Today, fund management suffers from high and increasing barriers to entry. Fund managers also have to increasingly think about custody & counterparty risk when thinking about where to hold and how to transfer their assets. The recent Lehman Brothers and MF Global bankruptcies which I personally experienced the repercussions of, first hand from the trading floor are all too quickly forgotten examples of this.
Accurate audibility of portfolios has also traditionally been very difficult. Long settlement times often lead to delayed information and can unveil ‘errors’ when it is too late to fix them. Risk managers have imperfect information and a conflict of interest given they are compensated by the very person they are trying to risk manage. Too much reliance on a long chain of humans in the process of booking, reconciling and settling trades creates room for messy errors that often go unmentioned.
The success and security of a fund therefore relies on the existence of high working capital, the accuracy of its people and the solvency of the custodians it works with.
Read the full article here