-related expenses were down 12% as a result of the Group-wide implementation of cost saving measures. Including exceptional items at Credit Suisse First Boston, fourth quarter costs were down 18% versus the third quarter.OrganizationAs previously announced, Credit Suisse Group streamlined its organizational structure into two business units – Credit Suisse Financial Services and Credit Suisse First Boston – effective January 1, 2002. This realignment is aimed at exploiting synergies, optimizing client focus, adapting the Group’s capacity and cost structure to the current market environment, and increasing productivity. Effective January 1, 2002, the reporting structure of Credit Suisse Financial Services comprises the areas: Private Banking, Corporate & Retail Banking, Life & Pensions and Insurance. The Personal Finance initiative has been included in Private Banking. Credit Suisse First Boston now also includes the Group’s asset management business, which will continue to be reported separately.Effective April 1, 2002, Olivier Steimer, Head of Private Banking International and deputy of the Chief Executive Officer of Credit Suisse Financial Services, and Jeffrey M. Peek, Vice Chairman of Credit Suisse First Boston and Head of the business unit’s asset gathering activities, have been appointed Members of the Group Executive Board. Rolf Drig will assume responsibility for the coordination of all Credit Suisse Group activities in its domestic market as Chairman Switzerland, in addition to his role as Head of Corporate & Retail Banking at Credit Suisse Financial Services. Heinz Roth, Head of Private Banking Switzerland at Credit Suisse Financial Services, has decided to leave the company after 25 years. Credit Suisse Group owes Heinz Roth considerable thanks for his valuable contribution to the development of the company. Alexandre Zeller, currently responsible for Credit Suisse Financial Services’ private banking business in French-speaking Switzerland, for clients in other French-speaking countries and Eastern Europe, and in offshore centers, has been appointed his successor.Proposals to the Annual General MeetingThe Board of Directors will propose a par value reduction of CHF 2 per share – unchanged versus 2000 – in lieu of a dividend to the Annual General Meeting on May 31, 2002. If approved by the Annual General Meeting, this capital reduction will be paid out on August 14, 2002.Gerald Clark, Vice-Chairman and Chief Investment Officer of Metropolitan Life Insurance, and Vreni Spoerry, Member of the Swiss Council of States, will step down from the Board of Directors at the forthcoming Annual General Meeting. Credit Suisse Group extends its thanks to both retiring Members for their long-standing commitment and valuable contributions to the benefit of the company. The proposed Members of the Board are: Thomas D. Bell, Vice Chairman of the Board, President and Chief Executive Officer of Cousins Properties Inc. and former Chairman of Young & Rubicam; Robert H. Benmosche, Chairman and Chief Executive Officer of Metropolitan Life Insurance; and Ernst Tanner, Chairman and Chief Executive Officer of Lindt & Sprngli AG.OutlookCredit Suisse Group remains cautious in its outlook for 2002 and expects revenue levels at Credit Suisse First Boston to be lower than in 2001 and earnings at Credit Suisse Financial Services not to exceed 2001 levels. Despite the challenging environment, the Group remains confident about its market position across all its core businesses. The Group believes it has implemented appropriate measures to meet current challenges and to capture new growth opportunities.T+1: Andersen Says It Is All an Expensive Mistake1Read Commentary from Industry Experts
Is the global securities industry wrong to favour a switch to clearing and settlement on T +1? Few companies know more right now about existential threats than Andersen Consulting, the consulting arm of beleaguered auditors Arthur Andersen. But even the Undead can recognise a gravy train when it passes, and Andersen Consulting today published its pitch for a slice of the revenues banks, broker-dealers and fund managers are expected to lavish on preparations for a switch to settlement on T +1. (“T+1 Time to Reconsider?”)Paradoxically, it is against the whole idea. This is not as odd as it sounds: Andersen favours an alternative solution, for which it would get paid handsomely if adopted. But, however it plans to profit from its plan, the arguments advanced by Andersen are certainly worth considering. First, the consultancy reckons the arguments for T +1 are less robust than its advocates claim. A switch from T + 3 to T +1 would reduce credit and counter-party risk, but only at the cost of massive spending on technology and hugely inflated operational risk as back offices struggled to work to the shorter timetable. Andersen favours settlement on T +2, supported by 100 percent same-day confirmation as a half-way house to an eventual move to T +0.Andersen is rightly harsh on the companies which have an economic incentive to press the case for T +1, especially vendors. It is also right to notice that enthusiasm for T +1 has waned as markets have declined, and attention has switched to other priorities in the wake of September 11. Hence the postponement of the T +1 deadline in the United States to 2005, three years beyond the original target. The other arguments advanced by Andersen are also sensible and convincing. Declining equity volumes have also reduced settlement volumes; IPOs are virtually non-existent; competition for liquidity through more efficient infrastructure has yet to bite anywhere; the idea that firms need incentives like T +1 to become more efficient is less convincing in weak markets, when managers focus more on costs more than revenues; and it is hard to see T +1 working on a cross-border basis when the forex markets are to continue settling on T +2.Andersen also notes that firms have a lot less money to spend on technology today, and have wised up to over-blown arguments. It estimates that $40 billion of the $100 billion spent on Y2K – the last great spending frenzy whipped up by vendors – was wasted. The proposed $8 billion investment in T +1 solutions in the United States alone is based on supposed savings of $2.7 billion a year, but the savings are highly sensitive to securities market growth and turnover assumptions. Firms already fleeced by vendors during the Y2K and Euro episodes, and now facing higher expenditure to cope with Basle II, are a lot less keen on an accelerated path to T +1 than they were in the days when volumes looked like rising indefinitely. And what of the Andersen alternative? It is to switch to T + 2, with a view to moving to T +0 once the securities industry is sufficiently standardised and efficient to make the move successfully. This would obviously give the industry more time to correct mistakes, but risk establishing a second plateau of inefficiency. To counter this, and encourage the necessary efficiency gains, Andersen advocates coupling T + 2 with progress towards 100 per cent same day trade confirmation. On this view, firms could make the adjustments necessary for T +0 at their own pace. During the transition period, says Andersen, wider use of central counter-parties (CCPs), cross-margining and cross-collateralization would help to minimise the risk of counter-party default. Perhaps oddly, given its manifest willingness to work with the rain of the market, Andersen argues strongly for faster and more extensive horizontal consolidation of CSDs and CCPs.Read Commentary from Industry ExpertsThe TFM: Why Are We Waiting?
When will the TFM go live? Dozens of operations chiefs from banks, broker-dealers and fund managers gathered at the SWIFT offices in London today hoping to catch a glimpse of the elusive Transaction Flow Monitor (TFM) promised by the Global Straight Through Processing Association (GSTPA). More importantly, they sought a timetable for it to go live. So they were disappointed to find that although the TFM is built, the necessary supporting infrastructure is in place (not least, the SWIFT network), the price list is published and the pilot firms involved want to go live, the board of GSTP AG has still to set a launch date. Attendees learned instead that the board will decide the issue within the next two weeks.In the meantime, they were treated to sales pitches from TKS-Teknosoft (for the GSTPA application of its Financial Industry Gateway tool), SWIFT (for its SWIFTNet connections to the TFM) and JP Morgan Investor Services (for its message concentrator service). Since GSTPA maintains that the failure to set a live launch date has nothing to do with the technology – and TKS Teknosoft designed and built it, and Morgan paid for it – the absence of the application itself has heightened suspicion among industry participants that the testing of the TFM has not gone as smoothly as expected. Indeed, attendees at the London meeting today were told that although the 30-odd pilot firms were no longer testing the TFM, so-called “parallel running” has still to happen. The worry is that GSTPA has built a tool its users are not ready to adopt, or even capable of adopting. For a start, the vast majority of potential users of the TFM know next to nothing about it. The GSTPA has spent a fortune developing the TFM, but nothing on marketing it. Unlike Omgeo – the Thomson ESG-DTCC joint venture, which has 6,000 customers already -it has no base of clients on which to build either. And many of those clients who are up to speed on the TFM are more worried, in the wake of September 11, about disaster recovery and business continuity than global STP and T +1. With the T +1 timetable now receding, some of the urgency has gone out of the STP problem since the TFM was conceived. The TFM is not a white elephant, but it needs to go live and build up a client list fast and soon.Secondly, the fund managers, broker-dealers, custodians and fund administrators who are going to use the TFM will have to change their behaviour. The TFM and its Omgeo equivalent (the CTM) are live, real-time, interactive tools which have to be fed with information to work. The third party “message concentrators” favoured by the GSTPA can supply some of the necessary information – notably reference data – but the transaction-specific material necessary for trade matching can come only from the parties to a transaction. As the industry moves towards T +1 the timetable on which they have to supply the data will speed up; counter-parties with inefficient back offices will lose favour, especially now that transaction cost measurement tools are so readily available; and age-old habits will have to change. Custodians, for example, will have to get used to taking instructions from broker-dealers rather than fund managers. Changing behaviour is a lot harder than writing software applications.Thirdly, the language in which different counter-parties in different countries will exchange information has yet to be settled. Bi-lateral and free form messaging have to be replaced with a standardised language. GSTPA is promising a rule book, but how will it be enforced? Of course, one day all parties to a transaction will exchange data in messages which are expressed in XML to the ISO 15022 standard, but this is still years away. There are plenty of legacy applications in the real world of the marketplace which no amount of data mapping and data dictionaries will ever make ISO 15022 compliant. Indeed, only a handful of the parties to the average securities trade – DTCC and CREST spring to my mind – are ISO15022/XML compliant so far. Which means an automated tool (the TFM) is being launched into an un-automated marketplace. No wonder there are reports that many of the transactions processed through the TFM during the pilots were entered manually.Fourthly, not every party to the average securities transaction is a member of SWIFT or wants to be a member of SWIFT. Plenty of broker-dealers and fund managers are FIX users and, despite the rapprochement between FIX and SWIFT, it will take years for a common messaging language to be developed. Which means a lot of market participants will have to access the TFM via FIXHub, the junction box SWIFT has built for FIX users. (“Swift To Provide Fix Hub Messaging Solution”and “Moving SWIFTly”, Global Custodian Winter 2001) Firms who do not belong to the Brussels-based messaging network will have to access the TFM via so-called “Closed User Groups” in which a SWIFT member interfaces with SWIFT on behalf of a group of others. It sounds messy, and probably is. Even among those firms which do belong to SWIFT, many are not ready to use SWIFTNet, the Internet protocol-based messaging platform SWIFT wants all its members to use by the time it disbands its old X25 store-and-forward (FIN) network at the end of 2004. In fact, from mid-2003 it will be compulsory to use SWIFTNet, yet so far only a handful of market participants – Clearstream, Euronext, CREST and a few central banks – have switched to it. Fifthly, large as well as small fund managers and broker-dealers seem averse to hooking up to the TFM directly. This is why twenty-odd “message concentrators” have appeared to provide them with a bureau service. But concentrators are not as easy a solution as they sound. Clients cannot plug into one and forget about the problem. The initial difficulty is to chose between the various contenders. Some are IT vendors offering little more than a grown-up middleware solution; others are CSDs; and the third and largest group are custodian banks looking to capture transaction flows from fund managers and broker-dealers which they can then ply with additional services such as foreign exchange, cash management and broker execution. (Indeed, delegates to the London event were treated to a thinly disguised sales pitch from JP Morgan Chase for their concentrator service.) Having chosen a provider, clients will then have to endure a slow and complicated transition from whatever they are doing now to the global STP modus operandi. They cannot simply plug into a message concentrator and carry on as before. Quite apart from the difficult transitional exercise of shifting their business on to a new platform, concentrators do not obviate the need to join both Omgeo and gstp/axion4 (and now the SunGard alternative) because they cannot bridge trades between a counter-parties using different VMUs. Clients, like message concentrators will have to join both systems, adding to costs. To get round the problem of trades with counter-parties who are not members of the same VMU, some message concentrators have proposed a clumsy “substitution” structure in which they pretend to be the counter-party for the purpose of completing the transaction. Sixthly, the vexed issue of inter-operability. Senior figures in the GSTPA, including Art Thomas and David Gilkes, make little secret of their belief that having two VMUs is unwelcome. The fact that SunGard’s entry means there are now three has only increased their exasperation. Frequent mention is made of the failure of the Inter Vendor Links (IVLs) created to enable clients of different ETC suppliers to inter-connect back in the early 1990s – a process which ended in the merger of the various solutions through the good offices of Thomson ESG – because they did not deliver the functionality which users wanted. Such attitudes do not bode well for the success of the current negotiations on inter-operability between GSTP AG and Omgeo, even though they were mandated by the Securities and Exchange Commission (SEC) in the United States. The two sides have talked since the Spring of last year about basic business issues – such as pricing, liability for failed trades and dual matching – without reaching agreement. Indeed, sources close to the inter-operability talks say they are unlikely to progress until a neutral third party agrees to chair them. Seventhly, the tensions between GSTP AG and Omgeo are assuming geographical and functional forms. GSTPA likes to describe itself as “global” – though it is not even in business yet – and Omgeo as “American.” However untrue this is – and Omgeo has large clienteles in Asia and Europe, which account for a fifth of its traffic – it is designed specifically to fuel European suspicions of American solutions in general and those sponsored by the DTCC in particular. (Interestingly, the GSTPA has yet to secure from the SEC a licence to operate in the United States, and does not yet comply with the Securities Industry Association standards for VMUs.) GSTPA also believes that its solution appeals to broker-dealers and custodians, while Omgeo has a stronger hold on fund managers. Whether or not this is true, what matters is that fund managers are not greatly excited about inter-operability between competing solutions: they will probably choose one, if they decide not to link via a message concentrator, and simply expect the broker-dealers and custodians they deal with to belong to both gstp/axion4 and Omgeo.Hedge Funds Better for Institutions Than the Rich Says Study
Just as the hedge fund sceptics were urging institutional investors to avoid inflating the much-talked-about spectre of a hedge fund bubble, up pops a study arguing that hedge funds make better sense for institutions than they do for private investors. Better still for hedge fund managers, the authors of the study argue that institutional investors need to get real. They say that arguing over whether to allocate 1 per cent or 3 per cent of the portfolio to absolute return strategies is a waste of time. To get any meaningful effects at all, they need to up their exposure, to 25 per cent or more of their portfolios. Essentially, the question posed to institutional investors by Gaurav Amin and Harry Kat of the ISMA Centre at the University of Reading – who combed through the monthly return data of 455 hedge funds tracked by Tremont TASS between 1994 and 2001 (“Who Should Buy Hedge Funds?”)- is more interesting than it looks at first glance. They found that including hedge funds increases the probability of a large loss, but does not significantly increase the probability of a large gain. Moreover, it reduces the probability of small losses and increases the probability of low but positive returns. In other words, institutional investors – which prize stable returns – ought to invest more, not less, in hedge funds. Private investors after spectacular returns ought to do the opposite. The authors’ assumption that high net worth individuals are still interested in capital appreciation rather than capital protection is probably incorrect (it is arguable that the rich are interested mainly in staying rich). But their conclusion that investors of all kinds need to up the ante to secure the effects they identify is undoubtedly sound.That there are problems with the integrity of the data, the illiquidity of hedge fund investments and the fact that the hedge fund industry may be reaching full capacity – in the sense of running out of profitable opportunities – are conceded freely by the authors. In fact, their animadversions of the available data contain an interesting aside — or at least an aside which ought to be interesting to prime brokers and hedge fund administrators. Amin and Kat observe that the apparently high correlation of convertible arbitrage, risk arbitrage and distressed securities funds reflects the inability of hedge fund administrators to generate accurate and up-to-date NAVs. “When confronted with this problem [getting up-to-date prices] administrators either use the last reported transaction price or an estimate of the current market price, which may easily create lags in the evolution of these funds’ net asset value.”

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