Why Experience Is Important In Outsourced Alternative Fund Management

Written by admin on March 29th, 2011

Institutional investors are increasingly demanding more transparency around the controls and procedures of hedge funds, fund of funds, private equity funds and managed account manager. There are four key operational risk areas that fund managers should focus. Here we take a quick look at “The Experience of Operational Personnel”.

Investing in bank debt requires dedicated personnel properly trained on the nuances of servicing the loans and supporting the ongoing maintenance and the process around the bank debt settlement. Based on the terms and conditions most loans are typically at the top of the capital structure of a legal entity. They share senior secured claim against the assets of a barrower and are protected by the covenants that are spelled out in a credit agreement. As such, any returns derive mainly from the receipt of interest payments rater than capital appreciation.

At the other end of the spectrum are equity investments, where capital appreciation is based on the majority of returns. Because the return profile of a bank debt investing is focused on interest income, the realization of anticipated returns is heavily reliant on operations to properly and promptly settle trades under the agreed upon terms. Given the frequency and volume of data flows, having proper and experienced personnel equipped with capable technology is critical to investing successfully.

However, there are problems that occur from time to time. Some of those problems that occur during the accounting and settlement cycle include missing paydowns, interest resets, credit events and settlements. These will trigger accounting errors, economic losses and, ultimately, the incorrect reporting of profits and losses. Incorrect computation of investment profits and losses can cause internal (management) and external (client) reporting problems that will directly affect the ability of an investment manager to manage the growth of his or her business.

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