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Key considerations of the fund manager - Coggle Diagram
Key considerations of the fund manager
Whatever bracket of investor is concerned, an element of questioning will arise when determining where to place your money for investment, including asking who is managing the potential for your investment returns
While every fund manager will caution an investor that the value of investments may go down as well as up and there is no guarantee that profits will be generated at all, no investor goes into an investment hoping to lose money
Finding a fund manager to whom you are willing to entrust your own or your clients capital is key and must not be entered into lightly
The best fund managers are those that do what they promise, and so the investment parameters are the first point of research for assessing the fund manager, what is it they say they can do with your money to generate returns?
Investment funds are required to issue offering documents, where these investment parameters must be laid out in a clear and transparent fashion
Offering doc: what will investor money be invested in?
When considering investment objectives, investors will need to consider just what it is the fund intends to do
In doing so a reasonableness test must be considered
Easier for funds with tried and tested investment objectives and thus a readily available source of information against which to compare, a more esoteric asset class or set of investment objectives where there is generally less published information for comparison may require different thinking in order to become comfortable with the proposition
This becomes a matter of an investor asking themselves, does it make sense? Is there a purpose for this? Is there a need for it? Is there a demand for it?
What is the offering doc intending to deliver?
The anticipated result of delivering the investment objectives seems reasonable in all of the circumstances, this is an investor asking themselves, does it look reasonable or does it look too good to be true?
Independent research should be conducted to gauge average returns not only for the type of investment involved but also those generally being generated in the wider context of investments
Eg if investments are bringing returns of 5% pa, an investment offering 10% pa might warrant greater scrutiny before either becoming comfortable with it or otherwise determining that it is too risky or otherwise unsuitable - eg potential fraudulent activity
Offering doc: who is responsible for that delivery and what is their track record?
This information might be more difficult to obtain as private funds or other investments will not generally have published information on them outside their own investors and related parties
One source of information will be to review what is available publicly, whether through online research or requesting information from other sources
As an investor's own fire power grows, so does its ability to obtain information on fund managers, even when it would ordinarily be kept private
Such investors will be invited to road shows or private meetings where the fund manager will go into some detail as to their experience and the performance of previous ventures, whether on a collective or individual basis
For the largest investors, fund managers will entertain far-reaching questions about past performance
As in all industries, some emerge as rock-stars and attract investment easily while others have to work harder to gain critical mass or recongition
Investors should not be drawn to rock starts before they have done their homework, many of these reputed fund managers deserve their reputations but there will always be those who abuse their positions
What incentives, or red flags, exist in respect of the fund manager?
No fund manager is managing investor money for altruistic means
The goal for every fund manager is to make money by managing the money of others fruitfully for which they may claim both management and performance fees
Management fees may be viewed by most to be generous, typically somewhere between 0.5-2% of the fund's AUM pa and therefore a lucrative form of revenue in its own rights
The true value potential for the fund manager comes from the performance fees that may be earned
As a performance fee is paid when the investment fund outperforms its investment targets, investors must consider that this creates a potential incentive for the fund manager to take risks to achieve the highest possible returns
Whilst certain levels of risk taking are expected, investors must consider whether the levels of risk are reasonable or excessive in the circumstances
What fail safes or other measures in place to monitor how that delivery is brought about?
Large investors will have in place numerous fail safes of their own, most generally through the ability to lose money on some investments as they form part of a widely diversified portfolio, for this reason a certain amount of losses can be comfortably borne while still generating a positive return in aggregate
The smaller the investor the larger the likely detrimental impact of an investment fund returning losses or significant under-performance
Law and regulation has been and is continually being enacted to deliver protection to the most vulnerable of investors in the market
At the investment fund level, regulation requires that key information on an investment fund is available through the offering document and through regular reporting eg financial statements
Some regulators will also require more subtle forms of investor protection including
The requirement to separate investment management from the risk element of the fund, this is becoming more prevalent with AIFMD being a primary example of how risk management and portfolio management have been separated as a matter of law
A more traditional model for investment funds is to have the fund board largely separate and thus independent of the fund manager. The independent board can hold the manager to account for its management of the fund. In these types of funds, shareholders have the right to vote on any changes in investment policy or investment objective as well as significant changes to the manager's fee structure. Many of these funds hold a continuation vote every 5 to 10 years where shareholders are able to vote on whether they are satisfied with the performance of the fund and whether they would like it to continue
In an open ended fund, investors do not typically have the right to vote, and instead the regulator will review the ongoing performance of the manager on behalf of the investors. When the manager wants to change a key provision in the Offering Doc there is a specific process to follow to ensure that all investors are made aware of the change and given the opportunity to leave the fund before the change takes place
The appointment of a custodian is another form of investor protection. Custodians are a regulatory requirement of many offshore investment funds and are engaged to safeguard the assets, typically by taking on the legal ownership or safekeeping of them in order to prove their eistence. The custodian will also monitor the conduct of other key parties to the fund (eg in the way they generate the funds valuations) and the way in which they deal with investors (eg through the presentation of financial information and at the point of subscribing or redeeming)
The requirement to publish and maintain a key information document for certain investment products such as hose within the scope of the EU Packaged Retail Investment and Insurance Linked Products which is a standardised document setting out key risk and performance criteria as well as scenario analysis with the intention to inform investor decision making