ISJ 048

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Regulation -

EFAMA on UCITS

Prole -

Alan Brown of Schroders

Under the microscope -

The future ofPrime Brokerage

Mad World?The Outsourcing Jailbreak

www.ISJ.tv

ISJ InvestorServicesJournal|Volume 7 No. 48

Annual membership

GBP 249 - UK, ROW

USD 379 - America

EUR 286 - EMEA

FundamentalsSecurities Services & Securities Lending for Funds, Managers and Investors

www.eFunds.tFrom October 2010

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BNP Paribas Securities Services is incorporated in France with Limited Liability and authorised by the French Regulators (CECEI and AMF). BNP Paribas Trust Corporation UKLimited and Investment Fund Services Limited are authorised and regulated by the Financial Services Authority. BNP Paribas Securities Services London Branch is authorised by theCECEI and supervised by the AMF and subject to limited regulation by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authorityare available from us on request. BNP Paribas Securities Services is also a member of the London Stock Exchange.

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1

Editor-in-ChiefRoy [email protected]

EditorBrian [email protected]

Advisory Board ChairmanClive Gande

clive.gandeISJ.tvSenior correspondentCraig [email protected]

US correspondentJohn [email protected]

Special correspondentsCherry Reynard

DesignSerena Ventrella

Head of salesPatricia De La Grange

[email protected] managersEradat [email protected]

CTOPeter [email protected]

Managing directorJon [email protected]

PublisherMark [email protected]

2i UK One Angel Wharf,59 Eagle Wharf RoadLondon, N1 7ER, UKT: +44 (0) 20 7183 7470F: +44 (0) 20 7250 0350

2i US 410 Park Avenue,15th Floor, New York, NY 10022T: +1 212 231 8421F: +1 212 231 8121

2010 2i Media. All rights reserved.No part of this publication may bereproduced, in whole or in part,without prior written permissionfrom the publisher.ISSN 1744-151X

4 Swingsand

roundabouts

8 Lead story Outsourcing Jailbreak,

14 Under themicroscope

The future of Prime Brokerage

18 The ISJ profile Alan Brown of Schroders

22 Regulation EFAMA On UCITIS

27 Technology MTF - Xtrakter

Risk Management behind Technology

Deutsche Bank, Bravura, SGSS

CONTENTS

Northern Trust

Risk Management

Mad World?

ISJ InvestorServicesJournal|Regulation -

EFAMA on UCITS

Prole -



The future of

Prime Brokerage


www.ISJ.tv

ISJ InvestorServicesJournal|Volume 7 No.48

Annualmem bership

GBP 249 -UK,ROW

USD 379 -America

EUR 286 -EMEA

FundamentalsSecuritiesServices&SecuritiesLendingforFunds,ManagersandInvestors

www.eFunds.tvFrom October 2010

I J 8 full FI L.indd 1 22/09/2010 1 : 3

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contents Continued

Safekeeping funds31 Spotlight on

SGSS and NBAD to join forces

36 The ISJ Profile

Tony Klim of Bravura

DTCC Acquires Avox38 US andTechnology

Focus

30 Analyse this Information Mosaic

Directory of services42 ISJ Directory

CONTENTS

Partnerships and alliances

Eurex on ETFS

Euroclear and Avox

ISJ

Investor

Services

Journal|

THE GLOBAL CUSTODY AND ASSET SERVICING INDUSTRY MAGAZINE

FundamentalsSecurities Services & Securities Lending for Funds, Managers and Investors

www.eFunds.tv

From October 2010

Regulation -

EFAMA on UCITS

Prole -



The future of

Prime Brokerage


www.ISJ.tv

ISJ InvestorServicesJournal|Volume 7 No.48

Annualme mbership

GBP 249 -UK,ROW

USD 379 -America

EUR 286 -EMEA

FundamentalsSecuritiesServices&SecuritiesLendingforFunds,ManagersandInvestors

www.eFunds.tvFrom October 2010

I J 8 full FI L.indd 1 22/09/2010 1 : 3

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swings and roundabouts Appointmen

Deutsche Bank

announces senior

appointment in DirectSecurities Services business

More evidence to suggestthat Deutsche Bank is keento rebuild some form of

cross-border securitiesservices capability, ashinted at in ISJ 47.

Deutsche Bank hasappointed Rebecca

Walsh to the position of

director, global sales andrelationship management,

within its Direct SecuritiesServices (DSS) business.

Based in London, Walshwill be responsible fordeveloping business

origination within theglobal clearing communityacross the 32 markets in

which DSS operates.

She joins from StandardChartered Bank whereshe spent three years in

transaction banking sales.

Prior to joining

Standard CharteredBank, Rebecca worked invarious relationship andoperational management

roles for 10 years withCitigroup.

Commenting on theappointment, Rob Scottand Michael Aschauer, co-

heads of global sales and

relationship managementfor DSS said: We continue

to focus on strengtheningour direct securities

ervices business bydeveloping new businessopportunities. The

appointment of Rebecca,with her extensive brokerdealer and investment

bank relationships,and expert knowledgedemonstrates our

continued commitment inthis regard.

RBC Dexia elevates

Marco Siero RBC Dexiahas appointed MarcoSiero as managing director

of its Switzerland ofce,based in Zurich. He willbe responsible for driving

further growth of thecompanys operations inSwitzerland, as well as

managing RBC Dexiasregulatory relationships for

this key centre.Siero will report to

Simon Shapland, head,

sales & distribution,continental Europe.

Siero has almost 20 years

experience in the investor

services industry. Hejoined RBC Dexia in 2008,

prior to which he heldvarious key positions in theglobal transaction services

division of Citigroup.Before this, he was

general manager of

Morgan Stanleys assetmanagement operations

in Luxembourg. Hiscareer in the nancial

services industry began

in 1991 with Kas Bank asclient service manager forDutch pensions funds and

insurance companies.

Bravura appoints AndrewBelger Sales Director -APAC

From Sydney, Australia,

comes news that BravuraSolutions Limited(Bravura) - a supplier

of transfer agency and

wealth managementsoftware applications and

professional services - hasexpanded its global teamwith the appointment of

Andrew Belger as salesdirector for the Asia Pacic

(APAC) region.

Before joining Bravura,

Belger held the positionof director, informationmanagement solutions,

Asia Pacic and Japan, atHP Software. In this role

he was responsible for salesleadership of HP Softwares

information management

solutions business in theAsia Pacic Japan Region

Prior to this, he held anumber of senior positionsat various organisations,

including MercuryInteractive Australia andIBM Australia. In addition

to knowledge of the ITindustry, he has signicant

experience with drivingsales teams and in theachievement of revenue

and operating prottargets.

He will be based in

Bravuras Sydney ofce.

Northern Trust Names

William Mak to LeadSingapore Ofce

Northern Trust hasappointed William Makas Singapore Country

Manager and Head ofInstitutions Group, South

Societe Generale Securities

Services appoints OlivierRenault as CountryManager for Luxembourg

Siero was most recently director of relationshipmanagement at RBC Dexia in Luxembourg, wherehe focused on large multi-market clients.

As the senior executive

responsible for the coordinationof all business activities in theSouth East Asia region, Makreports to Teresa A. Parker, ChiefExecutive Ofcer of the AsiaPacic Region for Northern Trust,who is also based in Singapore.

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swings and roundabouts Appointments

Societe GeneraleSecurities Services

(SGSS) has appointedOlivier Renault asCountry Manager for

Luxembourg, replacing

Michel Becker. Renaultwill report to SGSS

Executive Managementand becomes a member of

the Executive Committeeof Societe GeneraleBank and Trust (SGBT),

in charge of SecuritiesServices.Renault, 46, has a degree

from the Paris GraduateSchool of Economics,Statistics and Finance

(ENSAE). He began hiscareer as a consultant inthe banking sector before

being appointed Directorof Financial Control

for a services companyin France. He joinedSociete Generale Groups

Human Resourcesdepartment in 1999

and was then appointedHead of Clearing at SGSSin France. In 2006, hebecame Deputy Head

of SGSS S.p.A. in Milanwhere, in particular,he managed project

integration and synergieswith this subsidiary,

which was acquired bySociete Generale that year.

Siero was most recently director of relationshipmanagement at RBC Dexia in Luxembourg, wherehe focused on large multi-market clients.

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Lead story Outsourcing and offshoring

This unique public private experiment, as it was described inThe Times newspaper of May 13 this year, will see around 250prisoners both convicted and awaiting trial employed tohelp process bank paperwork. They will receive training in basictasks such as typing application form details into computersbefore being unleashed on the job.

In what sounds perilously close to allowing lunatics to takeover the asylum, they will also help to process insurance claims.

The world is familiar with the well rehearsed arguments in fa-vour of outsourcing and offshoring. The idea of using convictsdoes, though, however outrageous it might at rst sound, ticka number of boxes which could lead to it being given seriousconsideration.

Picking the right partner is a combination of art, science andsheer gut instinct. Organisations which are considering out-sourcing generally look for two key attributes.

One, commitment to the business. Will the supplier still bearound in ve to 10 years? In this case, it will depend on the

length of the original jail sentence.Not all suppliers which have entered

the market will survive; the likelywinners will be a handful of globalplayers, though in some countriesthere will be specialist niche provid-ers wholl do very nicely.

They should also ask if a supplieris credible in delivering day-to-daysolutions; do they have the capabili-ty and the capacity? Can the supplierdeliver the promised new solution,

and manage their client through the change process? People willfocus on systems, but it is more important to help clients man-age the re-engineering process, changing the way people think.

Important elements

Other important but secondary elements include cost reduc-tions, superior technology, an understanding of the industry,exiblity and capacity. Chemistry inevitably plays a part too.Do the people on either side feel they can communicate with

one another? Ask that question of staff involved at Barclaycardwhich recently decided to create a centre of fraud excellence inIndia and you will receive an expletive-lled reply worthy of theleadership of the British National Party.

An examination of the putative partners key attributes is notlimited to the buy-sides due diligence on the providers. Provid-ers will cast just as critical an eye over asset managers and fundmanagers before agreeing to join hands.

The size and quality of an organisation have a crucial role toplay in making the right selection, but they are only part of thestory. More important is the psychology. It might be a bit of a

clich but outsourcing is not based on a client-supplier relation-ship, its a partnership. The clients vision must dovetail withthe suppliers vision. If the client sees the supplier purely as avendor, its not going to work.

Client and supplier need a common platform, and to agreeon tax structure and location. The longer the mating dance,the better; both sides get to know one another better, and learnwhat the other likes and dislikes.

The economics need to work for both sides, but corporatealignment, cultural alignment and shared values are also im-portant. Suppliers who take a high-touch approach will not twell with clients who want a commodity service. In the securi-ties services world, the outsource supplier needs to become anextension of the fund manager involved.

The client might worry about giving up control, but the sup-plier will think more in terms of extending the clients reachand capabilities. Clients who are unable to invest intellectuallyare less likely to derive the full benets from outsourcing.

The economics need to work for both sides, but corporatealignment, cultural alignment and shared values are also im-portant. Suppliers who take a high-touch approach will not twell with clients who want a commodity service. In the securi-ties services world, the outsource supplier needs to become anextension of the fund manager involved.

The client might worry about giving up control, but the sup-plier will think more in terms of extending the clients reachand capabilities. Clients who are unable to invest intellectuallyare less likely to derive the full benets from outsourcing.

One area where the prisoner model clearly falls down is that theclient needs to know that it is not a guinea pig, that its supplierhas been over the course before and will not be learning theropes at its expense. The outsourcing market is mature enoughto recognise the importance of choosing the right partner.Honest suppliers insist they stand prepared to walk away from adeal if they think it is the right course of action for them or forthe prospective client.

Absolutely stark startingbonkers mad?The news that an Indian

outsourcing company, thatclaims The Royal Bank ofScotland and Goldman Sachsamongst its clients, plans toemploy time-serving prisoners

at Cherlapally Central jail inHyderabad, India, stronglysuggests the answer is yes.

Picking

the rightpartner is acombinationof art, scienceand sheergut instinct.

Has the worldnally gone mad?

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Risk is a key consideration, and there is a correlation betweenprice and risk. This is another area where the prisoner model issurely found wanting, given that its primary attraction seems tobe the low cost. The risk associated with handing condentialnancial information to convicted criminals must outweigh allpossible cost considerations. Fund managers make their livingby being innovative, and suppliers need to provide a viable serv-

ice. The back ofce needs to work, and to be totally trustworthy.If ever there were a transitional element to outsourcing that willkeep a fund manager awake at night, then surely this is it.In a normal outsourcing contract, cost reductions have to bepaid for, and the client will want to extract value from day one,whether in the form of a cheque or a promise on xed costs.This will normally have an impact on people, who need to knowwhether they will be out on the street or have good long-termprospects with the new provider. In this case, cue general ironiclaughter; releasing proven workers, even on the completion oftheir sentence, will surely quickly become anathema to all con-cerned, except the prisoners. Might we see the emergence ofimaginative new ways to extend the professional life of experi-

enced, hard-working prisoners? Or perhaps they could becomegenuine full-time employees with career prospects?

We have rst-evidence later in this issue of what is involved inselecting a supplier. In making a selection for an outsourcingpartner, we focused on the qualities of strong independent con-trols and checks and balances around key processes and service,says Steven Blakey, chief executive ofcer of ECM. Further-more, a good cultural t with GlobeOp and career opportuni-ties for our employees were essential.

Captive supplier

But the use of prisoners would introduce a whole new dimen-sion to the argument. Not least because in this case the supplierwould literally be a captive supplier. The reactions to the sugges-tion have, though, been genuinely interesting, even educational.The rst reaction is generally one of bemused laughter. The nextis to ask: are you sure? Whichever way the wow factor manifestshimself in any individual, it only takes about two seconds for

the educated brain to proceed to the question that Radiant InfoSystems put to The Times: Why not?

The reaction of Tony Klim, CEO (Europe, Middle East & Ameri-ca), at Bravura Solutions, and proled elsewhere in this issue,was thought-provoking. If its providing a useful contributionand prisoners are not being exploited, and they are willing to

do it, why not indeed? It could even help them become rehabili-tated, he commented. The suspicion is that where one providerfollows, opening up a new pool of even cheaper labour, otherswill follow in the race to cut costs to the lowest possible level.

All other considerations aside, this could signicantly throwinto disarray the popular theory that each new low-cost out-sourcing centre enjoys a 10-year life cycle before it is replaced byan even lower cost centre. If need be, the potential labour poolcould be quickly topped up in times of need by randomly ar-resting innocent people and so creating new inmates. In cultureswhere disregard is high for the concept of the rule of law, andwhere illicit payments are an accepted fact of life, the tempta-tion of those in a position to do such a thing could well provedifcult to resist.

Lead story Outsourcing and offshori

In making a selection for

an outsourcing partner, wefocused on the qualities ofstrong independent controlsand checks and balances aroundkey processes and service, saysSteven Blakey, chief executiveofcer of ECM. Furthermore, agood cultural t with GlobeOp

and career opportunities forour employees were essential.

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The news could provide another tool in the argument againstoutsourcing and offshoring. Someone is bound to react to thenotion that you could employ time-serving prisoners, com-

mented one market player. If youre already anti-offshoring,that kind of suggestion is bound to conrm your opinion of itas a practice. And many of us remain deeply sceptical about outsourcing andoffshoring, even as the cheerleaders reach a frenzy in their cel-ebrations of it. As observed in our separate story about the won-derful life of BT Radianz, BT says that it continues to innovate,enhance and invest in its nancial services portfolio. BT Radi-anz is just one part of a specialist suite of products dedicated tothe nancial services sector to address their communications-related requirements. From wholesale through to corporate

and retail banking, nancial markets and payments sectors, BTboasts that it helps to increase operational efciency, agility andcustomer service. It enables the largest, secure networked nan-cial community in the world to carry out its business reliablyand fast, using integrated voice, data and video to communicatewithin and between thousands of institutions and providersaround the world.

BT La-La Land

What BT claims is indeed impressive, if it is all true. But permitthose of us who live in the real world rather than BT La-La Landto disagree. Try telling that story to anyone who has had experi-

ence of telephoning a BT help line which is obviously located onthe sub-continent to book an appointment for an engineer tocome and investigate why their phone line makes them soundas if they are making a call while going over Niagara Falls in abarrel equipped with crackle magnication and echo enhance-ment machinery.

The day-to-day functioning customer helplines is a searingindictment of the principle and practice of outsourcing, anda 100% convincing argument against it. The regular, violentloss of temper by UK-based customers faced with explainingproblems to telephone operators who cannot speak English,whatever their paper qualications might claim, must surely be

causing grave long-term damage to traditional links betweenthe sub-continent and Britain. As must the practice of requiringIndian employees to watch the drab, dreary and horrendouslytedious EastEnders soap opera, and Match of the Day, the BBCsagship association football programme, so they can under-stand British life more fully. And encouraging Indian workersto adopt English-sounding names is surely the most patronisingelement of this peculiar form of neo-colonialism. On reection,life in jail is very possibly the ideal preparation for working inan Indian call centre. Maybe the world hasnt nally gone alto-gether mad after all. Do feel free to write to ISJ expressing yourown point of view, for or against the motion.

SJ: What is your reaction

to the news that an Indianoutsource services provider isproposing to recruit time-serving prisoners to handlesome of its workload?

Etienne Carmon: This isnot the rst time a prisonpopulation has been giventhe opportunity to work - inthe States, there are manyinstances of prisons manufac-turing goods. However, thisis the rst time I have heardof prisoners being involved inthe services sector.Broadly speaking, the servicessector requires skilled labour,whereas many manufactur-ing positions can be lled bythe unskilled workers readilyfound in prison populations.

ISJ: Do you think the idea is so outlandish that it shouldnt be

given the dignity of a reaction?

Etienne Carmon: Not at all. But there is an ethical element tothis question. If the workers are free to chose whether they wishto work, are of working age and work in suitable conditions,then there is no ethical issue.Furthermore, they have the opportunity to learn a new skillwhich could help them once their sentence comes to an end, andmay even earn money that could help compensate the victims oftheir crimes. Therefore, if these ethical aspects are well managedby the prison and strongly controlled by authorities, I dont seemajor problem in theory.

Lead story Outsourcing and offshoring

In Conversation with...

In additionto the morespecialisedactivitiesexplained above,business sectionsthat are mostoften outsourced

are administrativetasks, ITprocessing anddevelopment andcall centres.

Etienne

Carmon,

head of

international

product

development

at

CACEIS Bank

Luxembourg.

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Lead story How the world nally gone mad?

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In Conversation with Etienne Carmon

Etienne Carmon: Financial services companies looking tooutsource, carry out thorough due diligence prior to selecting apartner. There are o many aspects to this, including the ethicalaspect no company wants to fnd out it has indirectly usedchild labour or example. However, once the ethical concernssurrounding the workorce have been dealt with, the key con-

sideration is then quality.

Can the company provide a consistent level o quality in itsservices?

Etienne Carmon: To date, there have been ew examples osuccessul oshoring operations when the goal is cost cutting.The additional risk actor o utilising a prison workorce oractivities where quality is paramount seems unrealistic, espe-cially ollowing the recent fnancial turmoil. For these reasons,I doubt a fnancial company would seek to cut costs and bewilling to accept the additional risk associated with an incarcer-ated workorce.

ISJ: On a broader note, where might the suggestion sit in thebroader context o outsourc-ing and oshoring?

Etienne Carmon: Finan-cial services activities otenrequire heavy investmentinto human resources andIT and many companiesfnd their resources are betterutilised when channelled

into a specialist outsourcingcompany. Financial servicescompanies can fnd the skill

set and IT capabilities they seek in many local and internationalthird-parties, however, or the reasons explained above, a prisonis unlikely to provide the qualifed sta, the tight controls androbust technical inrastructure that is so essential to a successuloutsourcing venture.Whereas outsourcing is driven by a desire to deliver improvedservices, oshorings objective is principally cost-cutting, whichexplains why India and China, with large, cheap labour orces,are avoured by companies looking to signifcantly reduce theirproduction or development costs. I quality standards are met,

then oshoring is justifable, but in the fnancial sector, wherecontrols need to be tighter than ever, I doubt that any signif-cant part o the activities could easily be oshored. Oshor-ing has not yet been met with anything like the acceptance ooutsourcing and it will be many years beore asset managerscontemplate such a radical change to their company set-up.

ISJ: Can you remind us what works?

Etienne Carmon: As already mentioned, India and its out-sourcing competitors have access to a vast pool o relativelycheap, but skilled labour which enables outsourcing companies

to undertake tasks at a lower cost. Furthermore, due to thecompanies size, they are able to take advantage o economies oscale, spreading their resources across the business o numer-ous clients. Many European fnancial services companies havebeen able to signifcantly reduce their costs through outsourc-ing operations, whilst maintaining the quality levels their clientsexpect. To ensure a relationship is successul, it must be built on

a well-defned Service Level Agreements and Key PerormanceIndicators to ensure quality o service is maintained at all times.

ISJ: And what doesnt work?

Clearly, outsourcing can have its drawbacks too.FinancialServices companies are also putting operational risk and to anextent, reputation risk in the hands o a third party, so thoroughdue diligence is critical. In terms o IT, there have been cases oproduction errors occurring, which have been rapidly resolved,however inormation on the problem and the solution has notbeen orthcoming, leaving the outsourcee in the dark as to theissue.

Another problem companies ace concerns protection o intel-lectual property rights and industrial espionage.By outsourcing, you are eectively handing over your businessprocesses, know-how and inormation to another company.

Despite the presence o client confdentiality contracts, there isa risk that an unscrupulous person could exploit the inorma-tion to set up a company that competes with your own. Finally,the question o a local presence. Clearly, oshore call centreshave been the subject o negative press in the UK and elsewhere,demonstrating that clients wish their calls to be handled by alocal agent rather than an operator in another country.

However, setting up an outsourced call centre staed by localemployees in a country where you distribute your unds, can bean astute commercial move which can help to dissolve culturalbarriers.

ISJ: Do you have any other thoughts/opinions that are notcovered by the above?

Etienne Carmon: We have outsourced certain aspects o ourIT production and inrastructure to a reputable Luxembourg-based company, which took on a large number o our IT sta.We have outsourced the acilities management o back-up sitesas part o our business continuity plans. In Luxembourg, we

have outsourced client document management and reporting toa Luxembourg company which is granted the same status as abanking institution.

CACEIS hasoutsourcedfew parts ofits business,preferring toretain the greater

part in-house

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Under the microscope The Future of Prime Brokerage

Given thenancial crisis of2008, the hedgefund industry israpidly changing

to cope with anew world.

The entire industry is reacting to a variety of pressures from in-vestors and regulators which will eventually result in previouslyanticipated institutionalisation in the form of regulation, andstandardisation in technology and infrastructure. The indus-try has not evolved to support these new demands, and hedgefunds, prime brokers, fund administrators, technology vendorsand service providers now have to anticipate and engineer newservice models.

The industry began to claw its way back to the previous levels in

the past couple of months. Assets under management (AUM)in hedge funds managed from North America rose above $1trillion in April 2010 for the rst time in 18 months, accord-ing to Eurekahedge. At the end of April, global AUM stood at$1.53 trillion, also up 0.6% since the end of March 2010. Otherregions saw marginal net inows in April. European managersgained $500m and Asian (excluding Japan) managers gained$100m.

Still, increases in asset ows no longer means a return to theprevious operational status quo. The crisis has already fast-tracked the trend for multi-prime brokering that PaladyneSystems predicted several years ago. The collapse of Lehmanheralded the death of the single-prime broker model onewhere hedge funds rely on just one prime broker to service theirneeds. Now the vast majority of hedge funds (large, small orstart-ups) have multiple prime broker relationships.

On average a global hedge fund now uses three prime brokers,a number Paladyne expected would become the industry normin 2007 when large funds worked with as many as a dozen andsome utilised only a single prime. Others in the industry holdthe same view, according to a Celent report Hedge Funds inEurope Riders in the Storm released in May 2010 [see separatearticle], a third of hedge funds increased the number of prime

brokers after the crisis while 20% decreased to reduce costs andcomplexity of collateral management.

Finally, regulators are extremely focused on reforming ourindustry. A number of proposals are being contemplated acrossthe US and Europe that undoubtly change our industry. Someof these proposals include: banning naked shorts, spinning outproprietary trading desks from investment banks, as well as

spinning out the swaps business from investment banks. Any ofthese three proposals would result in a profound change in ourindustry.What should we expect next? These trends are rapidly anddramatically changing the operating model of the industry. Thecrisis has unleashed forces that are irreversible. In the yearsto come it will be seen as the catalyst that led to a completeoverhaul to the structure of the industry and the introductionof standardisation and co-operation. Each participant has beenimpacted in profound ways and must now meet new require-ments that cannot be effectively addressed by the status quo:

We are also witnessing the emergence of the mini-prime brokermodel one where a broker dealer acts as an aggregator of smallhedge funds to clear with larger prime brokers. On the fund ad-ministration side, we are seeing the death of self-administrationin the US hedge fund markets one where hedge funds rely ontheir internal processes and infrastructure to report net assetvaluations (NAVs) to their onshore funds investors.

On the technology front, we are seeing a rapid move towardssimplication of the hedge fund infrastructure to cut costs. Thishas come in two main formsmore reliance on third-partytechnology vendors, especially those with hosted ASP platforms,as well as expectations that service providers will ramp up theirservices to include more bundled technology platforms thatprovide integrated and comprehensive front-to-back ofcecoverage, while ensuring multi-prime broker support.

Investors

Investors are no longer satised with solely understandingperformance, but also now require a deep understanding ofbusiness risk. As a result, over the last several months, they havedramatically expanded their due diligence process to cover allaspects of a hedge funds operations and relationships. Accord-ing to a recent study by Albourne Partners, the average due

diligence process has now grown to over six months. Some ofthe key areas covered in this due diligence include counterpartyrisk, third-party fund administration, and operational/technol-ogy processes.Additionally, investors are now expecting other hedge fundinvestment vehicles for their investments. This is mainly com-prised of managed accounts (which is more common in theUS), and UCITS (which is more common in Europe). We expectthis trend to continue, although not at the initial pace as previ-ously predicted by industry experts.

Hedge Funds

The Futureof PrimeBrokerageby Sameer Shalaby

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Under the microscope The Future of Prime Brokerag

Hedge funds are facing unprecedented pressure to invest in aconsiderable amount of resources explaining and reportingboth their performance and their business risk to all types ofinterested external parties (including investors, prime brokers,administrators, auditors, regulators, and others). This reportingis further complicated by the need to aggregate their activi-ties across multiple prime brokers. We expect the relationship

between hedge fund managers and these external parties to bemuch more formalised, with signicant due diligence up front,and high expectations for ongoing transparency and reporting.

Prime Brokers

The crisis instantly dispelled any lingering doubt that the multi-prime model was not the way of the future. Overnight, hedgefunds sought to mitigate counterparty risk by moving theirassets across multiple counterparties. Prime brokers that couldprovide the adequate services and reduced risk, along with amulti-prime solution, were clear immediate winners. One ofthe winners in this race was Credit Suisse which was the rst

prime broker to introduce multi-prime technology through itsAdvanced Prime partnership. Primes that lack this multi-primeinfrastructure now face the costly prospect of retooling theirmostly single prime technology, to the new multi-prime stand-ard. This comes at precisely the same time as there is wide-spread pressure for primes to reduce their high-cost structure aswell as strengthen their balance sheets.

In addition, primes have been eavaluating and will continue toevaluate their current hedge fund clients to terminate unprot-able relationships. This will continue into the future with a clearfocus on protable clients that have the proper pedigree as wellas strong operational controls to minimise risks.

Another unsettling issue for many primes is their inability tounderstand the complete aggregated leverage of their hedgefund clients. This lack of transparency into the activities oftheir clients was a major contributor to the misgivings manyhad about the solvency of the investment banks at the height ofthe crisis.

Regulators

Although in many respects hedge funds were not contributorsto the nancial crisis, yet they were still blamed for much of it.

The public perception was that regulators had been asleep at thewheel and that they did not have an adequate understandingof the role that the funds played in the extreme market volatil-ity we experienced. As a result regulators can no longer allowthe industry to operate in relative anonymity. With regulationpending in Europe that seeks to protect investors and registra-tion of hedge funds taking place in the US, funds will be re-quired to become more transparent regarding their investmentholdings and activities. Regulators will need reporting capa-bilities that allow them to understand the risks associated withindividual funds as well as broader industry-wide systemic risks.

Furthermore, nancial reform is likely to span across invest-

ment banks, hedge funds, and possibly fund administratorsfrom transparency and reporting, to trading and shorting, topricing and valuations. We are likely to witness the beginning ofsignicant regulatory reform that will continue for several yearsto come.

Fund Administrators

The nancial crisis has had a signicant impact on fund admin-istrators. Given the reduction in total assets under management,most fund administrators have lost huge assets, in some cases,50% of their AUA (assets under administration). This trendhas put signicant pressure on fund administrators to revisittheir business models and their commitment to the space. Forsome, this created an opportunity to build their service offeringto support the wave of new mandates offered in the US alone.Given the pressure from investors to use independent fundadministrators, self-administered hedge funds have looked toadministrators for their help. We expect this trend to continuewell into 2010.

Fund administrators have looked to opportunities to offer full-service support to small-to-medium sized hedge funds. Manyadministrators have been expanding their offering to includemiddle-ofce support, in addition to their back-ofce andtraditional NAV services. Finally, many administrators have ex-panded their offering to include a technology platform that cansupport trade capture, real-time P&L, as well as multi-primereporting.

New RequirementsPrime Broker Roadmap Five Steps for Success

In order for prime brokers to be successful and capture moreassets in a multi-prime world, we expect them to adapt theiroffering by expanding it to include other services, in addition totheir traditional core services. We have identied ve necessaryrequirements essentially a roadmap to success:

Number One: Broker-Neutral Technology

Our roadmap is built rst and foremost around broker-neutraltechnology. While prime brokerage houses have often spokenabout a future state of open architecture, with multi-primesupport, this has only become an industry reality in the past two

years. Leading prime brokers offer the most advanced primetechnology platforms, but were compatible mostly with thesingle-prime model. Their clients so far have not had the choiceof hosting data from competing primes on the existing technol-ogy.

What these rms require are platforms that are not only seam-less across their various in-house desks, but also with technol-ogy platforms hosted by other primes. Additionally, they mustprovide combined accounting, reconciliation and reporting sothat a manager receives one consolidated statement at the endof the day or week.

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US focus Corporate Actions

Credit Suisse has recognised this need before any other primebroker and was a pioneer in providing such solution. It formeda groundbreaking alliance with Paladyne Systems in June 2006to offer a fully-hosted, front-to-back ofce multi-prime tech-nology platform. Industry analysts initially thought this wouldmake Credit Suisses clients less sticky. However, the strategywas clearly justied after the death of the single prime model in

2008.

Following this partnership, Citigroup teamed up with Linedatato include Beauchamp as part of its Open Prime offering, but itdid not offer a hosted ASP solution. In September 2009, Sophisjoined forces with J.P. Morgans Prime Brokerage business andintroduce iSophis, a reporting solution that allows hedge fundsto comprehensively manage their risk and portfolios acrossmultiple prime brokers. (Given the recent news about the im-minent sale of Sophis, this offering may be in jeopardy.)

Number Two: Independently Hosted Technology

A critical component of the independent technology offering isthe delivery model, which must be provided by an independentthird party and offered as a full service Application Service Pro-vider, or ASP model. The third-party delivery ensures privacyof positions and trading strategies, which is a key concern forhedge funds. Any multi-prime technology that is not deliveredvia an outside, independent vendor is less desirable becauseit potentially could offer a prime a complete view of a fundsactivities across all of their prime relationships. In addition, atechnology solution provided within the bank will be difcultto modify and interface with other prime broker technologyplatforms, as well as be another concern in any single-primecounterparty relationship. An independently hosted technologysolution (even if funded by any prime broker) still offers hedgefunds the freedom to maintain an independent relationshipwith the same vendor, even if they no longer have a relationshipwith such prime.

Number Three: Middle- and Back-Ofce Services

A third component of the roadmap is the delivery of middle-and back-ofce processing services to customers in combina-tion with the technology offering. Hedge funds are already keento outsource these functions as evidenced by the huge increasein demand for daily processing from fund administrators.

One benet is lower costs. It is cheaper for managers to havea third-party perform these functions rather than to attractand maintain the talent to do it in-house. Second, institutionalinvestors favour managers who leverage outside parties for dailyprocessing and reporting. Prime brokers are perfectly situated todeliver these mid-to-back ofce services given their familiaritywith cash management, daily settlement, reconciliation, col-lateral management, corporate actions processing and portfolioreporting. We expect prime brokers to more actively providethese services either on their own or, more likely, via independ-ent partners.

Number Four: Fund Administration and Independent NetAsset Valuation

The fourth requirement of our roadmap is to provide fundadministration and independent net asset valuation. More andmore investment banks have been building this capability as anadditional source of hedge fund revenue. Fund administration

needs to be run independently from the banks prime brokerageside to safeguard a funds privacy. As an alternative to perform-ing this function internally, banks can avoid potential conictsof interest and privacy pitfalls by establishing a strategic rela-tionship with a third-party fund administrator.

Number Five: Independent Business Consulting Services

As a nal component, prime brokerages will need to furtherenhance their independent business consulting practices.Most primes already consult with their clients in areas such asstafng, ofce space, technology systems, vendor selection andservice providers. However, these internal consulting groups are

very expensive and must remain current in many areas. Keepingin-house staff abreast of the latest trends, software, IT upgrades,among other things, in a fast-moving industry, can prove chal-lenging for banks.

As a more likely scenario, a prime would maintain a core teamin-house to provide such services, in addition to establishingone or two strategic consulting partnerships to complementtheir offering and perhaps include as a white-labeled service totheir customers. This model is not only more cost-effective. Italso ensures the objectivity of their business recommendations.Sameer Shalaby is chief executive ofcer of Paladyne Systemsrequirement. Squeezing the denition of what constitutes a day

will put further pressure on moving off T+3. If we stay in T+3,do we get any benet from an earlier afrmation? Another wayof looking at that is if we do same day afrmation, does it mat-ter if we stick to T+3.

Forcing The US Issue

Overseas regulation may force the US to act. Omgeos Cutronenoted that the EU, has been promoting a T+2 settlement cycle,parallel with the Target2 Securities settlement and has toharmonise settlement across the EU, with the German T+2 cyclebeing the driver. They have to go to T+2, Curtone said. T+3

would mean Germany would have to roll back their settlementcycle. Cutrone predicted that T+2 in the EU would force theUS to adopt. The other tendency is to stand pat on the groundsthat budgetary constraints remain signicant.The cheaper it is to fail trades, said Stamey, the less incentivethere is to change.

Once the industry is forced to change, however, he saw asilver lining for rms with high touch processing. Matching tosettle is going to force SDA, said Stamey. Firms that start thisfrom scratch wont have to take legacy systems out ofproduction. ISJ

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The ISJ ProleAlan Brown

A Director andTrustee of theClerkenwell, Lon-

don-based Car-bon DisclosureProject (CDP),which claims thatsince its forma-tion in 2000 ithas become thegold standard forcarbon disclosuremethodologyand process, AlanBrown is the kindof optmist whose

glass is alwayshalf-full ratherthan half-empty.Moreover, onesuspects thereare always plentymore bottles chill-ing in his fridge.

He also has a buring passion for the very specialist, sophisti-cated and presumably expensive activity of carriage racing.A young-looking grandfather of three, Alan Brown is passion-ate about climate change and the measures that people can taketo mitigate its effects without sacricing any quality of life. Imworried about the planet not being such a pleasant place to livein the future, and there is lots we can do to try and prevent thathappening, he says. We dont have to wear bearskins and livein caves, but we should get rid of the gas-guzzlers. There IS aLexus 4x4 hybrid. In fact, there is an upside to climate change ;the geological extension of the Champagne region is Kent, andI gather that the Champagne houses have already been investi-gating buying land there. They couldnt, though, call it Cham-pagne of course any longer; theyd have to call it Britain. ThereARE winners in this!

Losers could include the likes of Bangla

Desh. It could lose 15% of its land massif storm frequency and intensity increase,leading to a breakdown in agriculture and water supplies. Thatwould bring war, disease, famine and mass migration. The fourhorsemen of the Apocalypse will nd themselves very much intheir comfort zone if these predictions come true. Investmenton the scale of a third Industrial Revolution will be needed if weare to avoid such disaster.Alans own sacrices for the climate change cause include trad-ing in his gas-guzzling Porsche Cayenne for a Lexus Hybrid. Ican now drive to CDP meetings in a state of grace, he quips.He is also working on his house to reduce fuel consumption by

40-50%, by improving insulation and replacing two boilers withsuper-efcient zoned central heating, and totally renewing alllighting. Insulating buildings enjoys a very rapid payback of the

original investment, he reminds us. This writers own personalexperience bears that out. After taking advantage last autumnof a subsidised cavity wall insultation scheme at a total cost ofless than 250 for a house with around 1650 square feet of oorspace, energy bills have already dropped by more than 50 amonth. On that gure alone, payback took about ve months.

Alan is also devoted to his work for the CDP, an entirely vol-untary project whose objective is to persuade companies to dis-close details of their carbon footprints. The CDP boasts namessuch as former US President Bill Clinton, former UK PrimeMinister Tony Blair, and the current German Chancellor AngelaMerkel on its roster. It has grown year-on-year both in terms of

the number of companies participating in the disclosure and inthe quality of the reports that they produce on their corporatecarbon emissions. The CDP says thousands of companies takepart each year. More information can be found at: http://www.cdproject.net

This has come as something of a personalclimate change. Although his brotherwas always a conservationist, Alan was

originally a scientist. He holds a degree in natural sciencefrom Christs College, Cambridge University (for the sake ofpedantry we should probably add England, to differentitiate itfrom Cambridge Universities elsewhere). We wont go into thequality of the degree, he says. I would probably have got a rstin punting.

For some time Alan and his brother wouldnt speak to oneanother, even though he was not what today would likely belabelled a climate change sceptic. Or, even more emotively, giventhe strong linguistic link with a genuine man-made disaster, aclimate change denier. It is hard to believe that global climatechange is not being caused by mankinds activities, he saysin the quiet, personable, reasonable way that comes to deneperceptions of his character.

Schroders launched the Climate Change Fund at the end ofJune 2007, aiming it initially at retail investors. Alan takes greatpains to stress that Schroders launched the fund not to enhanceits green or eco credentials, but to make money, investing inmainstream manufacturing companies who will nd themselvesvery much in what he calls the fast owing part of the river.From a fund managers perspective, and whatever the topic ofdiscussion the fund manager in him inevitably forces its way tothe front, it would be dangerous to have a narrower focus onareas such as solar energy and wind power, he says.

The fund was the rst of its kind in the UK, offering investorsexposure to companies involved in mitigation of (measures

Alan Brown of Schrodersby Sameer Shalaby

Go Green, MakeMoney!Go green, and makeyourself some money.That is the advice ofAlan Brown, ChiefInvestment Ofcer atSchroder Investments.Not only will you bemaking a contributionto saving the planet,youll be helping toprepare for mankindsnancial future.

Losers could

include

Personal climate

change

8/8/2019 ISJ 048

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to reduce carbon dependency), or adaptation to (changes toadapt to the consequences of), the effects of climate change on aglobally diversied basis. Simon Webber and Matthew Frank-lin (Joint Fund Managers) are supported by a team of climatechange specialists, global sector specialists as well as Schroderswider global network of 80 experienced large and small capanalysts.

Simon Webber commented at launch:Investors simply cant afford to ignorethe realities of climate change. Across all

sectors, climate change will have a broad and lasting impactalong the value chain. For the mainstream equity investor, nowis the time to adopt a global approach to what will be a majorinvestment theme for the foreseeable future. Crucially, Schrod-

ers has the capability totake a global approachto a global challenge enabling us to identifythe broadest possible

opportunity set.

Before launching thefund, Schroders estab-lished a proprietary data-base of companies wherethe effects of climatechange have a signicantimpact on the long-term

investment case. Having established the investment universe,the team is focused on the very best ideas that have been identi-ed by Schroders global equity team and locally based equityportfolio managers and sector specialists.Robin Stoakley, Managing Director UK Retail said: We believethere are excellent returns available by investing in companieswhich will benet from efforts to mitigate and adapt to climate

change. Dealing with climate change is likely to be the biggestglobal investment theme of the next 20 years plus.

The rapidly changing landscape will enable innovative, exibleand well run companies to improve their prospects relative tocompetitors, leading to strong investment returns. We believean unconstrained portfolio dedicated to investing in thesewell positioned companies has the potential to generate verystrong investment returns. This is not just about a few windfarms.By mid-2009 it had begun to experience institutionaltake-up and Schroders was entrusted with $200m by an institu-tion (WHICH ONE?) to invest in accordance with the fundsstrategy.

The funds investment objective is toprovide capital growth primarily throughinvestment in equities and securities of

worldwide issuers which will benet from efforts to accommo-date or limit the impact of global climate change. Investmentwill be primarily in directly held transferable securities. Thefund may also invest in collective investment schemes, cash,deposits, derivatives, warrants and money market instruments.

The ISJ ProleAlan Brow

Climate change

launch

Investment

Objective and

Policy

Investors simplycant afford toignore the realitiesof climate change.Across all sectors,climate change willhave a broad andlasting impact alongthe value chain."

8/8/2019 ISJ 048

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The fund holds investments denominated in currencies other

than sterling, changes in exchange rates will cause the value of

these investments, and the income from them, to rise or fall.

The fund can use derivatives for investment purposes. These

instruments can be more volatile than investment in equities or

bonds.Potential investors in emerging markets should be aware that

this can involve a higher degree of risk. Less developed mar-

kets are generally less well regulated than the UK, investments

may be less liquid and there may be less reliable arrangements

for trading and settlement of the underlying holdings. Invest-

ments in smaller companies can be less liquid than investments

in larger companies and price swings may therefore be greater

than in larger company funds. The fund is not tied to replicat-

ing a benchmark and holdings can therefore vary from those in

the index quoted. For this reason the comparison index should

be used for reference only. By June 2010, the Climate Change

Fund, managed by Simon Webber and Matthew Franklin, was

worth 28.8m.

Its top 10 of 72 holdings in descending order of percentage

holding are: Polycom, (communications) BG Group (oil, gas

and consumable fuels), Lowes Companies, (speciality retail),

Cisco Systems Inc (communications equipment), Honda Motor,

(automobiles), Hansen Transmissions International (Ma-

chinery), Sekisui Chemical (household durables), Koninklijke

Philips Electronics (industrial conglomerates), Muenchener

Rueckversicherungs (insurance) and DuPont de Nemours

(chemicals).

Historic yield is 0.0%. Growth since launch is 5.5%, compared

with 1.0% for its benchmark index, the MCSI (World( NDR

GBP

The ISJ Profle Alan Brown

Alan Brown at a glance

Joined Schroders in 2005 and is a Director of Schroders plc.Joined State Street Global Advisors, initially as Managing Di-

rector of the London ofce, and later as Group Chief Invest-

ment Ofcer and Vice Chairman of SSgA, and Executive Vice

President of State Street Corporation. He joined Posthorn

Global Asset Management in 1984 as Head of Fixed Income,

moving to PanAgora Asset Management as Chief Investment

Ofcer in 1989.

Investment career commenced in 1974 upon joining Morgan

Grenfell as an equity analyst before moving to New York to

go through the JP Morgan Commercial Bank Management

Program. He returned to London becoming an International

Fixed Income Fund Manager, eventually moving up to Direc-

tor of Investments responsible for all Fixed Income.

Member of the Group Management Committee. Externally

he is Chairman and Treasurer of the CERGE-EI US Founda-

tion (Centre for Economic Research and Graduate Education

- Economics Institute), CFA Advisory Council for Market

Integrity, MSCI Barra Editorial Advisory Board and Carbon

Disclosure Project Advisory Board.

BA, MA in Natural Science (Physics), Cambridge.

Risk Profle

8/8/2019 ISJ 048

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C R A F T IN G T H E vision FOR THE securities industry

FOR ADDITIONAL INFORMATION VISIT www.isitc.org390 Amwell Road, Suite 402, Hillsborough, NJ 08844Phone +1 (908) 359-1184 Fax +1 (908) 359-7619 E-mail [email protected]

ISITC September 2010 Industry Forum & Working GroupsSeptember 12- 14, 2010

Four Seasons Hotel, St. Louis, MO

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Dont miss the chance to represent your firm and participate in

ISITCs ongoing industry forums and working groups.

We look forward to seeing you in St. Louis!

The Essential Work of ISITC Continues.

8/8/2019 ISJ 048

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Much has been written about the potential effect of the EUsAIFM Directive, and much more will certainly be written. Der-mot Butler shares with ISJ and its readers his thoughts on theDirective and other popular topics of discussion, even thoughthe nal result is not yet known at the time of writing.

I have no idea when it will be nalised. It appears that there isan impasse between the European Parliament and the EuropeanCommission and, if there isnt a sensible compromise and theDirective is passed on the basis of the worst options, then wewill have chaos. I personally think it is unlikely to be passedbefore the end of this year and, therefore, will run into the next

presidency. Whatever happens, I think it is unlikely that it willbe implemented before the end of 2012 and, speaking in the in-dustry, there are those who think it will just wither on the vine.

I dont think that we will have forgotten the lessons of the pastthree years, although I am not sure that is a relevant questionto AIFM. The AIFM Directive was denitely a political movethat had no real direct relationship to either the involvementof hedge funds in the economic debacle, or the potential forsystemic risk and the requirement for investor protection.

Marketing Non-EU Funds Into Europe

It would appear that the only way non-EU funds will be able tobe marketed into Europe and sold to EU member state inves-tors, will be if those non-EU funds are able to comply with EUregulations. More importantly, the managers of those non-EUfunds, if they are not EU registered, will have to undertake tocomply with EU regulations on transparency, reporting, etc.,and the regulator of the non-EU manager will have to conrmthat they will police the managers compliance with the EUregulations. I think this is never going to happen in the contextof the US regulator and, therefore, it is unlikely that a US-resident manager will be able to manage either an EU fund or anon-EU fund that can be sold in the EU.

Therefore, in order to be able to market a fundto EU member state resident investors, a non-EUregulated manager will probably have to set up an

EU-regulated manager who will be able to complywithout tainting the non-EU parent of the manage-ment company.Thus, it will be much more difcult for managersto market their products, however structured, intothe EU. This will reduce competition to the extentthat many managers will probably just not bother tomarket to the EU, but, more important than reduc-ing competition will be the fact that investors willbe limited in the choice and probably the quality ofservice with regard to certain hedge fund products.It is certain that investors will miss out on soundinvestment opportunities. I would like to think the

authorities do not have the faintest idea about whatthey are doing, because if they do understand what

they are doing, then it would appear that they have positivelyevil motives.

I do not believe it is a measured reaction to recent times in thecontext of hedge funds, because, as already stated, hedge fundswere not responsible for the nancial debacle. I do think that itis a knee-jerk reaction and the draft Directive, when it was rstissued in April of last year, was so blatantly obviously politicallymotivated and, unless it is improved substantially more than ithas been to date, it will turn out badly.There is a contention that one of the main motives is investorprotection and this follows the Madoff scandal. The irony isthat Madoff never had a hedge fund and that there were severalUCITS funds which invested in Madoff and lost all their money.This somewhat destroys the illusion that the regulated UCITSfund adds to investor protection.Restrictions on EU-resident investors investing out

of the EU into non-EU authorised funds

This seems to be very dictatorial and unreasonable Big Brother-ism. Investors into hedge funds are, virtually without exception,

Sophisticated Investors. It seems to me that this regulation isinfringing their liberties and could, no doubt, result in somelegal action down the road, under EU freedom or human rightslegislation. Where are Phil Goldsteins cousins when we needthem? [Phil Goldstein was the hedge fund manager who wona landmark action against the SEC for trying to force registra-tion of funds when they had no legal authority to do so]. Sucha regulation will reduce the competition and it will be bad forinvestors in the context of choice and the fact that they will missout on some perfectly good investments opportunities.

My comment above about authorities not having the faintestidea about what they are doing applies, although in this case I

Regulation EFAMA ON UCITS

On AIFMD, UCITS:The view from Custom House

Dermot Butler:It appears that

there is an impassebetween theEuropean Parliamentand the EuropeanCommission and, ifthere isnt a sensiblecompromise, thenwe will have chaos.

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think it is likely they do know what they are doing and one oftheir objectives is to nd out where everybodys money is and tocontrol it. It is not a measured reaction to anything and it maywell be a knee-jerk reaction and will turn out badly.

The likelihood is that both of these regulations are likely tolead many non-EU managers deciding to ignore the EU market

and that will lead to an increase in isolationism because I thinkmany European managers will have the same reaction to therecently introduced US regulations.

The benet of setting up in the EU as a manager or

fund

Obviously the main benet of setting up in the EU, whethersetting up either a manager and/or their fund in the EU, is thattheir fund will be able to be marketed to EU residents. I thinkit is likely that, if a manager wishes to go through the hassle inorder to market to EU investors, they will have to establish amanager in an EU jurisdiction on the understanding that that

manager will have to comply with the EU regulations which wehave already discussed. On that basis they will also be able toset up the fund in the same or another EU jurisdiction and willthen be able to market their fund in the EU, to EU Investors.UCITS

UCITS were originally introduced in 1985 as a counterpart tothe US mutual fund and is a product that could be marketedto retail investors in Europe. Although it has gone throughseveral changes, UCITS have always had restrictions regardinginvestments and quite strong regulation to protect investors.Although some of those restrictions have been eased, never-

theless there are only very few hedge fund strategies that canutilise UCITS without substantial amendment to their normalstrategy. Selling short for any reason other than hedging is verydifcult but this has been achieved by introducing derivativesincluding swaps.

It seems to be that the current popularity of UCITS

is based on three perceptions:

They will automatically give access to the European market;They are strongly regulated and therefore safer;They will not be subject to the restrictions under the AIFM

Directive, however the manager will in all likelihood have tocomply with the restrictions, that have been discussed above,with regard to complying with AIFM requirements.

The drawback with regard to UCITS and hedge funds strategiesas I understand it, is that it is still not possible to have nakedshorts within a UCITS strategy, although short positions can beestablished in indices or similar vehicles if they can be shown tobe hedging the portfolio or specic parts of the portfolio. Thus,it would be possible to hedge by going short of an index or ETFproviding the fund was long of securities that comprise, in part,the index or ETF in question. Similarly presumably the fundcould sell short of stock-specic futures contracts. However,

as I understand it, a fund cannot sell short of a motor index inorder to hedge a long position in pharma stocks.

It can be seen that the now common or garden merger arbi-trage, convertible arbitrage and even long-short equity fundswill have to modify their strategies in order to meet UCITS reg-ulations. Some will never be able to do so. On the other hand

a professional investor, long-short hedge fund, can be moreprecise about what it wishes to short and therefore presumablygenerate greater prots or smaller losses.

UCITS are more expensive to establish than a professional investor

fund and have higher operating costs. This is because:

Legal costs in terms of UCITS funds are very much higher thanthey are for what are almost boiler plate professional investorfunds. Those establishment costs have to be written off in therst year of operation unless the auditors are reasonably exible;Annual operating costs are higher because you have to have acustodian and the reporting and supervision requirements for

UCITS are very much more onerous and penalties for error arevery much higher for UCITS funds. Director fees are higher,audit fees tend to be higher, and there is almost certain to besome ongoing legal work with lawyers attending every quar-terly board meeting and very often having to update or amenddocumentation.

Investment manager fees dont come into the picture, as theyare the same for both types of funds. I dont think that non-UCITS funds are charging too little just that the structure ofUCITS funds makes it more expensive. It is correct that mostUCITS funds, which are generally mutual funds, have morethan $1m NAV (net asset valuation), but that is not the casewith hedge funds anymore.

To go back to my previous comment, the perceived

benets of UCITS funds are:

Greater distribution and a way of attacking the retail market.This is true, providing you have the distribution. Most hedgefund houses do not have the distribution and have to rely onthird parties. Hedge fund strategies are much more difcultto explain and many long only funds mutual fund/unit trustmarketers - do not wish to fall foul of the best advice regulationsin terms of marketing a hedge fund UCITS to retail clientele.

UCITS are more expensive to establish than a professional investor

fund and have higher operating costs. This is because:

1. Investors may think that because a UCITS fund has higherregulation, it needs less due diligence. Good regulation doesnot prevent the appointment of an incompetent investmentmanager.

2. It seems to be forgotten that there were at least two andpossibly four UCITS funds in Ireland and Luxembourg thatwere invested in Madoff. Therefore the UCITS structure hasnot, to date, prevented a crook taking money out of the UCITS

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www.pensionfundsonline.co.uk is the online source for pension fund

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www.pensionfundsonline.co.uk is the online source for pension fund

information created by the publishers of Pension Funds and their Advisers

(AP Information Services)and the joint publishers of International Pension

Funds and their Advisers (AP Information Servicesand IPE magazine).

This innovative online product has been developed to compliment the

use of both our pensions print directories Pension Funds and their

Advisersand International Pension Funds and their Advisers.

With options ranging from read-only to fully downloadable,

www.pensionfundsonline.co.uk gives you fully up-to-date information

on 6,500 UK and international pension funds at any time during your

12-month subscription.

www.pensionfundsonline.co.uk gives you access to:

Over 6,500 UK and international pensions funds and over 4,600 key

advisers to these funds

Easy-to-use and flexible search facilities allowing you to make selections by

fund sizes (in various currencies), adviser, country and industry

Hypertext links allowing you to skip between major funds and their

advisers with many hotlinks to company websites also available

On the fully downloadable version your search results can be output as csv files.

For further information including read-only and fully downloadable

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funds;

3. The UCITS fund avoidsthe AIFM Directive. This istrue as far as the fund goes,but it does not reduce theburden that has to be borne

by the investment manager it is after all the AlternativeFund Investment Manage-ment Directive.

If the manager has qualieddistribution arrangements,then it may be worth settingup a UCITS.Some of the big hedge fundmanagers have been able to

seed their UCITS by way of a transfer of subscriptions fromtheir existing offshore funds into their UCITS fund. Others

have very effective distribution networks such as MANS AHLFUND, and Winton, and I have no doubt that if they establishUCITS they will be able to get investors interested and meettheir $100m level quota in a relatively short time.It may be that a manager is in contact with a European institu-tion, or for that matter an Asian institution, which is mandatedto restric investments into hedge funds by way of UCITS. Theycome across an investment manager whose strategy they likeand are prepared to invest $100m but require a UCITS. Itwould be a very arrogant manager who didnt go through theprocess of establishing their own UCITS to meet the require-ments of those investors.

If the manager does not fall in under any of these options then,to make the UCITS successful he will need to establish some

form of distribution arrangement. The problem, that I havealready alluded to, with hedge fund and CTA strategies, is thatthey are more complex and therefore more difcult to explainto the average retail investor, who is likely to be inuenced bysomewhat biased tabloid and broadsheet press, but that is awhole other subject. It is my understanding that several UCITS i.e. many more than can be counted on one hand - have been

formed, but Im sure only a very few have raised any meaningfulmoney. That is probably because they fall under one of the threeexamples above.

You ask if we are going to see more fraud and theft. I am notsure that I see the connection between fraud and theft and aninstitution that wishes to invest in a particular strategy butis restricted from investing in anything but a UCITS vehicle.Having said that, it must be realised, that in any situation wherelarge sums of money are circulating, whether it is in the hedgefund Industry or anything else, that fraud and theft are likely tobe seen. Prohibition is the perfect example.

I have never believed that regulation per se stops the dedicatedcrook. It may stop or hinder the opportunistic thief, but thededicated crook will carry on regardless. I agree that withouttrust the Western economy is doomed but I dont think that itis doomed just because of some high-ying crooks. To put itanother way, you may only want to buy a house that has got agood alarm system, but we all know that wont prevent a cleverburglar, especially if you happen to be away from home. Thefact that you may be the victim of a clever burglar does notmean that you do not buy a house and choose to live in the parkinstead.

My comments, specically regarding Madoff, are not thatUCITS regulation is imperfect because Madoff existed. Whatwas imperfect about the UCITS regulations was that several

UCITS funds were able toinvest money with Madoff,either because the managerswere careless or because themangers did not follow theinvestment restrictions thatwere imposed on their funds.Madoff never had a fund.The error in this case appearsin regard to the managers

of the UCITS funds failingto do their due diligenceon Madoff. The problemwith Madoff was that it wasa huge sum of money thatitself was dwarfed by the sub-prime collapse. If you readThe Big Short by MichaelLewis, then one is inclinedto think that the sub-primemortgage market was run bybigger and better crooks thanMadoff ever was.

If the managerdoes not fall inunder any ofthese options

then, to makethe UCITSsuccessful he willneed to establishsome form ofdistributionarrangement.

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The onward march of themultilateral trading venuescontinues, while opinions aboundon which will be next to throw

in the towel as the inevitability ofconsolidation in an oversuppliedmarket begins to bite. RecentlyTradeweb Europe was ranked No.1for xed income trading and Chi-Xwas ranked No.1 for equitiestrading, according to clients ofXtrakter, a provider of post-trade

services and data to the capitalmarkets.

The most recent edition of its liquidity-tracking tables for thesecond quarter show that the top ve execution venues for xedincome were as follows: Tradeweb Europe (3.8% of the totalxed income transactions processed by Xtrakter during thisperiod); Bloomberg Tradebook (2.12%); MTS S.P.A (1.14%);ICAP Electronic Broking (1.00%); Bondvision (0.73%).

Xtrakter noted that when reviewing the combined venues ofexecution data that the MTS group captured 1.77% of totalxed income activity. OTC remains the preferred method for

Xtrakter clients to execute xed income trades representing85.03% of the total share processed.

When comparing Q1 & Q2 2010 percentiles relating to xedincome trading Xtrakter highlighted the following: the levelof trades executed OTC dropped by 0.64%; Tradeweb Europeincreased its share by 0.61% and Bondvision rose by 0.10% ofthe total amount of xed income transactions processed byXtrakter.

The top ve execution venues for equities during Q2 2010 asprocessed by Xtrakter were as follows: in rst place was Chi-XEurope (27.79%), in second place was NYSE Euronext - Paris(11.61%), in third place BATS Europe (11.22%), in fourth placeTurquoise with (6.39%) and in fth place the London StockExchange (6.21%).

Xtrakter noted when reviewing the combined venues of execu-tions that the NYSE Euronext group of companies captured17.87% of the total equities share. OTC execution represented9.34% of all equity trades conducted by Xtrakter clients duringthis period. A detailed breakdown of the top 10 venues andtheir percentiles is listed onXtrakter.com.

When comparing the percentiles for the rst and second quar-ters of 2010 relating to equity trading the following was noted:

The London Stock Exchange lost 4.54% of its share; Chi-Xdropped by 2.30% & NYSE Euronext Paris rose by 2.66% ofthe total amount of equity transactions processed by Xtrakter.

In 2009, Xtrakter calculates that it processed 578m transactionson behalf of its user community. It adds that its league tables arebased on the number of transactions processed by Xtrakter andnot by their nominal value.The tables do not include data relating to systematic internal-isers or general data for trades conducted on the LSE stockexchange trading system.

The consolidation of MTFs is more or less inevitable, according

to seasoned industry observers, following the pattern of behav-iour already experienced in the USA. At the last MTF mini-census, CESR (Committee of European Securities R

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