N° 3 · March 2005

Guarding against hedge fund fraud

Guarding against hedge fund fraud

10 33 35 44 Is the U.S.

the World’s BiggestHedge Fund?

Industry chief wary

of too many rules

Venturing on the Open Seas of Investment….Without Sails?

Special ReportSuccess in Asia

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INDUSTRY EVOLUTION

3march 2005

EDITORIAL5 Guiding Principles

By Pierre Christodoulidis

NEWS7 By David Miller

SPECIAL CONTRIBUTION10 Is the U.S. the World’s Biggest

Hedge FundBy Daniel-Sacha Fradkoff

INDUSTRY EVOLUTION16 A European tour of independent advisors

and financial intermediariesBy Mohammad Farrokh

LEGAL & REGULATORY20 Up the down staircase

By Yvette Kantrow

24 Aren’t we asking too much to credit rating agencies ?By Robert Pouliot

27 Guarding against hedge fund fraudJulie Dalla-Costa

33 Industry chief wary of too many rulesBy John Murray Brown

INVESTING – HOW TO NAVIGATE35 Venturing on the Open Seas

of Investment….Without Sails?By Véronique Bühlmann

38 The case for assets consolidation By Mohammad Farrokh

40 Anyone wants to be bored to death? By Véronique Bühlmann

SPECIAL REPORT42 Success in Asia

By Jean-Pierre Ziegler

44 The Polish Association of Financial Consultants and Intermediaries

46 VOTUM: Partner of independent financial services companies

48 An introduction to APCIMS – representing the private client communityBy Angela Knight

OTHER VOICES 49 Now the big currency question:

The buck stops where?By Jeremy Gaunt

TRUSTING – The IndependentFinancial AdvisorOwnerCIFA FoundationRue du Vieux Collège 3P.O. Box 3255 · 1211 GENEVA 3 SWITZERLANDTel: +41 22 317 11 11Fax: +41 22 317 11 77www.cifafound.chEditorial BoardPierre Christodoulidis,Executive President of CIFAVincent J. Derudder,Secretary General of FECIFRené W. Rohner,Secretary General of CIFA

PublisherRoland RayPromoédition SA Quorum CommunicationRue des Bains 35 P.O. Box 5615 · 1211 Geneva 11SWITZERLANDTel: +4122 809 94 70Fax: +4122 809 94 00www.quorum-com.chManaging EditorDominique Flaux

Contributors Veronique Bühlmann, PierreChristodoulidis, Julie Dalla-Costa,Mohammad Farrokh, Daniel-SachaFradkoff, Jeremy Gaunt, YvetteKantrow, Angela Knight, DavidMiller, John Murray Brown, RobertPouliot, Jean-Pierre Ziegler.

AdvertisingJohn J. RolleyImpressa SA 25 Route des Acacias1227 GenevaTel: +4122 301 48 38Mob: +4179 202 01 50jrolley@swissonline.ch

Art DirectorMichel Klex

Production Maryse Avidor

Printed in Switzerland

Nr 3 · March 2005

Guarding against hedge fund fraud

Guarding against hedge fund fraud

10 33 35 44 Is the U.S.

the World’s BiggestHedge Fund?

Industry chief wary

of too many rules

Venturing on the Open Seas of Investment….

Without Sails?

Special ReportSuccess in Asia

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EDITORIAL

All economic activity is focused on the publicand the consumer, otherwise it has no eco-nomic justification. For its survival, however,all economic enterprise is dependent on public confidence.

“Consumers, the public and legislators are alltaking a long, hard look at the way compa-nies are managed,” a friend of mine recentlycommented, particularly concerned at thetidal wave of economic and financial scan-dals, unprecedented in modern times. This concern is all the more serious since the phenomenon is not restricted to one par-ticular size of company or sector.

This wave of malpractice with its disastrousand long-lasting impact, striking a blow at thevery heart of the so-called “free enterprise”system, has led directly to a proliferation ofregulations which, in present circumstances,could best be described in the popular phraseas “closing the stable door after the horse hasbolted”. This is unfortunately what happenswhen legislation is passed in haste under thepressure of events rather than taking time toreflect calmly on the practices which reallyneed to be banned.

A serious debate has to take place on theultimate morality of certain behaviour. Naturally, a change of this sort could notcome about without the introduction of regu-lations to govern professions, such as that of financial adviser, in which enormousresponsibilities are at stake. A Code of Professional Ethics would help to instil into

the culture of those working in the professionan awareness of the importance of consistently-upheld moral and ethical values. It would bea sort of Hippocratic Oath, the cornerstone ofa commitment to respect these values.

For the founders of CIFA, history is not whathappens to you but what you make happen,and nothing is impossible for someone strivingto recover his lost dignity. However, courageon its own is not sufficient; imagination isalso needed.

When a new order evolves from an act of the human will, that same determination isrequired if clichés and misconceptions are to be altered permanently. The creation mustbe a true reflection of the spirit behind it.

It is worth re-examining some of the propheticvisions of Ludwig Von Mises, who, as farback as the 1950s, when reflecting on thedevelopment of Europe, cautioned againstcertain abuses he feared, namely that “the welfare state is immoral … inflation isrobbery in disguise … and supranationalstructures are a prescription for chaos andbureaucratic rule” – going further by empha-sizing “the centrality of ethics in the study of economics.”

These are some of the guiding principles ofthe founders of CIFA, which, after the disas-trous period we have experienced, are clearlythe result of a determination born out of thesearch for a consistent balance, a continuously-renewed solidarity between the public,the consumer and his adviser. It takes up thechallenge of the future by providing opposi-tion to strong-arm tactics by the authorities,a dark and anonymous body whose motivationand profile are often difficult to make out.

Instead of fighting against this opposition,we should be encouraging it.

Pierre ChristodoulidisExecutive President of CIFA

5march 2005

Guiding principles

“I prefer to do right and get no thanks than to do wrong and receive no punishment.”

Marcus Cato

NEWS

News briefsNews briefsNews briefsNews briefsNews

EQUITABLE LIFE POLICY HOLDERS ADVISED TO SWAPEquitable Life policy holders are beingadvised to swap to a company with a moreaggressive asset allocation since Equi-table’s with-profits fund is now predomi-nantly invested in fixed interest and gilts.Based on the Penrose report, there is littlehope that staying with the company willimprove their chances of redress. Depend-ing on their contract and if they are farfrom retirement, they should switch.(Money Marketing)

SEC PROBES WALL STREETSTOCK MATCHINGIt is reported that Wall Street is under SEC

investigation again for alleged anti-com-

petitive practices. Some 12 brokerages are

being probed for ‘internalisation and pay-

ment-for-order-flow practices’. This cen-

tres on arranging that Nasdaq stock orders

are executed at the best possible price, pri-

marily in the early minutes of trading, and

thus possibly putting small investors at a

disadvantage. (New York Times)

MISLEADING ADS DRAW HEFTYFSA FINESMisleading advertising or statements ledthe FSA to impose hefty fines on IndigoCapital (£355 000) and Axa Sun Life(£500 000). The FSA said the advertise-ments did not provide sufficient informa-tion on how the products worked, and weretoo focused on product benefits and freepromotional gifts. Comparative data usedwas also inaccurate. (Professional Advi-sor)

FSA PROCEDURES CRITICISEDA review of the FSA’s investigatory proceduresis expected following Legal & General’s partialvictory over the city regulator. It was claimedthat the FSA might have exaggerated the extentof the mis-selling of endowment mortgages inthe late 1990s. The FSA’s investigation was crit-icised by the tribunal and the fine imposed onL&G of £1.1 million looks set to be reduced.There is concern that L&G’s ‘procedural errors’were known over a long period of time, but werenot judged serious enough to warrant significantaction. (Financial Advisor)

SINGAPORE GUIDE FOR IFASThe Monetary Authority of Singapore has

issued a guide on ‘good practices for

licensed and exempt financial advisers’.

The Guide recommends that advisers

adopt a remuneration structure for repre-

sentatives that rewards the building of

longer-term relationships with clients, the

provision of good advice and compliance

with regulatory requirements. Examples of

the good practices of some IFAs are

included. (International Investment)

INVESTMENT SCAMS TRAP PROFESSIONALS TOOOFTA, the trade body for offshore financial advisers,

warns that people are still getting trapped by overseas

scams that offer spectacular returns over short periods,

and that require sending large amounts of money to dif-

ferent countries. Many such scams have been investi-

gated involving high pressure selling techniques by

boiler rooms that may disappear once the money is

paid. Interestingly, a recent survey by the FSA (that has

a UK hotline for scam victims), showed that 41% of

victims had been investing for over ten years, only 12%

were first-time investors, while 30% were professionals

or directors. (International Investment)

DB ADVISORS’ LOSSESBRING RESTRUCTURING Difficult market conditions wereblamed for poor performance byDB Advisors that led to revenuesin both DB Advisors and convert-ibles being significantly below thelevels of the third quarter of 2003.DB Advisors was blamed foralmost halving the equity depart-ment’s 2004 third quarter’s rev-enue. Deutsche Bank AG isrestructuring its hedge fund busi-ness. (International Investment)

EU RULING OPENS UP FRENCHINSURANCE MARKETFound guilty of tax discrimination, France has

been ordered by the EU to apply the same pro-

cedure to European life assurance contracts dis-

tributed under freedom of services as it does to

French contracts. This opens the door to expan-

sion of operations in France by foreign insurers.

Until now, policyholders have had to pay a

higher rate of tax on exit from a non-French EU

contract. Foreign insurers will still have to

appoint a fiscal representative in France to col-

lect taxes. (International Investment)

TORIES TARGET FSA IN CUTSPlanned cuts in bureaucracy by the Con-

servatives could also affect the powers of

the FSA and Financial Ombudsman Ser-

vice. The aim is to replace the Financial

Services and Market Act with a new one

and to examine the effectiveness of the

FOS. A two-year consultation period has

been launched with industry representa-

tives by Tory shadow financial services

minister, Richard Spring. (Investment)

NEWS

ASSET MANAGERS TO LAUNCHHEDGE FUNDSA Morningstar survey that polled 58 Euro-pean fund manager groups overseeing3.132 trillion Euros of assets, showed that50% expect to launch a hedge fund in thecoming 12 months. Hedge funds, whichare lightly-regulated investment pools ableto make money even during falling mar-kets have grown popular in recent years.73% of surveyed respondents expect hedgefunds to take market share from traditionalfunds. (Morningstar)

FSA THREATENS UNSCRUPULOUS IFASThe FSA will take action against any IFA

that tries to impose fees on clients if they

make a complaint to the FOS. An increas-

ing number of IFAs have told their clients

they will have to pay the IFA’s fees if they

lose. The FSA has written to IFAs alerting

them it will take action against any IFA

attempting to recoup money from clients

registering a complaint against the adviser.

(Money Marketing)

PARIS-BASED CESR AS HUBOF EU’S FSAP?The Paris-based Committee of Euro-pean Securities Regulators is taking onadded importance as a player in theEU’s ambitious programme to create asingle market for banks, brokers, insur-ers and investment funds. The EU’sFinancial Services Action Plan is at thecentre of this activity as it passes fromthe legislative to the implementationphase. CESR is promoting an ‘adap-tive’ strategy to deal with varied levelsof integration in different financialmarkets. This will involve some bigchanges in existing practices and muchdeeper co-operation among nationalregulators. CESR believes the emer-gence of large trans-European financialgroups will test the limits of the tradi-tional system in which countries mutu-ally recognise each others’ rules andregulations. The need might arise toappoint a ‘co-ordinating supervisor’ forcertain tasks, and possibly the adoptionof pan-European decisions as part ofevolution towards a broader Europeansupervisory structure. (FinancialTimes)

EU UCITS DIRECTIVE LIMITS INDUSTRYThe European fund industry has

warned CESR that over-prescriptive

rules on the UCITS funds that can

be sold across borders risk impairing

the European investment industry.

The problem stems in part from the

‘interpretation’ of the CSER directive

on UCITS III rules by different regula-

tory bodies, some being more liberal

than others. Philip Warland of PWC

said ‘In the modern world, there is no

way of trying to define and constrain

risk by writing rules around invest-

ment powers and borrowing limits as

UCITS does. The only way to define

financial products is in the terms of the

risk and reward outcome.’Alan

Ainsworth, member of the Asset Man-

agement Expert Group says ‘In trying

to harmonise products, the directive

has created an inflexible framework

of regulation.’ Industry experts are col-

laborating in a review of the UCITS

directive. (Financial Times)

IRS TARGETS BANKINGSECRECY VEHICLESA few months ago, the US InternalRevenue Service brought to an end the‘Swiss solution’ that allowed non-Ameri-can beneficiaries of revocable trusts andfoundations to preserve their anonymitywhile investing in American securities.Today, a Swiss bank acting as a ‘qualifiedintermediary’ has the obligation to retain aflat 30% withholding tax from accounts ofindividuals generating interest and divi-dends from American securities. The 3-year period of grace has ended andthe IRS insists on complete transparencythus eliminating the value of revocabletrusts and foundations as a financial vehi-cle due to their loss of confidentiality. (Le Temps)

BIS EXPLAINS DOLLAR’S 3-YEAR DECLINEBetween 2001 and 2004, hedge funds,managed futures and currency fundsplayed a major role in pushing down theUS dollar, according to a report from theBank for International Settlements. Foreign exchange activity surged by 57%to US$1.9 trillion, while trading betweenbanks and financial customers increased by78% in the same period. Money managersand hedge fund investors became increas-ingly interested in foreign exchange as anasset class and followed momentum trad-ing to exploit long swings and runs. Currencies as an asset class tended to out-perform equity and bond markets in thesame period thus encouraging an increas-ing scale of speculation. However, criticallows and peaks tended to catch hedge andmanaged futures funds by surprise. (The Business Times Singapore)

2004: BANNER YEAR FOR SINGAPORE FUND INDUSTRYNew asset inflows in 2004 are reckoned to

have surpassed even the 35% growth

recorded by MAS for 2003. Underpinning

the inflows is the renewed interest in Asian

equities and fixed income assets among

global investors. The number of offshore

investment funds registered for retail sale

has also burgeoned. Some fund managers

are reporting asset growth of well over

50%. One consultancy firm predicted

Singapore managed hedge fund assets

would hit US$3 billion by end-2004,

up from US$2.5 billion at mid-2003.

(The Business Times Singapore)

6-COUNTRY COMPARISON OF HOURLY SALARIESIn a 6-country comparison of hourlysalary costs including social contribu-tions, Germany comes off most priceyat 121, France second at 100, the USAat 86, Italy at 81, the UK at 77 andSpain at 68. (France en Chiffres)

NEWS

AITC REQUIRES MANAGER COMMITMENTThe AITC has published a paper, ‘Evalua-tion of the Manager, requiring the commit-ment of non-executive directors to theinvestment trust sector. The Associationsuggests that assessment be based notpurely on past performance but that con-sideration is also given to the experience,skills and commitment of the individualinvolved, the resources and reputation ofthe management house, and the level ofskill and care they bring to the job.(Investment Mid-Week)

FSA HIGHLIGHTS FEE DISPARITIESFSA figures revealed IFAs were receivingalmost a third more commission forinvestors making a monthly contributioninto collective investment schemes com-pared with lump-sum investors. The FSAhas calculated average commission levelsfor a host of investment products in prepa-ration for the new menu system, whichcompelled advisers to disclose marketaverage rates and maximum commission.(Investment Week)

FSA TOLD TO CUT IFA COMPLIANCE COSTSA review of the Financial Services andMarket Act 2000 concluded that the FSAshould complete improvements to reducecompliance costs and the financial burdenon IFAs. The FSA acknowledged that thecost of regulation was disproportionatelyfalling on smaller businesses and wouldwork with the IPP to ease the burden.(Financial Adviser)

IFA CHALLENGES FOS IN OVER-FUNDING CASEA case of over-funding a pension hasthrust the FOS into the spotlight after anIFA decided to challenge a ruling forcinghim to repay client contributions. The IFAclaims he followed best advice at the timethe free-standing additional voluntary con-tribution scheme was sold. Unusualchanges in the professional circumstancesof the female beneficiary brought about aconflict with Inland Revenue rules. With-out an appeal, the IFA must repay all con-tributions made through the FSAVC.(Financial Adviser)

COMPENSATION COSTSEXCEED FSCS LEVYProduct providers will pay just 20% of anIFA’s Financial Services CompensationScheme levy compared with the 85% paidlast year, because the levy has climbed somuch. The Association of IFAs had previ-ously negotiated a voluntary FSCS levysupport deal of around £6.7 million, butthis is a fraction of the £33 million nowrequired from IFAs. Some IFAs have saidthey will not pay the increases but AIFAcounselled that it is not worth being struckoff by the FSA and that IFAs should atleast pay the anticipated amount before thedeadline and then work out somethingdirectly with the FSA for payment of therest. (Money Marketing)

THE INSURANCE MEDIATIONDIRECTIVE (2002/92/EC)The final deadline for transposition of theIMD has already passed (Saturday, 15thJanuary 2005). The European Commissionwill not/cannot grant any derogation fromthe implementation date.The Commission will automatically com-mence infringement proceedings againstall Member States which have not imple-mented the IMD on time.Of the 28 Member States of the EuropeanEconomic Area only the Czech Republic,Denmark, Austria, Hungary, Latvia and theUnited Kingdom will have transposed theDirective on that date.On 21 December 2004 the Commissionissued a summary of the meetings with theMember States which took place on 17thJune and 8th October 2004. These meet-ings were aimed at clarifying some aspectsof the IMD (including questions fromBIPAR) and assessing what would happento Member States who did no implementon time.The meeting concluded that a summary ofthe status at Member State level of imple-mentation, definition of the Member Stateauthority for notification and whether ornot Member States wished to be notified ofthe intention of cross-border intermediaries(only one did not) shall be produced beforethe implementation date.In most Member States, Intermediaries ofall forms and particularly independentintermediaries selling across borders in theEEA are subject to profound legal uncer-tainty starting from Monday, 17th January2005.

10 march 2005

SPECIAL CONTRIBUTION

However, considering thateconomic growth is morebuoyant in America than in“Old Europe” (in the wordsof Donald Rumsfeld),it would appear at first

sight easier for the U.S. to bridge the shortfallbetween income and expenditure. America’simpressive growth is due to a number of positive factors: concentration of academicknowledge/research facilities (and hencetechnology), demographic upsurge, wide-spread flexibility, collective arbitration infavor of free competition (at the risk of lowerprotection thresholds), etc.

THE SAD CARICATURE

This being said, the U.S. has without doubtbecome the world’s number one debtor fol-

lowing the deficit’s ballooning since GeorgeW. Bush took over at the White House(America’s public debt currently stands at $8 trillion). However, this figure should beput into perspective as it corresponds toapproximately 40% of the U.S. GDP, whereasFrance and Germany’s public debts, althoughmore modest in absolute terms, equate to60% of their respective GDPs (i.e. 50% moreon a relative basis). In addition, should it sodecide, the U.S. could borrow from the rest ofthe world one quarter of the above amount...without any difficulty whatsoever.

Arguably, American public finances are notthe sad caricature which they are often madeout to be, especially considering the Adminis-tration’s determination to halve the deficit bythe end of the incumbent President’s secondterm. In passing, it is worth pointing out that

Is the U.S. the World’s BiggestHedge Fund and if so, what are the Consequencesfor the US$ and American Interest Rates?

The U.S. deficit, so frequently the subject of disparaging comments, is forecast at 3% of GDP in the Bush Administration’s latest budget (on par with EU criteria, but watch out for 2006…) whereas Franceand Germany are expecting to achieve a deficit somewhat closer tothe 4% mark.

Telegrams✎ UBS Registered Fund “UBS Tamarack Inter-national Fund LLC)’s assets almost doubled inone year reaching US$ 430 Millions as of Dec.31 2004, up from US$234 million from a yearago.

✎ Unigestion closes fourth FoF on 200 Mil-lion the Geneva-headquartered firm hasannounced a final close of its latest fund offunds ahead of a 150m target.

✎ Hedge Fund industry is about to pass US$1 Trillion in 2005, after a growth of 18% in2004 (including performance and new assetsinflows) representing US$ 148 Billion, and of31% in 2003. According to certain sourcesfunds assets could reach 4 Trillion by 2010.

✎ Edinburgh based Hedge Fund firm MartinCurrie doubled its profits in financial yearended 30th September 2004 to GBP 8.4M.In the meantime, revenues grew 40 per cent,from GBP 33.5m to GBP 47m. Martin Curriemanages GBP 7.7 Billion.

✎ Man Assets Group reaches new high point:US$ 42 Billion. The world’s largest freestand-ing hedge fund business, Man Group plc, hasraised US$2.2 billion in the last quarter of2004 of assets under management, up fromUS$38.4 billion as of Sept. 30, 2004.

✎ D.E. Shaw ordered to release 13F. Hedgefund manager D.E. Shaw will have to complywith SEC regulations that require all firms withmore than $100 million worth of equity under

SPECIAL CONTRIBUTION

11march 2005

than Alan Greenspan himself. The proponentsof this theory believe that the U.S., the world’snumber one debtor, has successfully imple-mented a system enabling it to generate apositive cash flow on the servicing of itsexternal debt (the difference between whatAmericans pay to foreigners and what theyreceive from them is a hefty $30 billion a year). The way the system works is thatforeigners invest mostly in U.S. Treasuries,yielding 2% to 4.5%. Subsequently, theAmerican financial system reinvests part ofthese funds in the U.S., and part in foreigncountries, earning anywhere from 6% to 12%.Like any good hedge fund, the U.S. leviesroughly 4% for the service it provides, i.e. totransform risk-adverse into risk-friendly capi-tal. Today, America masters the intricacies ofthis mechanism far better than any other nation.

A LEVERAGING EFFECT

Our personal opinion is that the U.S. (consist-ing of the Federal Government, the country’s50 States and the American consumers) mayindeed be considered as a hedge fund, for thesimple reason that a leveraging effect isinvolved. What happens is that the U.S. takesthe risk of running up significant debts inorder to invest the proceeds at a yield whichwill hopefully exceed the cost of the funds ithas borrowed. One of the advantages Americaenjoys over the rest of the world (which isactually financing the debt) is that net pay-ments on the US$-denominated debt remainthe same in the event of a US$ drop, whilereceipts in foreign currencies rise accordingly(and conversely for the foreign creditors).Nonetheless, like many hedge funds, thisstrategy could begin to falter – and possiblybreak down altogether – in the event of a sud-den interest-rate hike.

BETWEEN THE FIRST AND SECOND GULF WARS, AN INCREDIBLE NUMBER OF HEDGE FUNDS WERE SET UP

This being said, the U.S. and its currencycontinue to defy the traditional laws of eco-nomic theory which should apply in such asituation, i.e. a depreciation of the currencydue to the external deficit and a recessionowing to the rise in interest rates required tofinance the budget shortfall. The Americanmodel may well keep on functioning, butonly on condition that the country maintains a technological quasi-monopoly (the per-formance-generating factor) and an unri-valed position on global financial markets(making it possible to direct financial flowstowards a U.S. economy eager for foreigncapital).

a mere statement to that effect helped the US$rebound during January.

Moreover, while America still enjoys a stateof quasi-full employment, traditional industryis experiencing an irreversible decline due tothe ongoing relocation of production to China(hence the $120-billion trade deficit) and, infuture, of services to India (which, converselyto China, possesses a good mastery of theEnglish language, a vital key to success in theservices sector).

Between the First and Second Gulf Wars(waged by Bush Senior and Junior respec-tively), an incredible number of hedge fundswere set up, offering a large array of strategies.Indeed, it is no exaggeration to say that, for awhile, this asset class enjoyed almost expo-nential growth. The common characteristicsof these hedge funds include their tradingflexibility, the use of variable leveragingeffects (via loans) and, last but not least, themanagement and performance fees collectedby their managers.

ITS MANAGER IS NONE OTHERTHAN ALAN GREENSPAN HIMSELF

A current theory suggests that the Americaneconomy is the biggest hedge fund at theglobal level and that its manager is none other

management list their stock holdings (com-pany’s holdings estimated US$21billion). Untilnow D.E. Shaw was protected by the SEC’sallowance to managers that can prove disclo-sure of their holdings can damage their trad-ing strategy to keep their stock holdings confi-dential.

Alternative news✎ John Mauldin’s predictions for 2005:the famous Texan strategy consultant andcolumnist issued his awaited 2005 predic-tions. In his paper, he sees the Dollar keepingon falling despite a rise in the first months ofthe year, China starting the floating process ofthe renminbi by the end of the year, China’sgrowth going on at a sustained pace, US Fedrates still on the rise, and a frustrating year for stock markets investors.

✎ Service providers “league tables”: Cogent-Hedge recently released ranking tables of thevarious professional functions serving thealternative investment community. The figureswere collected through a survey conductedamong the 4300+ funds that make up theirdatabase.

✎ LEGAL COUNSEL 1 Seward & Kissel 11.5%2 Dechert 8.8% 3 Simmons & Simmons 5.3%4 Schulte Roth & Zabel 4.1% 5 Katten MuchinZavis Rosenman 3.7%

✎ OFFSHORE COUNSEL 1 Maples and Calder18.8% 2 Walkers 15.1% 3 Conyers Dill &Pearman 8.3% 4 Harney 7.0% 5 Ogier & Box-alls 6.2%

✎ AUDITOR 1 PriceWaterhouseCoopers26.5% 2 Ernst & Young 21.2% 3 KPMG 16.0%4 Deloitte 9.6% 5 Rothstein 5.8%

✎ PRIME BROKER 1 Goldman Sachs 22.1% 2 Morgan Stanley 19.6% 3 Bear Stearns15.5% 4 Banc of America 10.0% 5 UBS 9.8%

✎ ∑ADMINISTRATOR/ACCOUNTANT 1 Citco13.4% 2 HSBC Alternative Fund Services11.6% 3 BISYS 8.4% 4 Fortis 4.5% 5 Interna-tional Fund Managers (Ireland) 3.3%

∑✎ CUSTODIANS/TRUSTEES 1 HSBC/Bank ofBermuda 18.3% 2 Citco 8.0% 3 GoldmanSachs 6.5% 4 Morgan Stanley 5.5% 5 Fortis5.4%

✎ FUTURES CLEARING 1 Calyon Financial16.3% 2 Man 15.8% 3 Bear Stearns Securi-ties Corp. 10.0% 3 Refco 10.0% 5 FIMAT9.6%

Daniel-Sacha Fradkoff

12 march 2005

SPECIAL CONTRIBUTION

Thanks to the quality of its universities (whichattract large numbers of first-rate foreignstudents, notably from Asia), the close tiesbetween its academic and business communi-ties, the presence of numerous civilian andmilitary research facilities on its soil and thedominant position of many of its companies(Microsoft being just one of the spearheads),the U.S. continues to strengthen its techno-logical leadership. However, the financialscene is far less idyllic, owing to the fact thatAmerica no longer finances its partners/rivals(unlike what happened after World War IIwith the Marshall Plan), nor does it export itscapital (America has no other option but tocontinue attracting savings from the rest ofthe world). Thus, the US$ may well reach acrisis point, in the mid to long term, with regardto other major currencies (not unlike whatoccurred in 1971 with the removal of the goldparity), at which time potentially negativeevents (such as the re-pricing of the ChineseYuan) could occur almost concurrently.

Finally, it is important to underscore the factthat the U.S. is by no means sheltered fromsevere economic or monetary jolts. China,which has gradually become one of America’smain creditors, may prove to be less coopera-tive in future years than Japan was in the past(owing to the latter’s military dependence onits debtor). China could decide – as a retaliatorymeasure, a show of power or for whateverother reason – to no longer cover the $120-billion trade deficit in U.S. Treasuries, withinterest levels suffering dire consequences asa result.

In conclusion, credit may be given to the the-ory that the U.S. is the world’s biggest hedgefund, with all the advantages and drawbacksthat such a situation entails. In our opinion,this could trigger a strengthening of the US$against the world’s other major currencies bythe end of 2005 (compared to January of thesame year), even if the market’s invisible hand(rather than government manipulation) willeventually cause the US$ to plunge andAmerican interest rates to surge. However,although this scenario may be considered a near certainty, it is likely to eventuate onlyafter many years of status quo… and of growth!

Daniel-Sacha FradkoffActive-Advisors

2004 Hedge Fund Industry ExpansionReview – Winners and Losers:In 2004, the hedge fund industry expanded bya remarkable 18%, due mainly to fresh assetinflows and improved performance.

However, this expansion was not equallyspread among strategies. Whilst distressedsecurities achieved a return of 18% and suc-ceeded in attracting over US$6 billion in newcapital, merger arbitrage witnessed modestoutflows of capital and produced a negativereturn x for the year (-1%).

Event-driven funds grew by 28% in 2004.The sector attracted roughly US$10 billion innew funds and generated a return of almost14%.

Emerging market funds topped all sectors interms of performance, earning over 19%.Returns were driven by funds focusing prima-rily on China and Eastern European, up morethan 30% on an annualised basis.

Relative value funds attracted around US$11billion in fresh assets in 2004 and earned a5.5% return. With US$120 billion in assets,this hedge fund sector is estimated to be thethird-largest after equity hedge (almostUS$300 billion) and event-driven (aroundUS$130 billion).

Equity hedge attracted almost US$20 billion in new capital and returned around 7.5% in2004.

Macro funds saw inflows of only US$5.5 bil-lion in 2004 (well below the US$28.5 billionthey attracted in 2003) and earned around4.5%.

At 5%, the performance of market-timingfunds wasn’t sufficient to prevent significantasset outflows.

Funds of funds expanded by 22% overall in2004, but reliable sources believe that thiscategory has peaked, having reached almost36% of total hedge fund industry capital(roughly US$350 billion).

Valuation Issues:Many hedge fund managers face a seriousconflict of interest… every month of the year.This awkward situation arises when a fundmanager, whose compensation is based onfund performance, is responsible for deter-mining the value of the securities (often com-plex or illiquid) contained in his portfolio. Theproblem is that such securities are oftenextremely difficult to value, owing to a lack ofreliable market quotes. For this reason, a fundmanager may be enticed to misprice somesecurities in order to increase his fund’s per-formance and, as a result, his own compensa-tion. When calculating the profits made by hiscorporation, a CFO faces a similar dilemmagiven that the results of such calculations willhave a direct impact on his end-of-yearbonus.

2004 Asian Hedge Funds Overview: Asianhedge fund managers will remember 2004 asa challenging year owing to the choppy andtrendless market conditions that preventedvolatility strategies from working to full effect.Directional strategies had some difficulty inmaking headway given the fairly narrowbands in which markets traded. The impres-sive influx of money originating from recently-created funds brought relative value man-agers under renewed pressure. Of note wasthe widespread upsurge in market liquiditydue to an increase in fund numbers and thefact that short trading was beneficial to Indiaand Indonesia, two markets known for theirpast difficulties. Top performers for the yearincluded emerging market debt and distressed(owing to rock-bottom yield spreads), withevent-driven strategies not far behind.

TM & PARTNERS SATM & PARTNERS SA

8, rue Neuve-du-Molard

1205 Genève - Suisse

+41 22 316 01 20

www.tmp-sa.com

A GROUP OF PROFESSIONALS

… WHICH CULTIVATES QUALITY WITH PATIENCE AND WHICH REINFORCES ITS

PRINCIPLES WITH CARE …

Groupement Suisse des Conseils en Gestion Indépendants

3, rue du Vieux-CollègeP.O. Box 32551211 Geneva 3

Tel. +41 22 317 11 11Fax +41 22 317 11 77secretariat@gscgi.ch

T he market for independent asset man-agement is in good shape. It is in fact

developing strongly. Today in Switzerland,current estimates indicate that around 3,000professionals are handling around 400 billionSwiss francs. Observers have expressed nosurprise at this growing presence. It is infact partially due to the determination of agrowing number of asset or relationshipmanagers to break free of banking institu-tions in order to best serve a hard-acquiredclientele. For example, by enjoying the free-dom to provide clients only with the “appro-priate” products and services according to

Asset management is above all a ques-tion of time. How can an independentasset manager handle it all?

Biagio Zoccolillo: It has indeed becomeextremely difficult to cope with the multipledemands. Since there are only 24 hours aday, an independent asset manager (AM)soon finds himself confronted with a“dilemma”: how is it possible to offer arelationship-based service, to elaborateand implement effective investment strate-gies, to ensure quality follow-up for every

What is the solution offered by MirabaudAsset Management?

B.Z.: Our goal is to provide THE referenceplatform for independent asset managers.To achieve this, we have elaborated aninnovative concept: Mirabaud places itsreputation, its image and the serviceswithin its group at the disposal of AMs. Weoffer a clear-cut and totally transparentmode of cooperation featuring anextremely open structure that enables the

their needs and by avoiding any in-housepolicies. Nonetheless, however flourishingthis market (as indeed the entire profession)is, it faces increasingly heavy and time-con-suming administration and regulatory pres-sures. Biagio Zoccolillo, Senior Vice Presidentof Mirabaud Asset Management in Genevaand Zurich (MAM), and promoter of thisproject within the Mirabaud group, has awell-formed opinion on the issue…

client, to interpret and take into accountlegal information and obligations (particu-larly those of the complex money-launder-ing law), to offer appropriate products,using increasingly sophisticated technologicaltools, and of course to make new acquisi-tions? Frankly speaking, it is becoming vir-tually impossible, or only by dint oftremendous efforts maintained over manyyears and at exorbitant personal sacrifice.

AMs to exercise their profession withina favourable setting, while achievingsubstantial economies of scale. In returnfor an initial contribution, the AMs gainsaccess to a broad range of products andservices: logistics, back-up on legal issues(particularly compliance) and for its com-puter systems, top quality financialresearch information, an internationalnetwork of experts, etc. The AMs will

an inngrowt

“Our goal is to provide THE reference platformfor independent asset managers.” Biagio Zoccolillo

C O M P A N Y P R O F I L E

be entrepreneurs employed 100% byMirabaud Asset Management, but with an“entrepreneurial” salary scale. The aim is tosatisfy all parties and above all the AMs’clients.

Switzerland has a big market of AMs. Towhom particularly does MAM addressits services?

B.Z.: It is vital for us to work with realtalents who share our passion for providingcustomers with professional, tailor-madeadvice and services, portfolio managementand the same will to ensure continuity. Inshort: our philosophy. The success of thistype of company depends first and fore-most on that of human relations. We arebasically targeting highly qualified andexperienced asset or relationship managerswho are already established as self-employed professionals or are looking tobecome AMs.

What expertise can you offer?

B.Z.: Building on almost two centuries ofexistence, Mirabaud is firstly one ofSwitzerland’s oldest banks. Secondly, wehave also acquired considerable experiencein the field of AMs, since several companiesaffiliated with Mirabaud and based inGeneva, Zurich, London, Paris and Montrealare exercising this activity. That is why weare particularly well acquainted with all the needs, expectations and demands ofthis profession. Our business model, whichwe are currently promoting in Switzerland,is applicable to all the countries and citieswhere we have a presence, and potentiallyelsewhere. We have prepared ourselvesfor this and we now need to find the rightpeople.

Mirabaud Asset Management – valuecreator?

B.Z.: The aim is of course to create econom-ic value added. This concept will enable AMsto ease their overheads, to benefit from awell-established infrastructure and to focusexclusively on the relational aspect of theirwork, tailor-made advice and services,portfolio management as well as on newacquisitions. But above all it is crucial topoint out that, while maintaining total con-trol over their clientele, they will enjoygreater stability in terms of the targets andstrategies they set for themselves, which canonly be beneficial to their clients.

This is what one might call a “win-win-win” situation…

B.Z.: That’s true. People often speak of awin-win situation, but one should never for-get the all-important third factor in theequation: Custodian Bank – AM – THEClient. As I mentioned earlier, the ultimategoal is and remains to satisfy at all times THEClient. The latter will have an establishedand recognised partner able to offer termsthat are both competitive and consistentwith the Mirabaud philosophy, in whichrespect for human values and relationshipsare placed at the very centre of its concerns.It is worth highlighting the fact that theclient retains the privilege of choosing thecustodian bank

Mirabaud Asset Management Ltd.:

ovative concept in a strongh market...

Biagio Zoccolillo

Senior Vice-President of MirabaudAsset Management in Geneva andZurich, in charge of AMs at Mirabaud.

Born in Italy, a determined entrepreneur whogrew up in the Canton of Bern. Before joiningMirabaud in 2001, he operated in Italy and inparticular held key positions in major bankinginstitutions in Zurich, London and Geneva.

Mirabaud Asset Management Ltd.,Geneva and Zurich

Founded in Zurich in 1978 under the nameof Aegis AG, this entity began operating inGeneva in November 2004. It was in particularcreated to provide independent asset managerswith ideal and transparent working anddevelopment conditions, and to offer theirclients the security of a renowned institution.

Mirabaud

Founded in Geneva in 1819, Mirabaud & Cie,private bankers, is one of the oldest banks inSwitzerland. It has a longstanding tradition inasset management and investment funds.Mirabaud plaid a pioneering role in the fieldof alternative investments and, over the past30 years, has become a specialist in managingthe world’s largest alternative “multi-manager”funds. With branches in Geneva, Zurich, Basle,Paris, London, Montreal, Hong Kong andNassau, the Group also offers services designedfor institutional investors and financial inter-mediaries.

For any further information, please contactBiagio Zoccolillo at Mirabaud Asset Management Ltd.Rue du Stand 58, 1204 GenevaPhone +4122 593 46 00, Fax +4122 593 46 01

16 march 2005

INDUSTRY EVOLUTION

InCyprus, the industry is stillin a transitional period fol-lowing entry into the Euro-pean Union. Eventually,foreign IFAs will no longerhave to be members of

CIFSA Cyprus International Financial ServicesAssociation, as Simon Hills points out. “Up to last year, anybody in the financialservices arena as a non-Cypriot was requiredto be a member”, explains the Chairman ofCIFSA. The association’s membership haspeaked at around 110 early 2004, with IFAsproperly speaking numbering between 30 to40. In this context, the term refers to advisorswho as a rule do not manage assets but offerfinancial advice, so to speak as general prac-tioners. Asset managers in the Swiss sense ofthe term do exist but are very few, five to tenfirms, catering mostly to the needs of a fewvery wealthy clients. Indeed, one may ratherrefer to them as family offices, although the

term does not seem to be much in use inCyprus. Other members include stockbrokers,investment funds and trust companies. Even though the association has been initiallyestablished by the Central Bank, it functionsas an independent entity working in the inter-ests of hits members.

Making the point matters all the more toSimon Hills that the association’s future willdepend in part on its credibility as a represen-tative body for Cyprus’ financial servicesindustry, especially smaller foreign operators.“We will continue to assist in the legislativeprocess and look to serve as a worthwilevoluntary association”, he says. But CIFSA’sfuture will also be influenced by the impactnew legislation now being discussed is likelyto have on financial advisors. Indeed, the draft

law on Independent Financial Advisors couldvery well further stimulate the growth of asector mostly attending to the needs of abooming expatriate community largely madeup of affluent British pensioners. Thus, at leasttwo sizeable foreign IFA firms present inCyprus have already applied for full financialservice company status, which was not possi-ble prior to EU accession. But the draft law,which is likely to be enacted by 2006, possiblyas early as this fall, will also cost dearly to theIFA so much so that quite a few of them maybe induced to leaving the country. “The futurewill depend on how our members manage tostay in business”, admits Simon Hills.

The State seems intent on making the costsborne by financial services firms themselveswhich means that existing fees will grow even

A European tour of independent advisorsand financial intermediariesTRUSTING makes a tour of CIFA’s member organizations, starting withCyprus at the south-easternmost tip of the Union, before returning tothe very heart of Europe with The Netherlands and Belgium. The tourwhich will continue with other countries in subsequent issues, bearsalready sufficient witness to the diversity of the financial servicesindustry throughout the Continent. Whether advisors, asset managersor representative independent agents of large banks they exemplifythe various ways in which the industry is responding to the challengesposed by client needs and local conditions.

Mohammad Farrokh

INDUSTRY EVOLUTION

17march 2005

higher, especially the inescapable applicationfee, but also that new demands will beimposed on small financial operators. To takebut one instance, a liability insurance on badadvice, as exists in Britain, is being seriouslycontemplated. An ensuing lack of capacityhowever would be detrimental to the interestsof the State which undoubtedly benefits fromthe boom being brought about by newcomersmany of whom buy property and invest in theeconomy. Britons alone, not to speak aboutRussians and other nationalities, number atleast in the tens of thousands. While becom-ing Cyprus residents, they are still legally tiedto the United Kingdom where the concept ofdomicile implies a lot more than mere pres-ence in the country, relating rather to a seriesof criteria evidencing a long-standing rela-tionship. This also means that advice whichcould be given to expatriate British pension-ers by local advisors alone would not likely to be adequate. Thus the need for IFAs asinvestment and financial planning generalists,also knowledgeable about foreign residents’home countries, first and foremost the U.K.,is not going to decrease in coming years.

The Netherlands is one of the the few jurisdic-tions in Europe where independent financialadvisors (IFA) actually manage assets, Out of130 or so financial institutions licensed to thisend, about 80 are non banks, 60 belonging tothe Vereniging van Vermogensbeheerders(VVV, i.e. the “Association of wealth man-agers”). The VVV is still very young since ithas been founded in 1999. “The creation of theassociation was encouraged by the State andregulatory authorities”, recalls Mrs. M.E.A.Hiskes-Willemse who is the Vermogensbe-heerders’ Secretary General. With a lawdegree and a civil service background as anadvisor in key ministries, she is well preparedfor the task which is hers as representative ofVVV. As is the case in other European coun-tries, anti money laundering legislation has been growing more elaborate over thepast few years. While being quite demanding,Dutch legislation is also very practical.

Thus, banks are entrusted with the duties pur-suant to the “Law on unusual transactions”,which means that independent asset managersdo not have to worry about carrying orderscontrary to AML regulations. However,they still have to perform initial due diligencefollowing rather stringent criterias. Any newclient will have to be thoroughly quizzed andhis aims and objectives ascertained togetherwith his risk profile. “There is a lot of work to be done before the client is accepted as a client”, says “Mea” Hiskes-Willemse. The administrative burden to be dischargedby IFAs is likely to become even heavier in a

not too distant future as prospective Europeanlegislation will impose new duties. “The indus-try is facing enormous costs, so much so thatsome asset managers are going be driven outof the market”. However, the Secretary Generalof the Vereniging van Vermogensbeheerdersrefuses to set a treshold under which an IFAwould be regarded as too small to operate.“At present”, she concedes, “you need to haveat least between 50 and 100 million eurounder management in order to be profitable”.

These figures do not reflect the diversity ofVVV’s members, some of whome may indeedbe very small -two managers and a secretary-while quite a few are already fairly big. She will give no further indication as far as

membership profile is concerned since shebelieves it is not the role of an associationsuch as that she represents to interfere withthe business of affiliates. In the same perspec-tive, she also refrains from making extensivecomments about the wealth managementindustry in The Netherlands. Rather, it maybe more appropriate to speak of a non bankingfinancial sector, since clients need not bewealthy. Thus, individuals with assets notexceeding 50,000 euro will find an IFA whosetype of management will be suited to theirneeds and expectations, if these are reasonable.This should come as no surprise in a countrywhere some banks have made private bankingtype of strategies accessible to clients whowould have to content themselves with leaving

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INDUSTRY EVOLUTION

19march 2005

their savings on a fixed interest account else-where in Europe. Asked about CIFA, “Mea”Hilkes-Willemse draws a positive conclusionfrom her experience so far. “CIFA has becomea real umbrella, enabling me to build valuablerelationships”.

In Belgium, members of APAFI AssociationProfessionnelle des Agents FinanciersIndépendants, numbering 250 affiliates in theFrench-speaking part of the country, is anumbrella organization for franchisees of largebanks. Together with its Flemish equivalent,BZB Beroepsvereniging Zelfstandige Bank- en verzekeringsbemeddelaars numbering 840 members, APAFI represents the professionwith Government official and lawmakers.Throughout Belgium, there are over 5000independent agents working on an exclusivebasis with the country’s main retail bankingnetworks, among which such well knownnames such as Fortis and Dexia. These, as arule, rely to various degrees on independentagents rather than depending only on their ownbranches. Indeed, some banks work mostlywith external representatives. While inde-

pendent financial agents operate on the basisof an extension of the 1995 law regulating thefinancial sector, further regulation is nowbeing contemplated. The proposed legislationwould namely allow for independent brokersto work with several financial institutions,possibly marketing foreign bank productswith no existing networks in Belgium.

The success of independent agents operatingon the principle of franchise thus far seems tobe largely due to the lack of flexibility oflabour unions very strong in the banking as inother sectors of Belgian economy. Thus,farming out regular customer services as wellas financial planing advice offers flexibilitywhile the banks working through externalagents are not at a loss as far as visibility isconcerned since these as a rule retain anexclusive relationship with only one financialinstitution. As Jean-Pol Guisset, who isAPAFI’s president, sums up, “the client enter-ing an independent agency is coming into abank. There is no difference with a branch which would be an integral part of a network as far as banking operations are

concerned. But the size tends to be smaller,conducive to a more humane way of inter-acting with clients while opening hours aremuch more flexible”. As a results, relation-ships tend to be enduring, many clientsprefering to remain with their independentlocal agent, even when the importance oftheir assets would entitle them to a moreexclusive type of setting, possibly through a private banking subsidiary. This tendency is also encouraged by the wide range ofproducts on offer in bank agencies. Thus,banks as a rule also distribute insuranceamong other financial products. In Belgium,most banks would set the treshold for whatcould be referred to as “personal banking”at 250,000 euro, while “private banking” issometimes said to apply to portfolios over 1 million. But, as far as independent agenciesare concerned, there is no general obligationto “dispatch” the client to relevant organiza-tion whenever such limits are being overtaken.

Mohammad Farrokh

20 march 2005

LEGAL & REGULATORY

The piece explains that Institutional Investoris now training its analyst-obsessed eye at thehedge fund crowd with a ranking of the hed-gies’ favorite analysts. Topping the list, theJournal says, are analysts who are “goingnegative on a stock when other investors arehoping for good public relations.” In pre-Spitzerian times, the paper explains, analystswere “rewarded for touting a firm’s invest-ment-banking deals.” But these days, they’ddo better “to cater to the most-lucrative trad-ing clients,” that is, hedge funds, which, thestory maintains, often look to short stocks.Hence, their love of bears.

To be sure, that’s all straightforward enough(except for the story’s suggestion that allhedge funds are shorts, which is crazy). The new ranking seems to be a smart post-Analystgate move for II, and why shouldn’tthe Journal write about it — and then, as ithas in the past, try to duplicate it? But itmade us wonder: If these negative analystsare “catering” to hedge fund clients, aren’tthey just as conflicted as the positive analystswho catered to banking clients? Or do theyget a free pass because they’re bearish, whichin these bizarro times, is synonymous withpure?

It seems amazing to us that the Journal, whichcarried so much water for Eliot Spitzer duringhis analyst crusades, didn’t at least ponderthese issues. It’s not inconceivable that sometime in the near future, a Florida pediatricianor some other PC-enabled daytrader will garner some research by the top performerson II’s newest ranking and try to execute theirshort-term trading ideas — with disastrousresults. Who would they blame? Easy. The analysts whose research was really moregeared to their firms’ lucrative hedge fundclientele than to the general public. Four yearsafter the bubble and neither the media –

Have they been punished? Are we going down thatroad again? The result all ofthis bubble-centric blatherhas been a sense of massconfusion that has perme-

ated the coverage of everything from GoogleInc.’s initial public offering to Kmart HoldingCorp.’s marriage to Sears, Roebuck and Co.“Some of the breathless commentary broughtback fond memories of how Mary Meeker,Morgan Stanley’s Internet analyst, rhap-sodized over the Time Warner-AOL merger in2000,” New York Times ubercolumnistGretchen Morgenson wrote about the bigretailing deal. “That one turned out to be per-haps the most disastrous combination in cor-porate history.”

OH, WE GET IT. MEEKER IS A BULL.AND BULLS — ESPECIALLY ANALYST BULLS — ARE BAD. AND WRONG. BAD BULL.

Such is the central message of the media’sbubblemania these days, which, like somefrustrated George Costanza, has concluded thatif bullish analysts were conflicted and wrong,then bearish analysts must be pure and right! Astory in Tuesday’s Wall Street Journal, perhapsunwittingly, pretty much says it all. The head-line: “Negative Analysts Score Points.”

Up the down staircaseBulls or bears? Villains or heroes? Victims or criminals? More than four years after Nasdaq took its infamous, tech-induced nosedive, the financial media is still trying to wrap its collective brain around what is now blithely referred to as “the bubble.” Who was to blame?

nor anybody else – is clear on who exactlyanalysts should be serving.

Similar confusion reigned in a Nov. 15 NewYork Times story on the recent climb of techstocks. “Big-Name Wall St. Analysts EmergeFrom Scandal to Tout the Market,” read theheadline, signaling villainous bulls ahead.Indeed, the piece immediately introduces usto, yes, Mary Meeker, “once more out on thestump” for Morgan Stanley’s Internet clients,including Google, and Anthony Noto,a Goldman, Sachs & Co. Internet analyst who,the Times informs us, was recently awarded a coveted partnership in the firm.

Let’s deal with Noto first. The story maintainsthat “Noto’s eagerness to tout the prospects ofsome of Goldman’s more dubious investmentbanking clients is not as well known” as, say,Meeker’s or Henry Blodget’s. But, oh, it wasthere, the paper says, and it has a Goldmanperformance review to prove it. “Anthonyundermines his credibility by appearing asmore of an advocate/defender” of the compa-nies he’s covering,” the Times quoted thecirca 2000 review. (Perhaps Goldman willretaliate by quoting from the reporter’s per-formance review in its next research report on The New York Times Co.)

The story dredges up the disastrous callsmade by Meeker and Noto during the bubble,from eToys to Webvan to Homestore. Thesedays, however, “the Internet stocks theyfollow are on the upswing and the prospectfor new investment banking deals havecaused Mr. Noto’s and Ms. Meeker’s ownstock to rise,” it sniffs. It’s a development the Times is clearly offended by, evidencedby its excerpting of “stinging remarks” fromNoto’s review and by its reminder that Noto at one point was nicknamed “AnthonyDon’t-Know.”

By Yvette KantrowThe Deal, LLC

LEGAL & REGULATORY

21march 2005

To be sure, the Times allows that both Meeker’sand Noto’s “stockpicking skills haveimproved” based on their recommendationsover the last three years. But even that state-ment seems misguided, as if the duo wentback to analyst training school; it doesn’tallow for the fact that their performance hasimproved along with their sector. The realproblem here is that unless you can predictthe future, it’s impossible to judge if the picksmade by analysts today — bullish, bearish or otherwise — will look smart tomorrow,which most of Wall Street’s institutionalclients understand. Conflict, or at least theappearance of conflict, is at least somethingtangible to point to. But the eagerness of themedia to try to indict analysts for the direc-tion of their picks makes an already incoher-ent argument, ridiculous.

Covering the business of media creates lots ofopportunities for weirdness as reporters findthemselves writing about competitors, or, farmore awkwardly, their own employers.Things get even wackier when a mediamerger emerges. What happens when an out-let not involved in the transaction breaks thenews of a media deal?

Such was the situation the week of Nov. 14,when The New York Times was the first toreport that Dow Jones & Co., the publisher ofThe Wall Street Journal, had agreed to buyMarketWatch Inc. for $468 million. WhenDow Jones’s own newswire followed theTimes’ report that Sunday night, not only didit have to credit The Journal’s archrival forthe merger scoop, but it also had to fess upthat it could not reach a spokesman within itsown organization for immediate comment. Later that same week, a similar situationarose when the Times ran a somewhat morespeculative piece on news behemoth ReutersGroup plc looking to sell Instinet, its U.S.

Victims or criminals?

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LEGAL & REGULATORY

23march 2005

electronic stock trading arm. Reuters, whichowns more than 60% of Instinet, credited andfollowed the Nov. 18 Times story on itsnewswire, complete with a glaring “declinedto comment” from Reuters itself. By the nextday, however, official Reuters entered nonde-nial denial mode, as its London StockExchange shares rallied on the Times report.Reuters “is not in formal talks to sell Instinet”the news service reported, sourcing a com-pany spokesman, “but does not view it as along-term core asset.” (And these people aresupposed to be in the information business.)That same day, the Associated Press notedthat despite Reuters’ denials, “the marketremained focused on a potential sale.” As itturns out, “the market” appears to be right.By Tuesday, Reuters, according to the AP,told the LSE that “strategic alternatives”including “a possible sale, merger or otherbusiness combination or corporate transaction”was being considered for Instinet.

Meanwhile, swinging for a third M&A scoop,the Times reported Nov. 19 that Paris technol-ogy consulting giant Capgemini is consider-ing a sale of its North American unit.

The hedged report — “While a final decisionhas yet to be reached about a sale, Cap Gemini[the Times chooses to spell it differently thanthe company] has begun quietly canvassingfor potential buyers” — was denied by thefirm’s CEO, Paul Hermelin, at a conference inBarcelona. “Today, the group is totally com-mitted to the U.S. recovery,” Hermelin toldthe confab, according to Dow Jones.

We can’t wait for tomorrow’s papers.

© Copyright 2004 The Deal, LLC www.thedeal.com

Bull or bear?

INDUSTRY EVOLUTION

24 march 2005

LEGAL & REGULATORY

Such reaction comes at a timewhen major regulatory organisa-tions, such as the US Securities& Exchange Commission, theEuropean future equivalentcalled the Committee of Euro-

pean Securities Regulators (CESR), and theInternational Organisation of Securities Com-missions Organisations (IOSCO) are nowinvestigating the credit rating industry. Thefocus of the investigation is especially onEurope and Asia where so many complaintshave been expressed since 1997.At stake are monopolistic practice, lack oftransparent methodology, conflicts of interest,service efficiency and absence of overallindustry-wide compliance. But the most criti-cal issue remains whether credit risk canproperly capture the full riskiness of anorganisation. At the core of the investigation lies one singlequestion: aren’t we not asking too much fromcredit rating and aren’t there alternatives thatcould help diagnose better the risk of a corpo-ration or of a State? And shouldn’t theseinvestigations broaden their scope to overallcorporate research?

DRAWING THE LINE BETWEEN CREDIT- AND TRUST-WORTHINESS

Today, bond-holders know fairly well whatrisk they face due to the credit rating of issuers,with only limited liquidity issue. They have a fairly clear right of recourse (forcing theborrower into receivership in case of default)and the contractual framework of creditwor-thiness has over 150 years of trial and errorpractice and common law. They know whattheir value-at risk is relative and fairly clear if they decide to stick out up to maturity.

By contrast, share-holders, are virtually naked.They have no measure of their fiduciary risk,which is virtually un-recognised and totally

under-researched. Actually, the mere conceptof fiduciary risk is less than 10 year’s old inthe way it is being measured. Shareholders’value-at-risk is absolute and remains one of the most difficult to establish, not to speak of its much more pervasive liquidity issue.Their right of recourse is virtually.

This, highlighted by the cases of Parmelat,Enron, Swissair, Shell and so many others,further confirms that credit risk measurementcan not be a substitute to the assessment oftrustworthiness. Indeed, if all start-up compa-nies were measured on credit-worthiness,they would never be able to raise any funds.They are simply un-creditworthy. And it isonly the trustworthiness of their founders andproject that enable start-ups to break even,reach the audit status of “going concern” andbecome truly creditworthy.

It is not because a company is creditworthythat it is trustworthy and vice-versa. The samerule applies to States, NGOs and people. Andinvestment management firm may be credit-worthiness but this is completely irrelevant toits investor clients. What really counts forthem is the trustworthiness of the investmenthouse. Every one knows that. Just like a coin,the risk of an organisation is double-faced:credit and trust-worthiness. Sometimes creditrisk is at the heart of a transaction. Some-times, trust is what will make the difference,not solvency.

Surely enough, some may wonder: isn’t thesell-side research of investment banks andbrokerage houses already rating listed corpo-rations? And isn’t the latest trend of growingindependent research in North America and

Europe enough to reinforce the distinctionbetween credit and equity research? Not ifresearch, tainted as it may be from investmentbanking conflicts of interest, continues to bedriven first and foremost by capital marketconsiderations. The question is not whether acompany is sound, profitable and sustainablebut rather, will its stock move up or down andwhether market perception, trends and liquid-ity are favourable to the company? In view ofpoor pay-out ratios and a dwindling share ofdistributed profits, a growing divorce isdivided systematic market factors from intrin-sic factors in setting the valuation of a com-pany. The result ? Exogenous market factors,rather than endogenous drivers, increasinglyblur company valuation.

BACK TO BASIC WITH A MUCH BROADER INDUSTRY

So if better oversight, greater transparency andbetter practice can improve the performanceof the credit rating industry, the real acid testgoes well beyond mere competition. Naturally,the more the S&P, Moody’s and Fitch of thisworld feel that their market share is at risk,the more diligent they will become. The prob-lem here is that most other rating agencies areeither local and very small, with little foreignrecognition, or at best regional with littleresources and poor to nil research and devel-opment programmes. So where could the newcompetition really come from?

From a well-known but yet unsuspected quar-ter: the standard registrars or assurance qual-

Aren’t we asking too much to credit rating agencies ?When asked last December whether rating agencies should beregulated, 67% of finance professionals from all over Europe gatheredin Geneva at the Annual Risk Conference raised their hand in favour.

Parmelat, Enron, Swissair, Shell and so many others

The more the S&P, Moody’s and Fitch of this world

feel that their market share is at risk, the more diligent

they will become

LEGAL & REGULATORY

25march 2005

ity evaluators who provide well-known ISOcertificate of compliance and focus so heavilyon management systems close to what fiduci-ary risk is all about.

Over 600,000 companies around the worldhave so far changed their inner systems andprocesses to comply with a wide range ofstandards lead by the most celebrated one:ISO 9001. There are over 160 such registrarsaround the world and more are propping upeach month, although the industry is experi-encing a fierce period of consolidation.

The top 10, including Swiss, French, British,Scandinavian, German, Canadian and Aus-tralian operators, have a combined turnover oftheir evaluation business of?1 billion, or theequivalent of all of Moody’s and Fitch ratingbusiness around the world. Put differently,some of these organisations involved in regis-tration, inspection and certification serviceshave global turnovers exceeding that of Stan-dard & Poor’s Rating business. The Swissleader, SGS, is larger than S&P. Althoughmost are only 20 years old, when assurancequality started, the top 5 are involved in shipregistration and risk evaluation (Lloyds’ Reg-istrar Quality Service, DNV, Bureau Veritas,and the American Bureau of Shipping) sincethe 19th century. The only problem is that thisindustry is virtually absent from the financialsector and its certifications are fail-pass testinstead of risk measurement processes.

Nonetheless, several assurance quality certifi-cators have decided that the next strategicmove, beside improving economies of scalethrough acquisitions, was to go into riskmeasurement. The Norwegian multinationalDNV, the third largest registrar in the world,has just acquired CoreRatings, a small agencyin London involved in unsolicited rating oflisted corporations on their social investmentresponsibility performance. TÜV Rheinland,Germany’s largest registrar, has set a joint

venture with an affiliate of Allianz in thecredit rating of small to medium enterprisecompanies. The American Bureau of Ship-ping (ABS) has one of the largest risk man-agement consultancy businesses in the world.

The registrar industry has six main advan-tages over the current rating agencies whichcould enable them to become leading fiduci-ary risk rating agencies. • They do not operate a black box. The stan-

dards used to measure the compliance ofcompanies are well published and theyhave been adopted on a consensual basisacross the industry and public authorities.The reverse of the coin is that these stan-dards lack flexibility for the financialindustry.

• Unlike rating agencies, registrars talk toeach other, share common compliancepractice and systems. Each registrar mustbe fully accredited by the guardians ofstandards to ensure that they have the righthuman and material skills to fulfil theirtasks. The only problem they must urgentlytackle is the growing fraud of “quick anddirty” certificates, which have hit a numberof emerging markets.

• These registrars are extremely bottom-upas their core culture is engineering andoperational, whereas the rating agencies aremore top-down and financially driven.

• This means that registrars could benefitlargely from their grasp of a manufacturer’ssystems and processes to assess its sustain-ability and integrate the picture within afinancial complex. Rating agencies hardlyever visit company plants and their analystsdon’t understand how operations work,relying mainly on the financial condition ofthe subject company.

• Registrars are highly competitive, chargelower rates and are used to work on half thenet margin of credit rating agencies thataverage 25% to 40%.

• They have a vested interest in acquiringsome of the 100 local and regional ratingagencies around the world, completely neg-lected by the “Big 3”. Such consolidationcould enable them to build their risk meas-urement services and improve local prac-tice, especially across emerging marketswhere rating practice has been so slack dueto over-regulation.

Robert Pouliot

Robert Pouliot has been active for over 20 years in the rating industry. He createdCapital Intelligence Ltd, a leading bankrating agencies in the emerging markets,and Rating Capital Partners, the first fiduciaryrating agency measuring trustworthiness asopposed to creditworthiness.

The only problem is that this industry is virtually absent

from the financial sector and its certifications are

fail-pass test instead of risk measurement processes.

LEGAL & REGULATORY

“I’M SO TIRED of the liesright now that I couldscream. I’m not a good liarand my mum always said itmade my ears turn red,”laments Charles L Harris,

principal of hedge fund Tradewinds Interna-tional.

When the performance of 43-year-old Har-ris’s hedge fund headed south he made a deci-sion that would not only change his and hisfamily’s lives for ever but also those of all ofhis investors.

When he realized that he had no other choicethan to come clean, Harris made a DVDrecording in July 2004 asking his investors totreat him with compassion and permit him tocontinue his efforts to try to recoup their lostmoney.

He also admitted that he had taken investormoney offshore. The recording in which heconfesses to being a pitiful liar shows him ona boat, presumably the $481,000 62-footyacht listed in his assets, probably anchoredsomewhere in the Caribbean.

Tradewinds International LP was created byHarris in 1996 and was run from his homeand an office in Winnetka, Illinois. It investedin currency, bond and equity products. In2001, he created Tradewinds LLC, the gen-eral partner of his second investment fundwhich was called Tradewinds International IILP.

Harris explains: “Last year [2003] we had anerror and we actually lost about 8% for theyear instead of being up by 12%. I knew itexisted and I tried to make up for it and I justmade a big mistake… big mistake.”

Two months after Harris sent the recording toinvestors, on September 1 2004, in a coordi-nated effort the SEC and the CommodityFutures Trading Commission brought a civillawsuit in the federal district court inChicago, Illinois, against Harris and his

hedge funds. The funds’ assets were frozenand an order to preserve all documents wasobtained by the court.

Although most hedge funds and funds offunds prefer to have investors believe thathedge fund fraud is not a significant concern,it is happening too often to be ignored.

In the past three months alone the SEC hasbrought five cases against hedge fund advis-ers for allegedly defrauding investors or usingtheir funds to defraud others.

This brings the total of such cases for the pastfive years to 51 and estimated investor lossesto more than $1.1 billion.

Jamey Basham, branch chief at the office ofinvestment adviser regulation in the SEC’sinvestment management division, says: “It’svery common to see misrepresentations bythe hedge fund adviser to investors to coverup losses.”

He adds: “For the smaller frauds, it’s morecommon that it’s just outright diversion ofassets. For the larger cases it’s more commonto see failed trading strategies.”

NAV MISREPRESENTATION

On September 9 the US Department of Jus-tice, through the US District Attorney’s officefor the Northern District of Illinois and fed-eral agents, filed a criminal lawsuit againstHarris, and the FBI arrested him in Miami.

The CFTC and the SEC allege that Harris hadfraudulently raised at least $10 million fromat least 30 investors for Tradewinds Interna-tional II. They allege that he defraudedinvestors by misrepresenting the value of thefund and past rates of return.

They also allege that he misappropriated thefunds by using them allegedly for personaland business purposes. In particular, Harrisfaces allegations that he told investors in 2003that the fund’s net asset value was between

$18 million and $23 million when tradingaccount statements show a total value SECcases filed against hedge funds Since August1 2004 Date Defendant Alleged of filingamount 02 Sep Charles L Harris $10mn 25Aug Haligiannis et al $27mn 24 Aug Scott BKaye et al $1.9mn 18 Aug Gary M Kornman$142,000 09 Aug Anthony P Postiglione et al$5mn $1.1 million during that time and onlyaround $30,000 left at the end of 2003.

In addition, the CFTC states: “Harris mayhave used at least $1 million in investor fundsfor purposes other than trading, including forHarris’s personal and business expenses” dur-ing 2003 and 2004.

The SEC’s complaint alleges that “in 2003and 2004, at least $2.4 million of investorfunds were never transferred to the tradingaccounts, but were used instead for Harris’spersonal and business expenses and to repayinvestors at artificially inflated rates, whileTradewinds II secretly incurred losses”.

IN THE FOOTSTEPS OF PONZI

When a manager maintains the fiction that afund is producing returns by using newinvestors’ cash to repay other earlier investors“at artificially inflated rates” rather thaninvesting it, it’s known as a Ponzi scheme.The criminal strategy is named after CarloPonzi, who in 1919 was the first to utilize it.

Harris might face up to 30 years in prison ifhe’s found guilty of the charges brought bythe DoJ. He might also face a fine of at least$1 million, depending on his ability to pay,and the court can also declare forfeit any ill-gotten gains. Both the civil and criminal law-suits are pending and Harris is being held incustody.

His is not an isolated case. The SEC filed itsmost recent action against hedge fund advis-ers on October 14 for alleged association witha Ponzi scheme. The SEC filed a complaint inthe US District Court for the Southern Dis-trict of Ohio alleging that several individuals

27march 2005

Guarding against hedge fund fraudThe SEC is pursuing more and more hedge fund abuses. It hopes that requiring managers to register, as passed by the regulator onOctober 26, will eradicate the problem. It won’t. Investors need to see independent valuations.

28 march 2005

LEGAL & REGULATORY

had, among other things “defrauded dozens ofinvestors by conducting a Ponzi Schemethrough a purported hedge fund, ParamountFinancial Partners, LP.”

The SEC also alleges that the one of the indi-viduals and various fund marketers persuadedpeople to invest at least $15 million in thehedge fund between at least May 2000 andMarch 2001 and then the individual “misap-propriated or diverted those funds to pay ear-lier investors and pay personal businessexpenses”.

The largest of the five actions the SEC hasfiled against hedge funds for fraud since theend of July involves 33-year-old CharlesAngelo Haligiannis and hedge fund SterlingWatters.

On August 13, the SEC alleged that Haligian-nis had “systematically been defraudinginvestors who purchased limited partner-ship interests in Sterling Watters”. Itaccuses the manager of raising atleast $27 million since 1996 by dra-matically misrepresenting the per-formance of the fund.

The SEC alleges that Haligiannisstated in marketing material thatthe fund had $180 million inassets and that it had returnedmore than 1,500% sinceinception. It also allegesthat the manager had sentinvestors a quarterlyaccount statement atthe end of July that“showed an aggre-gate of tens of mil-lions of dollars ofinvestor equity inthe fund” whenbrokerage recordsshow the fund hadbeen losingmoney to the pointthat it was “essen-tially worthless”.

The US Department of Jus-tice, under the auspices of the USAttorney for the Southern District of NewYork, announced the unsealing of its indict-ment against Haligiannis on September 30.

In addition to similar accusations as the SEC,the DoJ alleges that Haligiannis used newcontributions to pay existing investors or to“fund withdrawals made for Haligiannis per-sonally”, in a manner similar to a traditionalPonzi scheme.

The indictment also alleges that in 2000,for example, the fund reported that it was up41.45% for the year but had in fact sufferedmore than $17 million in trading losses.

intense. Hedge fund assets have grown bymore than 30% in the past year alone and areexpected to reach $1 trillion as early as theend of the year.

Regulators are trying to extend their oversightto hedge funds. But they probably have

too few capable staff to be effective.Meanwhile, some hedge funds are

responding to demands todemonstrate an inde-

pendent confirma-tion of valua-

tions of theirholdingsand per-formance.

Butinvestors

still need tobe wary of how

these valuationsare obtained.

The potential forinvestors to be taken

advantage of byunscrupulous hedge fund

managers has become sucha concern to the SEC that it

made it one of its prioritieswhen it proposed a new ruleand amendments to the Invest-

ment Advisers Act of1940. However, it isnot clear that compul-sory registration formanagers of hedge

funds with assets above aspecified size, the rule the SECcame up with, is the answer.

CONTROVERSY

The rule was passed on October26, but not without controversy.Only three of the five SEC com-missioners – Democratic commis-sioners Harvey Goldschmid andRoel Campos and chairman WilliamDonaldson – voted in favour.Republican commissioners CynthiaGlassman and Paul Atkins opposedthe rule.

The split between the commissionersreflects the split in industry opinion. Manymarket practitioners doubt that registrationwill bring any benefits. According to the SEC,54% of the letters received during the consul-tation period opposed the rule, 19% supportedit and the remaining 27% raised issues withthe rule.

THE REGULATORY RESPONSE

While these cases and others proceed, thedebate over how to prevent hedge fund fraudfrom getting out of control is becoming more

LEGAL & REGULATORY

The Investment Company Institute andInvestment Counsel Association of Americawere among those that favoured it; the Man-aged Funds Association joined the majority ofhedge fund managers that responded inopposing the rule.

More than 40% of existing hedge fundsalready register with the SEC and many tes-tify that the registration process is not burden-some.

Jonathan Bean, managing director at MellonHBV Alternative Strategies, says: “We’vebeen registered with the SEC for more thanfour years.” He says compliance has been rel-atively simple. “[For example,] we had a CFOfrom day one,” he says. “But most don’t,” headds.

He points out, though, that the additional costinvolved will mean “fewer participants com-ing to the market”. This might work in thefavour of existing hedge funds as there willbe fewer of them chasing market opportuni-ties. “I suspect higher returns for those in themarket now,” says Bean.

While the SEC commissioners concur thatthere has been an increasing amount of hedgefund fraud, opinion is divided as to whethermandatory registration of managers will pre-vent it.

Commissioner Glassman says of the five mostrecent cases brought by the SEC:“The proposed rule would have had no effecton any of them.” This is because managers ofhedge funds with less than $25 million inassets under management will not be requiredto register. Four of the five most recent casesinvolve hedge funds under that size.

Ted Laurenson, partner at law firm BakerMcKenzie and a member of the American BarAssociation’s task force for the proposedhedge fund rules, says of the recent casesbrought by the SEC against hedge funds: “Myown view is that it’s quite unlikely that some-one who is going to engage in this kind ofactivity would register with the SEC in thefirst place, even in the face of a requirementto do so.”

EVADING THE REGULATOR

Laurenson points to another widely heldconcern with SEC hedge fund regulation. “A concern a lot of us have, which has givenrise to scepticism, is that the people who dothe SEC examination are generally very jun-ior people at the SEC,” he says. “They’re notparticularly in a position to evaluate what’s

going on within a hedge fund [for complexstrategies].”

Commissioner Glassman takes up this point.She says: “The chairman has stated that theSEC only has 495 staff conducting examina-tions of around 8,000 mutual funds managedin over 900 fund complexes and over 8,000investment advisors.” She adds: “We’re alreadystretched as an agency to examine the mutualfund industry with around 91 millioninvestors.”

The implication is that those who haveenough money to invest in hedge funds hadbetter be able look out for themselves.

Richard Perry, head of the financial servicesgroup at law firm Simmons & Simmons,agrees. “[SEC hedge fund regulation] isunlikely to be effective because they haveenough difficulty regulating mutual funds andnow have to take on hedge funds as well,” hesays. “And the priority must be mutual fundsbecause it involves retail investors and theyneed the protection.” What can regulators do?

Perry says: “I could imagine a scenario wherea registered investment adviser is not permit-ted to calculate the NAV of their funds.”

Regardless, the SEC hopes that making hedgefunds register will at the very least give it adefinitive view of the number of hedge fundsoperating in the US and the size of assetsinvested in them.

Moreover it hopes that the requirement forhedge funds to be able to prove robust pricingprocedures for valuing funds and the threat ofan unannounced visit from SEC inspectorswill at least help to discourage hedge fundsfrom defrauding investors.

Investors themselves might be well advised toinquire more closely into hedge funds’ riskmanagement infrastructure and the qualityand independence of middleoffice staffemployed to confirm valuations. These are abulwark for shareholder protection at thelarge investment banks from which many startraders have sprung into the less regulated andless controlled hedge fund world in recentyears.

BITTER EXPERIENCE

Banks have endured bitter experience ofrogue trader risk that has driven them to beefup risk management and hire independentstaff capable of standing up to the forcefulpersonalities of star traders who bring in bigrevenues for the firms.

Many hedge funds lack such infrastructure.“One of the issues is the mispricing of securi-ties in order to hide failures from investors,”says Robert Plaze, associate director of theinvestment management division at the SEC.

“Here are people under immense pressure toproduce returns and so some people succumbto fudging. There are no internal checksagainst fudging. There’s no-one looking overtheir shoulder to check pricing.” He adds:“Mutual funds have a board of directors andauditors.”

It may be that the hedge fund industry wouldhave moved towards objective pricing withoutregulators pressing for it. Dan Shapiro, part-ner at law firm Schulte, Roth & Zabel, says:“Regardless of registration [requirements],there’s a lot of pressure from investors andpeople who work with hedge fund managerssuch as prime brokers and administrators tomove in the direction of more objectiveattempts [at pricing].”

A Capco study published in its AlternativeInvestments journal in August shows that val-uation issues have played either a primary orcontributory role in 35% of hedge fund fail-ures. It also found that in more than half ofthese cases, failures due to valuation issueswere caused by fraud and misrepresentation.

Shahin Shojai, director of strategic research atCapco, says: “If [a hedge fund] manipulatesthe numbers then everybody loses money. Soyou need independent people not paid by thehedge fund to evaluate what hedge funds do.”

Head of risk management at Man GlobalStrategies John Vlasto says that Man’s busi-ness makes use of independent valuationservices and third-party risk managementservices (see chart on page 60).

He says the firm uses valuation serviceproviders to capture the prices of instrumentsheld in the underlying MGS managedaccounts. The valuation service provider(VSP) will then calculate the month-end netasset value of these funds for Man.

Many administrators, such as Bysis, Citco,PFPC and HSBC/Bank of Bermuda, offer

29march 2005

“The people who do the SEC examination are not in a position

to evaluate what’s going on within a hedge fund”

30 march 2005

LEGAL & REGULATORY

independent valuation services. HSBCacquired Bank of Bermuda in February thisyear which included its Alternative Fund Ser-vices division (AFS). Postacquisition, AFShas more than $170 billion in assets underadministration and $140 billion of that isalternative assets, with the majority being sin-gle hedge fund and fund of fund assets.

Drew Douglas, global head of product man-agement for HSBC’s Alternative FundServices, says: “Single strategies and pricingare an issue in the industry and as invest-ments become more complex it becomesmore difficult”

Equities are easy to value as they are tradedon an exchange. However, the widespread useof complex products such as credit defaultswaps, swaptions, floors and caps have madeit more difficult for hedge fund managers toprice their investments, let alone for third par-ties to do so. “[Independent valuation is] allbased on the caveat that an independentexpert can value the products,” says Capco’sShojai.

Shojai believes that “99% of people tradingconvertibles have no idea how they are priced.You’ve got fixed income, options and under-lying equity constantly changing. If you havegot a portfolio of these things it’s the mostdifficult thing to do.”

This makes it easier for prices to be con-trolled. “If [a fund is] down 10% [the man-ager can] easily manipulate convert pricing toshow that it’s up by 10%,” he says.

Valuation service providers use brokers andcounterparties to value complex trades. How-ever, there’s the potential for collusionbetween the broker and the hedge fund man-ager as the manager is the broker’s client.“VSP providers would insist on at least twosources for such trades,” says Man’s Vlasto.

HSBC’S Douglas believes that administratorsare meeting the challenge. “We price [com-plex instruments] by using complex pricingmodels.” Models are not the market but atleast they can be independent.

A third party provides the software. Forexample, HSBC uses SunGard’s FastVal.“FastVal by SunGard Reech allows us toindependently price a range of over-the-counter products,” says Douglas. “We oftenget prices from a market maker or broker anduse pricing tools to validate it.”

Douglas acknowledges that illiquid securitiesare also difficult to price. “If it’s a listed

instrument but it hasn’t traded for a while we often use the average of brokers’ prices,”he says.

Hedge fund managers are moving towardsdaily pricing, which is proving to be anotherchallenge for administrators. HSBC’sDouglas believes that half the challenge ofproviding independent daily pricing is toidentify good software. “[You need softwarefor] managing market data and connectivityto the underlying environment to enable youto do it on a daily basis,” he says.

It’s not enough just to know that a hedge fundhas an independent administrator. Investorsneed to know the role being played by theadministrator as many hedge funds thatemploy administrators do not use them forcalculating NAV.

Peter Astleford, partner and co-head of thefinancial services group at law firm Dechert,says: “In the US, some do [use administrators]to some extent which is the worst because[investors] think they have the comfort ofindependent administration [that is, independ-ent valuation].”

SIDE POCKET SECURITY

Another way in which hedge funds havebegun to deal with securities that are difficultto value is to exclude these securities from thefund’s NAV and put them in a socalled sidepocket instead.

“What that means is that the investment isheld only for the benefit of the people thatwere investors in the fund on the day that theinvestment was made,” says Harry S Davis,a litigation partner at Schulte, Roth & Zabelwho represents many hedge funds.

“The security in the side pocket is not markedto market or revalued when the rest of theportfolio is revalued (such as monthly for pur-poses of calculating the monthly NAV).Instead the security is kept at the value atwhich it was purchased,” he adds.

“The security isn’t valued again until thefund sells the security and then it is valued atits actual sale price. This takes the subjectiv-ity out of the valuation process because thesecurity is only valued twice, once when it ispurchased (at its actual purchase price) andagain when it is sold (at its actual sale price).And the only investors who get the profit orloss from that security are investors that arein the fund at the time that the security ispurchased,” explains Davis.

Risk managingthe black boxLast month, fund of hedge funds Prisma –which has more than $1.3 billion in nondis-cretionary assets under management –announced that it had chosen Riskdata’s riskmanagement product to manage itsfund’s risk.This kind of move is becoming increasinglypopular among funds of hedge funds, sothird-party risk management providers aregaining ground in this large segment of thehedge funds arena. Many of these funds ofhedge funds use services such as those pro-vided by Riskmetrics, Riskdata, GlobeOp andBarra in addition to, or in place of, in-houserisk management systems. There are twotypes of risk management products avail-able. One does not rely on the third partygaining full position transparency from thehedge funds while the other does.Riskdata and Barra both offer productsthat do not require full transparency ofpositions. Riskdata looks at what risk thehedge fund is taking based on the pastperformance of the fund and its relationto past market movements, rather than itscurrent trading positions.Olivier Le Marois, CEO of Riskdata, says:“We created a product to deal with lesstransparent funds.” The system also catersto funds providing different levels of trans-parency. “It enables risk transparency nomatter what the transparency of the under-lying fund,” he says.The need for detailPrisma’s head of risk, Emanuel Derman,says his firm decided to use Riskdata’sFOFiX system precisely because hedgefunds don’t provide much transparency.“Riskdata is looking at the bigger picture,”he says. “You have trouble managing hedgefund risk if you don’t have detailed [informa-tion on] positions. Riskdata takes a goodshot at telling you something about how thefund will behave when markets move, butwithout positions it cannot tell you every-thing. You have to step back and see if itmakes sense.” Derman says his firm is alsoconsidering using additional risk manage-ment systems alongside Riskdata, includingthose that require full position transparency.Such providers include, for example,GlobeOp, Bear MeasuRisk and RiskMetrics.“[These types of risk managementproviders] are getting positions and doingdetailed analysis of scenarios and value atrisk. That’s more accurate but you can’t do itfor your entire portfolio because you can’tget the transparency [from all hedgefunds],” he says.

LEGAL & REGULATORY

The profit or loss on the sale of that securityis then credited to the capital accounts of onlythose investors who had investments in thefund at the time the security was purchased.

But, what if an investor wants to get outbefore the security has been sold? “You couldredeem your investment in the nonside- pock-eted part and get the other [returns from theside-pocketed investment] when [the man-ager] gets rid of it,” says Davis. “Alterna-tively, the manager could give the redeeminginvestor its pro rata share of the security.”

European-based industry players believe thefact that there have been few cases of hedgefund fraud discovered in Europe so far – ifany – shows that the wider use of independentadministrators by European hedge fund man-agers has acted as a preventive.

There is a stark difference between the Euro-pean model and the US model. Research anddata firm HFR’s figures show that most off-shore funds use an administrator whereasmany US-based funds do not. Of the 87.8%of the funds (onshore and offshore) in theHFR database that reported to HFR that theyuse an administrator, only 24.4% are domi-ciled in the US.

Perry at Simmons & Simmons, says: “Onething that’s clear in the European model isthat it’s the norm for an administrator to inde-pendently calculate the net asset value pershare of the fund.” He adds: “The norm in theStates is for the investment [hedge fund] man-agers to calculate the net asset value per share[themselves].”

Astleford adds: “US hedge funds [typically]calculate NAVs wholly or partially them-selves. So either through fraud or error there’sa lot more scope to get it wrong.”

After attending a recent conference held inthe US by the Institute of Financial Engi-neers, Perry says: “It’s clear that noone there,including investors, seems to be demandingindependent pricing of funds. It’s just whatthey’re used to. People are saying ‘what’s thevalue add of an administrator?’”

European hedge funds might be more likelyto use third-party administrators partlybecause of UK tax law. “My theory [as towhy the European model is different] is thatEuropean hedge fund management has beencentred around the UK until now,” says Perry.

“UK tax rules on offshore funds mean that[hedge fund managers] make sure the fund isclearly managed and controlled outside the

UK. Therefore, it’s been convenient foreverybody to appoint non-UK fund adminis-trators to deal with the administration sideincluding NAV calculations. It has reinforcedindependent administration and calculation ofNAVs.”

TAX IMPERATIVES

It’s an unintended consequence that may ben-efit investors. Hedge fund managers need tominimize their funds’ onshore activities in theUK in order to take advantage of tax benefitsoffered to offshore funds. This often meansthat the European hedge fund managers arebased onshore in the UK and as much of therest of the business as possible is outsourcedto offshore service providers.

Conversely, hedge funds in the US areonshore and there has been no tax motivationto contract administration services out to anindependent service provider.

Independent valuation will not on its own pre-vent hedge fund advisers from engaging infraudulent activity. For example, infamoushedge fund Manhattan Investment Fund,

whose principal Michael Berger was foundliable for securities fraud in 2001, had a third-party administrator and yet was still able todupe investors. Berger was shorting technol-ogy stocks as the sector boomed, yet was ableto present a gain to investors as he had“inserted a confederate between the fundadministrator and broker”, says the SEC’sBasham.

The US District Court for the Southern Dis-trict of New York found that instead of report-ing losses to investors, Berger had created fic-titious statements in which he significantlyoverstated the market value of the fund’sholdings. It’s a complex and dangerous worldwhere sticking by simple and familiar pre-cepts may be the best defence. Schulte’sDavis says: “Investors should say ‘show meyour portfolio, show me how you’re doingthat’”. He adds: “If it sounds too good to betrue then it probably is.”

Julie Dalla-Costa

© Copyright EUROMONEY 2004

31march 2005

LEGAL & REGULATORY

Willie Slattery’s namedoes not immediatelyjump to mind whenone thinks of PeterYoung, the cross-dressing rogue fund

manager, who in 1996 almost brought downMorgan Grenfell Asset Management.

Mr Slattery was working in Dublin at thattime, running part of the funds administrationoperation of Deutsche Bank, MGAM’sGerman parent. He had been in the job just a few months, providing trustee or custodyservices for hundreds of Dublin-registeredinvestments funds, including one of the threefunds managed by Mr Young.

When the scandal broke, it was a measure ofDeutsche Bank’s confidence in Mr Slattery,that he was rapidly reassigned to take over as head of compliance at the troubled UKsubsidiary.

It is not a period he is very ready to talk about,but steering his German employers throughthe UK regulatory probing that inevitably fol-lowed must have been a testing experience.

Mr Slattery is no less obsessed with the needfor good governance today as chairman ofFinancial Services Ireland, the industry tradeassociation. But, interestingly, he believes oneof the main threats to Dublin’s position as acentre for funds administration and otherfinancial services activities is not too little buttoo much regulation.

“The regulatory environment is becomingmore onerous than any other jurisdiction with

which I am familiar,” he told the FSI annualdinner in September, in the presence of theguest of honour Jean-Claude Trichet, presi-dent of the European Central Bank.

It is a point he repeats during an interviewwith FTfm in one of the dockland hotels that

now dot Dublin’s international financial serv-ices centre.

Ireland, he says, has emerged as a major forcein fund management in the last 15 years. “But the key point is we need to be marketled the whole time. We need to be asking our

33march 2005

Willie Slattery, chairman of Financial Services Ireland, foresees troublefor Dublin’s competitive position from the single European market andthe rise of eastern Europe.

Industry chief waryof too many rules

34 march 2005

LEGAL & REGULATORY

clients what do they want to do in Ireland,and then create an infrastructure whichenables them to do that, and then let the mar-ket deal with everything else.”

Light regulation is only one of the ingredients.But with a welter of recent legislative initia-tives – setting up a new single financial regu-lator, an Office of Corporate EnforcementIreland, and a separate auditing and accountingregulator – he is worried that the authoritiesmay have “over-reacted to certain historicalevents”.

It is a reference to the recently unearthedbanking scandals, particularly at Allied IrishBanks where it was found that senior execu-tives were rewarded with preferential shareallocations in key privatisations. Mr Slattery’scontention is that the misdemeanours all hap-pened years ago. Indeed their discovery andthe investigations of the scandals point uphow much Ireland has changed.

For business, regulation is a cost, and hepoints out that while Dublin is still morecompetitive than London or Luxembourg,it needs to look at what is going on in easternEurope – for example in Poland or the CzechRepublic. “Over time they might be quitecompetitive in the type of business that wecurrently do.”

Perhaps his biggest worry is what is happen-ing at European level with the move towards

creating a single market in financial services.He is particularly concerned to stem the trendtowards harmonisation in tax and otheraspects of financial services, which coulddeprive Ireland of one of its strongest cards.In particular he is adamant that while thereshould be “common standards”, individualmember states “should be able to implementthose rules in ways that suit their particularmarket”.

He says: “Excessive harmonisation has thepotential to damage jurisdictions like Irelandwhose principal competitive advantage is tobe able to respond in a very speedy way to theclient base.

“If you’re prevented from doing that, businesswill ultimately migrate out of Europe. There

is no doubt about that. There is a danger thatthat process will seek to harmonise every lit-tle detail.”

Ironically, unless the current ructions inEurope force the entire commission to bereplaced, Charlie McCreevy, Ireland’s formerfinance minister, looks set to become Euro-pean commissioner for the internal market.

That is some source of comfort, Mr Slatterybelieves. “He’s well informed about financialservices. He has an open market mindset, nota narrow regulatory mindset. I think he willbe a positive force.”

John Murray Brown

© The Financial Times, November 8 2004

The regulatory environment is becoming more onerous than any other jurisdiction with which I am familiar,

INVESTING – HOW TO NAVIGATE

Just about every sector of the marketis, or is about to become overbought.“The recent hike in real estate islargely due to the lack of investmentopportunities in stocks and bonds.On the credit markets, spreads are

awfully tight: they do not reflect the realrisks. People in search of yield have gone toofar”, alerted David Mullins, Chief Economistof the Vega Group during the 10th annualEuropean Conference on Hedge Fund Invest-ments in Geneva1). One of the consequencesof this lack on investment opportunities is thatthe slightest niche becomes exhausted quitequickly and that the shifts become faster andincreasingly severe. Another consequencesuggested by Renee Haugerud, CIO ofGaltère International fund, is that “theinvestors expect results during the first yeareven though our approach is designed for atwo to three-year period. I would really likeinvestors to adopt a broader more long-termoutlook on investing.” Santo Volpe, CIO ofEden Rock Capital Management Ltd notes

that “in order to ensure better yields, we willhave to make some sacrifices in liquidity.”

HAVE WE RETURNED TO THEDECADENCE OF THE GOLDEN90S?As far as corporate debt is concerned, the vastmajority remain wary. As Baring Asset Man-agement writes, “all current mathematicalmodels show that corporate debt is over-bought, but this market can continue to dowell before an insatiable demand for yields2).One must however be careful not to fall preyto the decadence of the Japanese context ofthe 90s. Indeed, this could come about partic-ularly if downgrades should increase again.”This hypothetical risk can become a hard

reality quite quickly. As Standard and Poorsnotes, “Expectations for economic stability,relatively favorable financing conditions, andhealthy corporate profitability imply a san-guine outlook for defaults in the near term,with the global default rate edging up slowlyfrom its trough before the end of 2005…Concerns for a more material increase indefaults in 2006 and beyond remain” 3).

IF DEBTORS PROVE FRAIL, PULL THE PLUG!

Even management firms known for their con-trarian approach now advance cautiously. It is in light of this that fixed income team ofCarmignac Gestion finds that, “ the low

35march 2005

In search of yields, the low interest environment may lead to riskychoices. How can you avoid them? It seems that a bit of patience andopportunism are just about all that fixed income managers have toguide them in this seemingly uncharted territory.

Venturing on the Open Seas ofInvestment… Without Sails?

Véronique Bühlmann

36 march 2005

INVESTING – HOW TO NAVIGATE

spreads of corporate bonds reflect the abundantliquidity and excellent health of companies atthe moment. In this regard, there is little toworry about, but also little to gain except totake significant risks on uncertain names.Overall, in this delicate climate, we prioritisemedium term loans and sell low spread cor-porates and buy government bonds. We keep10% to 12% of emerging market debt and optfor a more dynamic management strategy byhedging the interest rate risk.”

Another management firm usually diversifiedin high yield, Clariden sheds some light on itsposition: “The thrust of our strategy remains

to take advantage of the higher yield onlower-rated credits but to run relatively lowduration risk. However, we have this monthcut slightly our commitment to non-invest-ment grade bonds and increased exposure toinflation protected government securities”.

EMERGING MARKET DEBT: GO THE LONG/SHORT ROUTE

On the high yield market, the emerging debtsector no longer provokes gleeful outbursts,as S & P notes: “After a strong performancein 2004, emerging debt fund managers weregenerally cautious on the outlook. Bernt

Tallaksen, who co-manages the AAA ratedThames River Traditional Funds – HighIncome Fund expects lower returns accom-panied by higher volatility. He believes most of these returns will come from interestpayments.”

In this context, Dexia Asset Managementoffers an original alternative in the form ofDexia Long/Short Emerging Market Fundthat invests in government bonds and semi-government bonds of emerging markets.According to the management firm, “a fundthat takes both long and short positions is thebest way to optimise its hold in the market in

INVESTING – HOW TO NAVIGATE

the event of sudden turmoil while stillenabling one to come out on top in the postcrisis rebound. Indeed, most market crises(Korea, Russia, Brazil) were followed bydrastic rebounds that provided exceptionalyields.

WHEN IT COMES TO INEFFICIENCY, EUROPE REIGNSSUPREME

Another option for addressing the low-yieldproblem is to opt partially for hedge funds. In this area, there are two competing schoolsof thought. However some would call it a clashbetween the “old” and the “new”. For the“old”, invest only in sectors with which youare very familiar. Keep things simple withoutbecoming elementary. For example, avoidderived strategies based on pure mathematicalmodels. Instead, target those based on con-crete economic developments such as asset-based lending strategies 6).

On the other side of the fence, the «new» con-sider volatility like an asset class. Withoutgoing quite so far, Jean-A Turretini, portfolioanalyst and manager at EIM Inc, writes in an article on the European hedge funds indus-try, “Taking all approaches into account (in Europe), it is estimated that 7% use fixedincome strategies, 6% use event-driven meth-ods, and 8% employ relative value strategies.The rapid growth among European manage-ment firms specialized in credit and creditderivatives (CDs or CDOs) is due to the factthat some large European commercial bankswere quick in developing such products dueto a stronger demand. Hence, these groupsnow enjoy a finer know-how in this area, par-ticularly as far as quantitative analysis is con-cerned.

European fixed income arbitragers often enjoythe mosaic effect that the region affords them.While the US is geopolitically limited, theyare able to take advantage of the inefficienciesbetween the Swiss, European, English, Scan-dinavian and, at times, Eastern Europeancurves… These patterns represent opportuni-ties that have not escaped the even-driven

managers specialized in high-yield bonds,in distressed securities or in merger & acqui-sitions” concluded the analyst. Provided thatthe cost of these products remains reasonableand managers apply a more hedge-basedapproach as opposed to relying on aggressivehigh leverage tactics, they may serve as apromising alternative.

BETTER TO DERIVE THAN STRUCTURE

Capital protected structured products oftenpromise the best of both worlds: risk-freeyields. In actual fact, many inquiries show ris-ing scepticism towards such claims – toomany products, too few explanations, too manyhidden costs for too little in yields. Indeed,some go as far as to make accusations of“mis-selling”. And unless asset managers arebig good-for-nothings, it seems sound toprefer cash and derivative methods rather thanstructured products. As Roland Duss of Fer-rier Lullin & Cie Inc. argues : “new genera-tion derivatives enable one to add value to anybond portfolio. One must understand theunderlying structure before acting, as pricechanges, sometimes significant, can occur. It is best to opt for structures guaranteeingcapital, only placing remuneration in harm’sway. Two products are particularly notewor-thy, Constant Maturity Swaps (CMSs) andCallable Daily Range Accrual Note(CDRAN).”

Last but not least, it is probably more by takingthe wishes and needs of the client intoaccount and not by playing around with hypo-thetical performances that the asset managerwill obtain the best mid-term “yield”. In thisarena, there remains much to be desired, atleast if you agree with Roland van den Brink,managing director investments at the 16bnPensioenfonds Metalektro (PME): “Theindustry hardly knows the things which are inthe mind of their clients. It is about returns.”But one must also explain the potential gainsof a give product for a given portfolio and notonly defending one’s own interests, or thoseof one’s company. One must indicate the righttime to start using the investment

product suggested by the asset manager 8).Basically, one needs some honest, straightforward sails to go the distance!

Véronique Bühlmann

1) David Mullins Jr. is the chief economist at the Vega

Group, one of the world’s largest hedge fund management

groups. Mullins was a founding principal at Long-Term

Capital Management . Prior to joining LTCB, Mullins

served as vice chairman and governor of the Board of Gov-

ernors of the Federal Reserve System. Earlier in his career,

Mullins was the Assistant Secretary for Domestic Finance

at the US Department of the Treasury. He played

a significant role in developing the plan to address the

savings and loan crisis. After the 1987 stock market crash,

he served as associate director of the Presidential Task

Force on Market Mechanisms (commonly referred to as

the Brady Commission).

Cf. MARHedge’s 10th Annual European Conference on

Hedge Fund Investments in Geneva Feb. 14-16 –

http://www.marhedge.com/conferences/geneva/geneva.htm

2)Baring Asset Management – Allocation d’actifs

stratégique mensuelle – 31st January 2005

3) S&P Global Bond Markets’ Weakest Links and Monthly

Default Rates, New York, Standard & Poor’s, Feb. 3, 2005

4) Clariden – Investment Strategy February 2005

5) S&P: Strong fourth quarter in emerging market debt

funds but fund managers are cautious on outlook, London,

14 February 2005.

6) Asset based lending: pour une définition cf. « Sono il

factotum della citta ! Gioachino Rossini, The barber of

Seville – Santo Volpe, Eden Rock Capital Management.

7) Stratégie obligataire 2005, November 2004, Roland

Duss, Ferrier Lullin & Cie SA

8) Investment & Pensions Europe – PME’s Van den Brink

Slams Asset Managers. IPE.com 10/Feb/05

37march 2005

38 march 2005

INVESTING – HOW TO NAVIGATE

Y. Sinan Öz is a founding member of MIF,a multiclient family office which monitorsassets on behalf of about thirty-five clientstotalling 3,2 billion Sfr., a figure in excess of6 billion when accounting for other illiquidassets, namely real estate, private equity, artcollections, yachts, etc. Together with PascalMuller and Manuel Alvarez he makes thecase for assets supervision, consolidation andreporting, drawing from eight years of experi-ence which he intends to put at the disposal of other, mostly institutional, clients througha new company which is in operation sinceJanuary, 2005.

How does MIF step into the wealth manage-ment process without being itself an assetmanagement firm ? Y. Sinan Öz: MIF is at the outset a multi-client family office. In this context and forreporting purposes, we have been respondingto a growing demand to present the clientwith a global picture of both his liquid andnon liquid assets, i.e. integrating non financialassets such as real estate, works of arts, privatejets, yachts and so on. The firm does not man-age assets but monitors the operation of vari-ous banks and financial specialists throughoutthe world. In other words, we do not make theinvestment decisions ourselves but oversee

the management of others on behalf of ourclients. To this end, we have been developingan in-house consolidation system which hasactually proven quite effective, so much sothat it is now being offered to a new categoryof end users, namely asset managers andindependent financial advisors (IFA).

Does that mean MIF is now widening itsscope of activity?Y. Sinan Öz: Yes indeed. However, in orderto clearly distinguish between the two lines of business and avoid all possible conflicts ofinterest, we are in the process of spinning offthe consolidation services into a stand-alonefirm. The family office will continue operat-ing as it has done successfully since 1996while the new company being set up hasalready moved into new quarters commencingJanuary 2005. The latter will be offering toother clients, i.e. asset managers and IFAs,the supervision, consolidation and reportingservices which MIF has fine tuned over thelast five years.

Manuel Alvarez: We offer the client a systemlooking much like an instrument panel whichenables him to know exactly where he stands,

in terms of asset allocation, performancemeasurement and related statistics. In a sense,the service enables the asset manager or IFA,acting as a co-pilot or navigator, to help theclient take investment decisions congruentwith his financial goals. Total visibility overthe assets is the key word here.

Obviously the need for such a service arisesonly which very wealthy clients…Y. Sinan Öz: Undoubtedly, very high networth individuals may derive considerablebenefits from having a clear picture of assetsotherwise too vast and diverse to encompassso to speak at a glance. But the setting up of a new entity is more specifically meant forthird parties, i.e asset managers and familyoffices. These are finding it increasingly diffi-cult to monitor client portfolios while makingthem fit within a picture conducive to makingthe most appropriate investment decisions.

Would I be mistaken if I said that increasingadministrative complexity due to ever moreintrusive regulations has a role to play. Especially as far as anti money launderinglegislation is concerned…Pascal Muller: Outsourcing administrativeduties makes a lot of sense for asset managersand IFAs who can then better attend to theircore business. Our aim is to supply the backoffice and the reporting leaving the asset man-agers free to concentrate on their specific mis-sion.

Y. Sinan Öz: With the spread of AML regula-tions an ad hoc computerized transactionsclassification system is indeed becoming cru-cial. Thus, AML adds weight to the case forconsolidation. For any flow of money in orout of an account, the system can integrate,on a confidential basis and in electronicformat, the relevant documentation, includingthe reasons and background information of a given transfer when applicable.

The point you make may well carry the daywith asset managers or family offices. But it is likely to sound less convincing how-ever with the client himself who as a ruletakes the paperwork for granted…

The case for assets consolidation: a roundtable with Y. Sinan Öz and MIF associates

Y. Sinan Öz

Manuel Alvarez

INVESTING – HOW TO NAVIGATE

Manuel Alvarez: It is true that the clientoften take the paperwork for granted. Clientsare eager to follow the evolution of theirassets, especially in terms of performance. As for the asset managers, consolidation alsoprovides them with a means to breaking freefrom the bondage of depositary banks. Suchan overview as is possible with consolidationmay not be essential for those working withone or two banks, sharing the same procedures.When it comes to asset managers operatingwith a series of banks throughout the worldhowever, consolidation becomes essential.

Are banks not well aware of such a drive forharmonization?Manuel Alvarez: Efforts are in effect beingmade at harmonizing data coming fromdifferent sources. At present however, there isno overarching integrating system, no unify-ing data channel. As a consequence, assetmanagers tend to select banks on a technical,that is on a compatibility basis, rather than ontheir competitive merits as should be the case.

Pascal Muller: One has to understand what itimplies for the client to be forced to stick to asingle global custodian, thus being deprivedfrom the benefits he could derive from a mul-ticustodian environment and a variety ofjurisdictions. Now, there is no proper justifi-cation for absence of choice in such a matter,since consolidation is precisely there to pro-vide the client with a global view of his assetswithout tying him down to only one custodian.

Manuel Alvarez: What the client expects issomething different in terms of service, i.e. aglobal visibility on assets. The advantage isobvious, not only as far as avoiding errors

is concerned but also when it comes to imple-mentation. The financial advisor must havethe means to follow through on the client’sstrategic guidelines and ensure a proper exe-cution of tactical decisions.

Would you say that consolidation is equallyvaluable to advisers and managers alike?Manuel Alvarez: An advisor will be in a posi-tion to outline and follow up on a far morecoherent strategy on the basis of reliableconsolidated information. But this is alsovalid for the typical asset manager who findshimself in a much more comfortable positionwhen he has a general view of the client’sassets, including those with which he is notentrusted.

Y. Sinan Öz: Consolidation is no less valu-able when applied to the notion of “CurrencyOverlay Management”. A currency overlaymanager is constantly able to keep abreast ofhis client’s overall net currency exposurewhich enables him to take the appropriatehedging decisions consistent with the globalstrategy.

Listening to what you are saying, the case forconsolidation sounds very much like existingPortfolio Management Systems (PMS)… Y. Sinan Öz: Consolidation as we see it goeswell beyond the scope of any existing Portfo-lio Management System. A PMS, by defini-tion, is made to facilitate the management andreporting of primarily liquid assets. Less liq-uid assets and the reporting requirements thatgo with those types of assets –such as privateequity, real estate, collections, etc,- poseserious integration issues to such systems.Furthermore, managing liabilities and a greatvariety of reporting styles requires a flexibilityhardly to be found in any PMS. Consolida-tion, although it may look or sound similar,is at the end of the day very different from aPortfolio Management System.

Pascal Muller: A PMS is used to processorders and monitor the ensuing transactions.Consolidation on the other hand integrates allrelevant data in an intelligent and comparableway. It would be fairly easy to account for,

say, the integration of a thoroughbred racestallion with “breeding rights”, but how doesa covering fit into the system? The situation isstill fairly simple and may conceivably bereferred to as a dividend, but anyone trying tomake all kinds of assets fit into a single frame-work is faced with increasing complexity. A PMS falls far short of such expectationssince by definition it is not devised for thesame purpose.

We have been talking at some length aboutwhat consolidation really means. But isn’tdevising such a system the task of computeranalysts and other software specialists?Sinan Öz: Certainly, you need computer pro-grammers and software specialists, but that isonly half the answer. What is also required isthe expertise coming from the asset manage-ment and aggregation business. Thus onlyhalf of the persons in our new venture areinformation technologies and software spe-cialists, the others being back office special-ists on aggregation.

While the benefits of consolidation seem nowfairly clear, a word should be said about itspotential drawbacks. After all, wealth man-agement is still very much about confidential-ity which may find itself sometimes at oddswith too clear and comprehensive a picture of the client’s assets…Sinan Öz: Reports and clients files are allreferred to with numbers without any clue asto the owners’ identities. Thus, the upside ismuch more important than the downside andthis is so well understood that I can recall ofonly one instance of an outright refusal ofconsolidation per se. The question arises inmuch the same way in the context of anygiven single custodian bank with the addedinconvenience of having all one’s eggs withinthe same basket, a major inconvenience muchto be avoided which is also what consolida-tion is about.

Interview: Mohammad Farrokh

39march 2005

Pascal Muller

40 march 2005

INVESTING – HOW TO NAVIGATE

Once upon a time there was anhonest financial adviserwhose client asked him toanalyse his portfolio’s per-formances using competinginvestment approaches.

The financial adviser and client thereforeestablished a strategic benchmark. On onehand, the client undertook a portfolio thatcomprised solely index products. Meanwhile,he hired an active manager, making sure totell him his reference index before biddinghim farewell. Three long years passed beforethe client and the financial adviser met againto examine the results.

DANGEROUS DEVIATIONS

To their surprise (sic), neither passive noractive strategies faired quite so well as thestrategic benchmark.. But why? Because thepassive investor’s deviations from the bench-mark, meaning his allocations to equities,bonds, and cash were untimely. Furthermore,his average asset mix left him with a perform-ance rate lower than half that of his strategicindex!

As for the active manager, his poor perform-ance was due in part to his asset allocation.Though much more disciplined than his pas-sive counterpart, and deviating only slightlyfrom strategic allocation, the active managerplaced an allocation whose potential returnproved less than that of initial strategic alloca-tion. In addition, his stock picking almostamounted to the contrary as he only gleaned ameagre half of the total world equity index.Even on his home market, the active manager

was disappointing at best: he largely under-performed the index! What conclusion do you think the client drewfrom these results? Did he decide to changehis active manager? Did he opt for a system-atic passive approach and avoid the frequentand unproductive back and forth? No, he firedthe financial adviser who provided him withthe performance analysis. Why? Primarilybecause sticking to one strategy “is boring”,particularly when the portfolio is greater than300 million euros.

ONE REVIVAL, AND THENANOTHER, AND THEN ANOTHER…

In 2005, a year marked by much uncertaintywith regards to rising interest rates and thesliding dollar, it seems more prudent to avoid

taking additional risks rather than embarkingupon a quest for the goose that laid the goldeneggs. Indeed, a substantial portion of portfo-lios have yet to regain their pre-market-slumpfooting. Sceptics need only look at the resultsof the vast majority of asset allocation fundsand pension funds as well. It is in this currentmarket climate that one must consider newinvestment propositions which, lest we forget,tend to arrive on the market when demandpeaks not when their performance potential isgreatest.”

Gold assets demonstrate this: their revivalcame a bit late. As S& P attests, 2004 was awonderful year for most specialist sub-sectors:“resources topped the comparisons with a 26%advance by the sector-median fund for theyear as a whole, followed by financials with a

Anyone wants to be boredto death?Which stock markets are to be under- or over-weighed in 2005? In light of the dark cloud of uncertainty hovering over markets, the bestanswer to this puzzling question may just be to ask yet another: doesthe returns/risk ratio of a deviation from strategic allocation hold anypotential at all?

INVESTING – HOW TO NAVIGATE

16.7% rise. Only investors backing the goldand mining sector missed out on the rewards,with that sector recording a 3.6% setback”.

BUILDING ON QUICKSAND

These results beg the question: what can weexpect from real estate in 2005? The trend isclearly towards pushing investors, particularlyinstitutional investors, towards this sector;presenting it as one of the last portfolio diver-sification strong-holds. Despite analysts’claims, one wonders if there really is anypoint to awaiting a true plus in accrued expo-sition in real estate. Indeed, new productscoming to the market smell of the approach-ing end of a cycle and suggest risk profilesquite different from those of traditional realestate known for its stability.

Cs’s Real Estate Fund Property proposed lastNovember, the first Swiss real estate fund toinvest primarily in projects granted with abuilding permit “enables investors to partici-pate actively in the increase in value of abuilding upon its construction.” We couldargue, it allows investors to take all the risksinherent to the building phase, – a step thatdraws one much closer to venture capital! In keeping with this train of thought, AXAInvestment Managers launched a few monthsago the first ETF on quoted European realestate companies, the EasyETF Eurozone.

Yet, the fund is set on an index made of 80%of real estate or building companies. It willtherefore react more like an equity fund thana true real estate fund characterised by rela-tively stable growth.

EMERGING MARKETS: HARD TO PREDICT

Another hot trend is commodities which arestrongly linked to emerging markets. Generalopinion is usually favourable towards the lat-ter because “the lull in economic growthmakes industrialised nations’ stock marketsless attractive than those of emerging markets”affirmed CSAM’s Phillip Vorndran recently.However, this does not at all mean that emerg-ing markets are a virtual panacea. Dexia AssetManagement expresses in its February com-mentary, “Even if our positive outlook onemerging markets and our conviction as far aslong term revalorisation … remains resolute,2005 seems as hard to predict as 2004.”

And S & P adds: “Most managers are cau-tious on the outlook for emerging marketequities. Rajiv Jain, who manages the Standard& Poor’s A-rated Vontobel Fund – EmergingMarkets Equity Fund, thinks that after ‘twoheady years’, market returns in 2005 will bemid single digit at best and could easily benegative. Similarly, Wojciech Stanislawski atComgest, responsible for the Magellan fund,believes that in the short term, emerging mar-kets may experience a small correction,although he remains bullish longer term”.

In the same report, S & P goes on to notethat: “the favoured region is Asia since Asia islikely to demonstrate higher levels of growththan Latin America and, with a lower depend-ence on the US and commodities, its risk pro-file is arguably lower, too. Managers gener-ally consider Latin America to be expensive,with the exception of Brazil, where they think

there is still scope to cut interest rates. Valua-tions in most Central and Eastern Europeanmarkets are considered stretched after theirstrong performance in 2004”. Furthermore,some funds that target Eastern Europe, rank-ing among the very best, just closed all newsubscriptions.

CHECK THE INVESTMENT SCOPE

To return to the issue of commodities, theselection process is crucial. The S & P reporton sector funds demonstrates that, in 2004,the success of an investment was not just amatter of choosing the right sector, investorshad to select the right fund to maximise theirgains. For instance within the resources sectorthe best performer among the S&P ratedfunds, the AA-rated Investec Global EnergyFund marked up a 41% rise over 2004, whilethe German domiciled AA-rated dit-Rohstof-fonds managed just a 11.9% increase

Indeed, the report goes on to state that,“this was not a case of one management teambeing better than another but the funds’ differ-ing investment mandates. Investec’s fundinvests almost exclusively in oil-relatedcompanies, while the dit-portfolio has noexposure to energy at all. Investors are welladvised to check any fund’s investment scope before investing.”

In its most recent Fund Facts headline, UBSsuggests that there are “new avenues to returnsthrough new funds .” The question is, returnsfor whom – the fund manager or the investor?

Véronique Bühlmann

41march 2005

42 march 2005

SPECIAL REPORT

With years of experi-ence, working directlywith teams of expertson ground, and in con-duct with fundinvestors, we have

skipped agonies on various cynical in regardto investment criterion. One has to choosewisely, but how? In profound signification ofinvestment complicity, it is essential to virtu-ally have knowledge of the managerial teaminternally at high level, when taking up highmagnitude of investments in Asia. Secondly,corporate governance plays a grave roll, asthe company must assert a proven record ofgood governance, as well as liaison to suc-cessful steady growth.

As early as in 2000, we have been on recordby saying that Asia has been undergoing the“W-shaped” economic recovery. 2005 wouldprove to be the turning point for the first sus-tainable economic growth since the 1997Asian crises. There are strong signs webelieve, that Asia could be heading into highmagnitude economies with continuation ofstrong economic performances in the secondhalf of this decade. There is the likelihood fora technical rebound in the Asian economies inthe next few years to complete the “W-shaped” recovery a mid all the odds of pend-ing uncertainties globally. There has beenhuge progress made over the past years inAsia at an amiable pace, attributed to initia-tives by governments and companies alike inrestructuring their financials, a lead to futureprosperous. While some sectors will recoverat a pace not fast enough – asset light compa-nies will take a lead in fast recovery than bigasset-laden ones.

Overall, we consider the emergingeconomies, China and India, at their highestbeat for growth, which now peers with awak-ening rays of highlights as the “ mega-trends”for further lengthy prosperity. As theeconomies of the two countries evolve rap-idly, we are bounty to see among them, risingtides, emerging growth industries, in which“lion entrepreneurs” can excel to deliverinvestors with “multi-baggers.”

In regard to investment approach, we dofavour certain industries, after our thoroughstudy of historical events and demographicaltrends. On investment point of view, we dofavour certain aspect of business model,bearing in mind that, a company with asteady high growth, even with periodical setback in stock volatility, the key aspect arecompanies with intellectual content in infor-mation technology, resources and consumerrelated life-style.

Investments Success with Fund ManagersYears of investment trends can spark momen-tum in identifying ways to successful con-structive, consistence in long-term strategicinvestments, as it’s an elusive goal for institu-tional investors globally. While absolutereturn is what all investors aim at achieving, itis not always a triumph that fund managers

deliver an absolute return, only a handful ofthem do deliver better-than-market invest-ment returns. With so many Asian fundsavailable in the market, it is vital for fundinvestors to scrutinize the very aspect ofinvestment, in viewing the concept of sustain-able long-term success. Secondly, investorsshould look beyond the fund performance fig-ures or the hype, and instead assess the qual-ity of the fund manager, and also the com-pany behind before intrusting their money tothe fund managers.

Philosophically, gesture to good test of prod-ucts can be equally helpful when it comes toinvesting in equities. Investing in equity, as anasset class, can be justifiable with solid man-agement background and a view of patterngrowth, as well as foreseeable growth poten-tiality in the company’s profile that doesoccur coherently. Without the applicable ofthis scenario, equity returns will, with almostcertain, gait in disappointment manner due tomyriad of adding high costs. We have allexperienced events, that were a few years agotoo irrational and even unthinkable to takeplace, yet, lessons learned after the 11th ofSeptember reminded as all that, one can neverpredict the swings of stock markets periodi-

Macro Economic – Mega-Trends and Rising Tides… Investing in Asiacan be a bit of bustling and hustling, even so, there are plenty of invest-ment opportunities, in terms of diversity investment.

Success in Asia

It is also common knowledge that success builds upon success and nowhere is this truer than

in small, fast growing companies.

SPECIAL REPORT

cally outlook. Hence, investing wisely, beingcautious, and embracing the very best stocksof investor’s choice, could actually spare anyinvestor from real damages caused by volatil-ity in global markets as at current. One shouldalso choose a fund manager that has an equityinvestment approach, and with a decisivemind, to overcome all other obstacles that cancripple the markets outlook.

INVESTING – ACHIEVING LONGTERM INVESTMENT SUCCESS

Strategically, investing in Asia requires afocussed mind, a firm decisive pillar cate-gorising which sector to go for, as one has tobear in mind that there are always risks taken,in making decisive steps to invest, thereforeone should learn to “read between the lines”approach to master their goals. In regard toother methods of investment approach, trad-ing in and out of stocks to achieve 10%-15%annual return is absolutely a risky factor,which cannot yield sustainable long-termreturns. Such investment approach can beviewed as extravagant, and insidious impactof transaction costs, as one has to take in con-sideration the now unpredicted marketshocks, which could cause a major loss ofstock value. We in our investment approachtend to focus on long-term investment, indivisively selective sectors and companieswith “multi-baggers” – potentiality being theonly asset that liaison actually equity returnsin Asia and does indeed deliver.

The multi-baggers approach is to seek toinvest at the right price, making sure that theinvestment choices are done selectively, insecular growth industry, preferential of com-panies with immense and high dimensionpotentialities. In fact, investors should viewweak market as opportunity to accumulatestocks before strong profits results areannounced. This model works well, for long-term investors, taking a long-term investmentapproach, in holding onto the company for awhile; this could generate enormous return inprofits. Secondly, investors approach shouldbe of sentiment, to hold on to their invest-ments even when the stock appreciates if the

company has a solid financial background,with high value business model, since compa-nies with such value will always bounce backeven after price volatility.

Gradual stock accumulations at the right pricetend to scale down risks on losses, if it indeedoccurs. Investors should not make a single betinto a company, hoping to sell out after cer-tain share price appreciation. Instead,investors should start up small with meaning-ful position and then decisive further increasein acquiring more shares if the company haspotential growth.

LONG TERM STOCK HOLDING

Companies that qualify, as a multi-bagger,would be rare to come across. We believe asour investment strategy, that those stocksshould be held in the portfolio as long as theycontinue to meet growth expectations. Also,investors should sale if the company breaksgood corporate governance, and makes unex-pected changes in its business model, and sec-ondly, only where a company has reached fullpotentiality. Investors, we believe as well,should also sale if the entrepreneur sells offhis own shares without valid good reasons. It

is also to take notice that, finding a winner inAsia is rare, therefore, it does not make anysense to take profit and try to find anotherwinner. Constant finding such good compa-nies are very slim, as it is not a sustainablestrategy. Investors should rather make addi-tional investments in stocks they are familiarwith. In fact, investment risks fall with famil-iarity. It is also common knowledge that suc-cess builds upon success and nowhere is thistruer than in small, fast growing companies.

SMALL AND MEDIUM CAPITALIZATION COMPANIES

Investors should in their own pace, considerfocusing on under-researched and non-indexedsmall and medium capitalization companies asthere are often pricing inefficiencies, or positivecorporate developments that go undetected.As such, companies to look for should repre-sent both the virtues of Asia enterprise andhard work, as well as the best of Westerncapital management principles and corporategovernance – very significant.

Jean-Pierre ZieglerJPSecurities SA(jpsec@bloomberg.net)

43march 2005

44 march 2005

SPECIAL REPORT

The professional financial inter-mediary is needed by individ-ual as well as institutional con-sumers of the financial market.The demand for this is growingalso from the side of financial

institutions – so-called producers of financialservices and financial products. The profes-sional functioning of the financial intermedi-ary market is much facilitated by clear,rationally constructed legal bases, high ethicalstandards and transparent criteria for the prac-tice of the profession. A well-prepared finan-cial intermediary should not only deliverready-made products, but propose to the con-sumer tailor-made financial solutions for hisspecific problems. The clients would like toprofit from services provided by well-educated,certified independent intermediaries, offeringa variety of solutions suited to their needs.The intermediaries, on the other hand, expectrecognition for the value of their work, suit-able conditions for doing it, a rising profes-sional status as well as opportunities for pro-fessional development. There is still a lot tobe done to make these wishes reality.

GENESIS AND MISSION OF THE PAFCIThe association was created on 10 March 2004as an initiative of a group of persons who havebeen actively engaged for many years in thedevelopment of the Polish financial market:

Dr Malgorzata Pawlisz, former President ofthe National Insurance Institution and of theBoard of the Polish Employee Pension FundSociety DIAMENT S.A., president of thePAFCI.

Janina Danuta Firlicinska, Chairman of theRevision Commission of the Polish Union ofBanks and Vice-Chairman of the SupervisoryCouncil of DOMINET Bank S.A., for manyyears President of the Board of the CUPRUMBank S.A., Vice-President of the PAFCI.

Dr Andrzej Fesnak, Vice-President of the PolishChamber of Insurance and Financial Brokers,owner and head of a training company,FTS Education in Finance, Vice-President ofthe PAFCI.

Artur Nieradko, owner and head of a financialintermediary company, for many years mem-

ber of the board of numerous top financialinstitutions in Poland, among others BankHandlowy w Warszawie S.A. (CitibankHandlowy, member of CitiGroup), Vice-President of the PAFCI.

Among other initiators who took part in the firstmeeting of the association are representativesof several Polish banks, including KrzysztofLutostanski, Member of the ManagementCommittee of the Chamber of PensionSocieties, and Malgorzata Niepokulczycka,President of the Polish Consumers Federation.

THE ASSOCIATION WILL FOLLOWTHE PROCEDURE REQUIRED TO OBTAIN THE STATUS OF APUBLIC UTILITY INSTITUTION.

Objectives• Besides pursuing activities aimed at creating

exemplary solutions for the good function-ing of the financial intermediary market,the PAFCI seeks to enhance the professionalstatus of financial consultants and interme-diaries, improve the quality of their services,and draw up as well ensure the observanceof ethical, legal, organisational, financialand educational standards for the financialconsultants and intermediaries’ market inPoland.

• The association will also establish a systemof standards and certifications attesting theprofessional qualifications and competenceof financial consultants and intermediariesin Poland; establish educational schemes to enable those interested to acquire theappropriate qualifications; and develop a strong lobbying forum working in theinterest of the financial consultants andintermediaries’ market.

• The PAFCI will furthermore protect therights of financial consultants and interme-

diaries and help to raise their professionalcompetence and qualifications; help widenand deepen the knowledge public knowl-edge about financial intermediation andconsultancy; and promote the education ofthe Polish society on matters of finance.

Concrete measuresThe PAFCI, besides drawing up reports andexpert appraisals, will prepare drafts of leg-islative acts for the Polish and EuropeanParliament on matters concerned with the finan-cial consultants and intermediaries’ market.It will represent the interests of the professionin dealings with government institutions,other financial market entities, principals andcustomers, and provide advice to public andnon-public institutions on matters related toobjectives pursued by the association.

The association will also organise conferences,symposia, seminars and workshops as well asdeliver lectures on topics related to the itsobjectives; run training schemes; participatein subject-related research programs and dis-seminate their results; and organise educationalprojects in collaboration with government andnon-government institutions, domestic andinternational business entities.

The PAFCI will actively cooperate with Polishand foreign institutions pursuing similarobjectives, and undertake with the EuropeanFederation of Financial Consultants and Inter-mediaries educational, information and lob-bying projects aimed at developing the finan-cial consultancy and intermediary market inEurope

Finally, the association intends to draw uprules and regulations governing the award ofdistinctions to individuals and institutionswhich have played a distinguished part in thedevelopment of the financial consultants andintermediaries’ market in Poland.

The Polish Association of Financial Consultants and Intermediaries (PAFCI)

SPECIAL REPORT

materials for the Academy’s students, but alsoconference materials, studies, reports and expertise. The Foundation will be giventhe responsibility of elaborating and publishingthe post-conference materials to be used fortraining.

Training and educationThe PAFCI will act as a patron and initiatorof permanent courses and training for devel-opment and education of financial marketstaff – mainly financial consultants and inter-mediaries. The training programme is beingelaborated together with the partners of theassociation and will strengthen the cohesionof the Polish market with those of the EuropeanUnion member states, according to the direc-tives given by the European Parliament andthe European Commission. Priority has beengiven to a first course entitled “The basics ofthe financial knowledge for the financialintermediaries”.

ResearchThe PAFCI works in favour of setting the Pol-ish financial intermediation and consultancystandards on the European level. It has seeked the collaboration of a number of institutions in Poland, among others theLazarski School of Trade and Law in Warsaw.

Regional branchesThe PAFCI will set up regional branches indifferent parts of Poland. Already registeredis a PAFCI Southwest Branch, covering threeout of the country’s 16 districts. It is headedby Janina Danuta Firlicinska. The next brancheswill be set up in the other major businesscities: Poznan and Gdansk.

www.pafci.teleos.pl

45march 2005

PAFCI’s partnersPAFCI’s national partners are Polish cham-bers and associations representing the inter-ests of consumers, professional branches of consultants and financial intermediaries,financial market institutions as well as gov-ernmental and parliamentary bodies engagedin the law-making process, the supervision of the financial market and the defense ofconsumer rights.

The international partners of the PAFCI arethe European Federation of Financial Consul-tants and Intermediaries (FECIF) in Brussels,the European Academy of Financial Planning(EAFP) in Bad Homburg (Germany), theEuropean Financial Planning Association(EFPA) in Rotterdam (Netherlands) and theConvention of Independent Financial Advisors(CIFA) in Geneva.

Plans of the association and foundationThe PAFCI, together with the EAFP, is plan-ning to organise numerous conferencesdevoted to independent financial consultingand financial intermediation issues that existin the European Union. Conferences andseminars will be organised in collaboration

with foreign partners and Polish institutions.It is also planned to participate in joint under-takings with foreign associations, federationsand conventions.

The first of the planned cycle of conferences wasthe “Financial Intermediary in the EuropeanUnion”. Held in Warsaw on 23-24 March2004, it gathered representatives of all circlesof the Polish financial scene as well as manyforeign guest speakers. The conference wasorganized by the Strategic ConsultancyCentre TELEOS Co Ltd (Poland) and theConference of Financial Institutions (Poland),with the help of the PAFCI.

The PAFCI is planning to organise in 2005, incooperation with some of its European part-ners, another conference on the theme of“The Financial Intermediary in the EU”. The conference will be devoted to the devel-opment of the financial products offered byintermediaries to individual and institutionalconsumers in Poland and in the EU.

PublishingThe PAFCI intends to be quite active in pub-lishing, elaborating not only the educational

Dr Malgorzata Pawlisz, President of PAFCI, speaking here at an international conference in Brussels with (from left to right) Vincent J. Derudder, General Secretary of FECIF; Jean-Pierre Duverney-Guichard, Chairman of FECIF; and Luc Willems, Belgian Senator.

46 march 2005

SPECIAL REPORT

VOTUM: Partner of independentfinancial services companies

Due to the complexity of the markets, individ-ual financial services companies are no longerregularly in a position to be able to ensure a complete overview of market participants,products, the competitive environment, techno-logical changes and the resulting opportunitiesand risks. Consolidation processes, foundingof new companies, product innovations andcustomer behaviour are all undergoing rapidtransformation processes.

VOTUM is the organisation for independentfinancial services companies, which givescustomer-related and quality-oriented helpand advice within its market. Members of theassociation consider their activity as a serviceto benefit their customers. All full and sup-porting members are committed to commonobjectives, which are summarised in the asso-ciation’s code of ethics and are gearedtowards long-term customer relationshipsbased on trust.

VOTUM develops product guidelines for itsmembers and provides neutral decisionparameters for making appropriate productchoices. The work of the association helpsmembers to meet their objectives whilst takingcommon basic values into consideration.Tasks such as market observation and analy-sis of court decisions and tax legislation arecarried out collectively. The associationprovides its members with the required marketpenetration and superior market knowledgeon subjects and problems of fundamentalimportance.

Product partners integrated into the associationas supporting members also take part in theregular general meetings where opportunitiesarise for a direct exchange of experiences.The collective work fosters trust and empathybetween the financial services companies andproduct providers. Small and regional compa-nies also gain from this reliable orientation in

a complex market. They are in a position tooffer their increasingly cautious clientelecompetent, reliable and transparent help andadvice.

Training of advisers is of particular concernto VOTUM. The association supports the enti-tlement of entrants to thorough, specialisedtraining and orientation. In the interests of thecustomers and employees of its members, theassociation advocates an unambiguous defini-tion of the occupational image and access tothe profession. This involves establishing andobserving high and uniform training standards.

DIALOGUE FORUM FOR MEMBERS AND THE PUBLIC

For 10 years now the association has beencommitted to representing the interests ofindependent financial services companies inpublic. A fundamental element of this is rep-resenting the interests of the 54 members,which have joined since then, along withapproximately 80,000 sales partners, to politi-cal and supervisory bodies, specialist journal-ists and other associations. The ManagementBoard and managers maintain close contactwith national and European political and eco-nomic organisations and institutions and theirdecision-makers. VOTUM leads socio-politi-cal discussion for the establishment of equalopportunities by ensuring fair competitionand ensures legal safeguards through the pro-vision of legal assistance and expert opinion.

The association regularly gives its membersup-to-date and comprehensive informationabout important attitudes, trends and legal ini-tiatives. As an “interests early warning sys-tem” this function offers an important addi-tional benefit for all association members.Early recognition of important changes andnegative developments offers an opportunityfor dialogue between the members in order to

Prof Rolf W. Thiel, Executive Director

SPECIAL REPORT

47march 2005

develop constructive proposals for improve-ments to be introduced to the decisions com-mittee.

A COMMON UMBRELLA FOR QUALITY AND TRAINING

The confidence of the customer, the image ofthe industry and the capability for influencingeconomic developments are fundamentallydetermined by the productivity of the com-pany, the quality of the products and the skillof the adviser.

The association sees itself as the “spearhead”of adviser training and wants to ensure cus-tomer care of a certain quality via all salespartners working for member companies. Therefore, VOTUM and its members arecommitted to minimum requirements andquality standards for advisory services. Membership of the association should guar-antee reliable and competent advice. For thispurpose, the association develops optimisedproduct and product line-specific consultingguidelines. In addition, the association hasdeveloped relevant contracts and forms whichserve both to protect the customer and also tooffer a solution to the problem of liability.

VOTUM assesses product providers and basicproducts, which is increasingly gainingimportance. To do this the association securesthe assistance of external, independent ana-lysts, experts, examiners and other specialists.The association also calls for transparency of product suppliers with regard to companyreference numbers, current accounts, dealingwith problem cases and solvency.

The desire and willingness to establish anindividual profession for financial serviceproviders is growing in the industry. VOTUMis striving for a collectively developed andimplemented occupational image for inde-

pendent financial consultancy in Germanyand Europe. Uniform regulations for trainingand advanced training are a fundamental basisfor this. The association has submitted a full legislation proposal to both the nationallegislator and the European Commission andparticipates in relevant discussions in Berlinand Brussels.

CONTACT POINT FOR LEGAL AND TAX ASSISTANCE

The relationship of the customer to the adviseris also subject to constant change from a legalpoint of view. Hardly any other subject preoc-cupies the financial services industry morethan the problem of liability due to regulartightening of the liability regulations by courtdecisions. In disputes, sales partners and/orfinancial services companies are exposed tomany liability problems, such as reversal ofthe burden of proof.

As the first association for financial servicescompanies, VOTUM has developed a safetysystem, which offers members and theiradvisers extensive protection for consistentapplication in the area of adviser liability. Theassociation offers its members a complexsafety kit based on model contracts, analysissystems and product-specific consultingguidelines. VOTUM maintains an extensivearchive of important judgements, printed arti-cles and publications. Above all, this archiveincludes collections of judgements with morethan 5,000 verdicts, industry publications andpress reports.

The association supports legal petitions by oragainst members with:• Legal assistance by specialist lawyers• Brief expert’s report• Help with line of reasoning• Collections of judgements• Ombudsman’s institution

The ombudsman settles member disputeswith customers, employees and sales partnersand also disputes amongst companies. Refer-ence to the ombudsman leads by virtue of thebinding commitment of all member compa-nies to interruption of the limitation period.As a result, the parties gain the necessarytime to arrive at an amicable, out of court set-tlement. All disputes to date, which were for-warded to the Ombudsman’s office, wereresolved amicably.

COMMITMENT TO FAIR COMPETITION

Dealing with money requires strength of char-acter. Financial distress, negligent dealingswith capital investments and the resultingnegative headlines are damaging to the finan-cial services industry, which is under scrutinyfrom the public. Therefore, a high level ofsensitivity of financial services companieswith regard to the requirement for competentdealings in the customer’s interests isexpected. This requirement also applies to thequality of products and to the observance ofall measures relating to security in order toconserve and successfully increase capital.Also with a view to meeting these objectives,all VOTUM members are committed to thecode of ethics drawn up by the associationand also declare that they will deal fairly withone another in keeping with the rules of faircompetition. These rules of conduct prohibitdeliberate enticement of employees, salespartners and customers of a company member.In the event of disputes, member companieswill firstly endeavour to come to an agreementamongst themselves without resorting to legalproceedings and, if necessary, will also callupon the services of the ombudsman appointedby the association.

www.votum-verband.de

48 march 2005

SPECIAL REPORT

By Angela Knight, Chief Executive

APCIMS, the Association of Private ClientInvestment Managers and Stockbrokers, is thegrowing trade association of 219 firms operat-ing on more than 500 sites across the UK,Channel Isles and Ireland. Last year ourmembers undertook 13 million trades on theLondon Stock Exchange and they have Euros400bn under management for the privateinvestor. Formed in 1990, APCIMS is thelargest trade association of firms in Europerepresenting the private client community.

More than 12 million people in the UK cur-rently invest in stocks and shares to securetheir financial future. The members ofAPCIMS offer a broad range of stock brokingand investment management services, fromthose offering full discretionary portfoliomanagement, through firms providing adviceand trade execution to their clients, to “execu-tion only” or no advice firms.

Working closely with our members, ourobjectives are:• To advance the interests of our members

with governments, regulatory bodies, finan-cial institutions and all participants in thefinancial services community;

• To provide information and assistance toour members across a range of regulatory,market and business issues;

• To communicate change in the industry toour members – to ensure they have theinformation to anticipate trends and spotnew opportunities;

• To lead the debate in Europe in the devel-opment of the European securities industry,influencing decision makers and policy par-ticularly where it relates to the privateinvestor.

Through our network of contacts, our ownregional meetings, committees, workshopsand reports, we provide strategic forwardthinking to ensure our members, and in turntheir clients, gain the greatest advantage fromthe changes and opportunities of the future.

Looking at the outlook for APCIMS membersin 2005, it certainly appears that “the onlyconstant is change”. There are many keyissues we are examining closely, both homegenerated in the UK by our financial regula-tor, the Financial Services Authority (FSA)and UK Government, and from the EuropeanInstitutions. These include the FSA’s initiativeon conflicts of interest, Depolarisation whichis about the independence of advice and thecost of regulation – who pays for what. Thenfrom Europe, there is the new CapitalRequirements Directive (CAD), and thereplacement for the current Investment Ser-vices Directive known as MiFID, which willchange how all financial firms operate,whether wholesale or retail. Meanwhile, thereare changes to taxation on Unit Trusts, thesettlement of Splits, the proposed acquisitionof the London Stock Exchange, anticipatedchanges in clearing and settlement, plus aGeneral Election all to contend with. It’sgoing to be a busy year!

We aim to assist our members on business mat-ters too. In conjunction with FTSE, APCIMSprovides a set of indices, which indicate thereturns that private investors might expect fromtheir portfolios. The FTSE/APCIMS indicesare designed to give the investor a measure tocompare the performance of Income, Growthand Balanced funds and a basis for reviewingthe asset allocation and structure of the portfo-lio with the fund manager or stockbroker. The indices are compiled from statisticalinformation returned regularly by our mem-bers, calculated by FTSE and published every Saturday in the Financial Times.

Additionally, APCIMS runs a popular seminarprogramme for its members. There arearound twenty of these a year where seniormarket practitioners present on a variety oftopics; recent subjects have included MoneyLaundering, Client Classification under thenew Investment Services Directive (MiFID),Taxation of Hedge funds and meeting theAmerican authorities Qualified IntermediaryStatus requirements so that our members’clients do not find themselves being liable for US tax.

There is a help line for our member firms,two compliance days a year, an investmentday, the annual conference, and, yes, a coupleof parties too – all part of APCIMS activities.We aim to provide the all round service thatour members seek.

APCIMS has a free directory which lists allour members, the services they offer, wherethey are in the country and how to get intouch with them easily, and a web site thatgets about 8,000 serious hits a month. We respond to thousands of requests for thedirectory from private individuals each year.Along with trying to ensure that we have thebest and simplest environment for the privateclient broker and investment manager to oper-ate in, so they can provide the best servicesfor the individual investor, this is our contribution to giving the shareholder the information the need.

For a free copy of our directory of membersplease contact us at:

APCIMS112 Middlesex Street, London E1 7HYTel: 020 7247 7080Fax: 020 7377 0939Email: info@apcims.co.uk

An introduction to APCIMS – representing the privateclient community

OTHER VOICES

49march 2005

Whether the sell-off iswarranted remains amatter of contention.But at least for now,momentum is pro-pelling the dollar to

record lows against the euro and unnervingsome investors and companies who had betdifferently.

“At the moment, the market has got the bitbetween its teeth,” said Paul Duncombe, headof currency management at State StreetGlobal Advisors. “(The dollar) can certainlygo a lot further.”

The dollar was testing $1.30 to the euro onMonday, having fallen in value from around$1.24 in mid-October when currency strate-gists said it broke definitively out of a 7-1/2month trading range.

Given that a Reuters poll in mid-Septembershowed leading investors expecting an end-year rate of around $1.20, the fall must havecaught many by surprise.

Strategists said that the original mid-Octoberbreak came courtesy of hedge funds whowere testing the levels. After that, others –medium-term investors, Middle East accountsand some corporates – got into the act, buyingeuros before the price rose too high.

Increasingly, the pressure is also on thoseEuropean companies which have not yetmoved to protect their dollar-based earningsfrom the currency’s downturn.

Thanos Papasavvas, currency strategist atCredit Suisse Asset Management, said hisfund firm shorted the dollar when it broke outof the range at $1.2450 in mid-October.“We hear that European corporates have notbeen doing that, so they have been caught onthe wrong foot,” he said.

THE BUCK STOPS WHERE?

One gauge of how strong the current momen-tum is came on Friday after the U.S. LabourDepartment reported that non-farm payrollsrose twice as much as economists had expected.

Implying strength in the U.S. economy andfurther scope for interest rate increases fromthe U.S. Federal Reserve, the surprise datashould have lifted the dollar. In the event, itdid so only briefly before the decline resumedand the euro hit an all-time high.

“I think this is a pretty good guide (to) justhow entrenched negative sentiment is towardthe dollar,” Richard Franulovich, senior cur-rency strategist with Westpac Banking Corp,said at the time.

A second gauge came on Monday when Euro-pean Central Bank President Jean-Claude

Trichet said that recent moves were “unwel-come” – the kind of comment that in the pasthas bolstered the dollar. The dollar did firm,but only briefly and the move was muted.

SO WHERE DOES THE DOLLARGO FROM HERE?

As for much of the year, the answer dependson what side of the great dollar divide you areon – whether the large and growing U.S. cur-rent account deficit spells continuing weak-ness, or whether the U.S. economic landscapemeans dollar strength.

Mark Farrington, head of currency at Princi-pal Global Investors, belongs to the lattercamp. He said the dollar is driven primarilyby interest rate expectations and Friday’s jobsdata gave scope for the Fed to tighten morethan earlier softness had implied – a factorthat will eventually lift the dollar.

Now the big currency question:The buck stops where?LONDON, Nov 8 2004 (Reuters) – Hedge funds may have triggered it,but the dollar’s sharp slide over the past few weeks is more than justspeculation – it is a reflection of mainstream investors scrambling todump the currency.

50 march 2005

INDUSTRY EVOLUTION

“We are nowhere near the end with the Fed,”he said, describing the current dollar sell-offas “a classic deviation from fundamentalsdriven by emotions”.

PERHAPS NOT HERE

Ranged against that view are those who seelittle to stop the dollar from falling to offsetthe current account deficit.

The re-elected administration of U.S. PresidentGeorge W. Bush, it is argued on the one hand,will allow the dollar to decline, boosting U.S.exporters.

“Bush’s non-interventionist or laissez-faireethos means there will be no standing in theway of a dollar in need of further depreciationagainst all currencies,” Mike Lenhoff, chiefstrategist at wealth manager Brewin DolphinSecurities, wrote last week.

Trichet’s ECB, meanwhile, is seen as benefit-ing from a higher euro as it eases inflationarypressures, particularly energy prices.

Its biggest fear is that the dollar decline willbe faster than it has been to date.

Sentiment – as judged by market moves –clearly appears to be leaning heavily to theweak dollar side at the moment.

It could be driven even further if Europe’scorporates truly have not hedged enough andare still long on dollars.

Note: This article was written on November 8 2004, following the sharp decline in thedollar that occured around the U.S. election.– The Editor

© Reuters 2004

Credit Suisse’s Papasavvas said both corpo-rates and investment houses would take anyslight strengthening of the dollar as an oppor-tunity to sell. “We would expect some correc-tion to take place, but not by more than apoint or two, before fresh selling comes backin,” he said.

By Jeremy Gaunt,European Investment Correspondent, Reuters

June 8-10 2005, Geneva - Noga HiltonJune 8-10 2005, Geneva - Noga HiltonInstitutional partner

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