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This edition first published 2019
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Library of Congress Cataloging-in-Publication Data
Names: Hudson, Matthew, 1962- author.
Title: Fund managers : the complete guide / Matthew Donald Jeremy Hudson.
Description: First Edition. | Hoboken : Wiley, 2019. | Series: The Wiley finance | Includes index.
Identifiers: LCCN 2019026640 (print) | LCCN 2019026641 (ebook) | ISBN 9781119515586 (hardback) | ISBN 9781119515593 (adobe pdf) | ISBN 9781119515340 (epub)
Subjects: LCSH: Asset management accounts. | Strategic planning. | Capital market—Government policy.
Classification: LCC HG1660 .H83 2019 (print) | LCC HG1660 (ebook) | DDC 332.1068—dc23
LC record available at https://lccn.loc.gov/2019026640
LC ebook record available at https://lccn.loc.gov/2019026641
Cover Design: Wiley
Cover Image: © /Adobe Stock Photo
Is your world a fund, Daddy?
– Rafe Hudson, aged 10
I am writing this book as a natural sister to my earlier book, Funds: Private Equity, Hedge and All Core Structures (which I will refer to as the ‘funds book’). This book concerns the managers of the funds. The funds book proved popular with asset managers that use it as a structuring reference guide to their own funds or to check structures of funds different from their own, MBA and finance students, and more widely as part of training for managers, finance professionals, lawyers, and accountants.
This book sits alongside the funds book and examines the managers and their structures, as well as their day-to-day issues, hopes, and aspirations. As such, it is a little more anecdotal than the funds book and contains quotes and ideas from many managers and investors that I work with. The company that I work at – MJ Hudson – advises over 600 asset management groups and 200 institutional fund investors.
I also reference a number of lessons that I have learned (often the hard way) over more than 30 years (so far) in asset management. During this time, I have been a lawyer, asset manager, business builder, chief executive officer (CEO), chief investment officer (CIO), and chief compliance officer (CCO) – a wealth of experience to draw upon.
The funds book focused on alternative asset management. This book is broader and considers managers across all asset classes – although alternatives is more my zone. There is an emphasis in this book on creating and building management companies, as well as the current trend for mergers and acquisitions (M&A) to build scale in an effort to counter complexity, regulation, and multi-investor demand.
In the past, I worked within a fund managers' incubator at a bulge-bracket investment bank (Credit Suisse First Boston), and I also created a tech-incubator (Far Blue Ventures) which backed new IP-focused companies. I currently help others create new managers, such as Alpha Hawk (an emerging hedge manager incubator, where I am a co-CEO and MJ Hudson runs the infrastructure). Personally, I love new creations, and most of my career moves have involved starting something new. In this book I endeavour, therefore, to focus on the refreshing, the creative, and the new.
Starting an asset management company from scratch is always possible, although regulation has made it harder. I started one from scratch myself in 2000 and have helped many others start theirs. Creation is often the best fun. However, be aware that it might take several years of loss making. No doubt, your first plan will be too complex in its initial excitement and, for all your own joy, investors will want to wait and see. Do not be put off by increased regulatory requirements, but double your annual budget. Also, like any building project, double your first timescale estimates.
Spinning out a manager from a larger group is quicker. My top tip is to have your previous parent invest in the fund as a precursor, but not to invest in the manager, save with a call option in your favour, as this can put off new investors.
Ask yourself whether you genuinely have partners with whom you can establish a management company. If you think that you do, then be super clear, from the start, on what your strengths and weaknesses are. Also, each partner should commit hard cash to the venture in similar proportions and you should map out how the partnership will survive the first bad years. A fund manager ‘seeder’ is a group that invests in the management company. Seeders typically want 20% to 25% of the management company. Ensure there is a call option in your favour at an agreeable valuation. A cornerstone is an investor that cornerstones your fund. Such an investor will want a share of the performance of the fund and possibly a management fee break. Seeders and cornerstones can accelerate your business. The first investors are the hardest to close; everyone wants in once you are successful.
This book considers the ups and downs of the last ten years, as well as future-gazing to threats and opportunities of the next ten. The funds book came out during the immediate aftermath of the credit crisis (that I define as the period from mid-2007 to 2009, that saw the bankruptcy of Lehman Brothers and the collapse of Bear Stearns – to mention just two) and in the midst of the longer financial crisis (that I define herein as the period of negative to low growth from 2008 to 2013).
This book is also most timely, because it is set at the start of what I call ‘the new era of asset management’. This new era is marked by a shift in the focus and energy of regulatory authorities onto the asset management industry, which have been distracted until now with their endeavours to remove the major systemic risk of modern-day capitalism – mass bank failure. In addition (as a Brit), we also find ourselves in interesting times with the United Kingdom (UK) winding up for its departure from the European Union (EU) in 2019 (perhaps!) and dealing with the inevitable fallout. The new era we find ourselves entering is also one of AuM scale or very deep niche skills. The middle is the valley of death. M&A in asset management is becoming prevalent. Regulation, increased substance, increased disclosure, and technology-led threats and opportunities are very much with us, and scale is helpful in managing these challenges.
This book spends some time on the regulators' new focus on industry practices, as well as the effects changing legislation will have on the UK, EU, and US – the three largest asset management blocs. Chapter 12, however, examines regional differences in asset management, with a particular focus on jurisdictions outside of these three blocs. Clearly, Asia is on a dramatic ascent in asset management.
I postponed writing this book to await 29 March 2019 – the planned date for the official departure of the UK from the EU (Brexit). At the time of writing, the date for Brexit is uncertain (but a second extension on the deadline has been agreed for 31 October 2019), and some words have now entered my swear-word vocabulary; such as ‘longstop’, ‘extension’, and ‘red lines’. Still, the world spins on and the asset management community must continue to thrive and get on with the day job. Similarly, authors must finish books. Thus, in this book, I have assumed that the UK will ‘Brexit’ and leave the EU. That, in my own business, I have assumed from the date of the referendum result in 2016. Hence, I set up a regulated Luxembourg platform in 2017 in preparation for loss of EU financial passports. Also in this book, I have assumed that some sort of withdrawal agreement is signed and trade talks commence soon (or the UK stays in the EU customs union). Either way, I have written this book on the basis that at some point the UK loses the EU passports. More on the B-word later in the book.
The ongoing tussle between man and machine is another important backdrop to this book. Each side to the ‘man versus machine’ debate professes to have humanity's best interests at heart. Those supporting the use of robots argue that everyone's quality of life will vastly improve, whereas those that are sceptical of technology's rise claim that mass unemployment in an already wage-stagnant economy is a dangerous combination. This debate does not escape the boardrooms of asset managers as they look to cut costs, increase efficiencies, and stay relevant to the young.
So-called ‘ESG’ and ‘impact’ fund managers receive a heavy emphasis in this book, as rapidly growing key issues, as explained in Chapter 4.
This book does not examine the prior performance of different types of asset classes. Neither does it predict their future performance or make any detailed assessment of risk and return. Rather, it is a guide to all things fund manager – a mini-encyclopaedia to their structures, governance, regulation, taxation, technology, and, most especially, their challenges and opportunities.
Included in this book are some quotes from interviews that I have conducted with CEOs of asset managers to help me formulate a more immediate and relevant context for the technical aspects of the book. I have deliberately chosen CEOs from a range of asset classes, and all being founders of their company or strategy. This makes them all ‘lively’ and interesting. Their summary biographies are at the back of the book, and they are:
To help with the navigation of this book, a short summary of each chapter is set out below.
Chapter | Contents |
1 | Seismic Shifts – a look at the macroeconomic, technical, and political changes in the last ten years, with a focus on the most influential trends within the asset management industry. |
2 | What Is it Like Being an Asset Manager? – a fly-by tour of some hot topics discussed by managers, and the public's perception of them. In addition, what is it like being an asset manager, and do various strategies lead to different behaviour? |
3 | Structures and Economics – an introduction to the inner workings of an asset manager. It offers a snapshot of the structuring, fund manager economics, popular manager jurisdictions, fees, and differences between listed and private managers. |
4 | Governance – a look at how the business of an asset manager is run, with a particular focus on the relevance of boards, committees, and non-executive directors. The growing influence of both external regulation and ESG are also considered. |
5 | Investment Strategies – a review of the major investment strategies employed in asset management and how they influence asset managers themselves. |
6 | Investors' View of the Industry – an analysis of different fund investor entities and how they view their asset managers. This chapter therefore considers pensions plans, SWFs, family offices, charities and other investors in your funds. |
7 | Asset Allocation and Portfolio Construction – a look at how your investors and, by extension, you as the manager, construct a portfolio and some of the theories behind asset allocation. This chapter also reviews historical methodology and considers how some of these theories are holding up in 2019 and what the future holds for them. |
8 | Technology – an exploration of how technology is being harnessed for investment research and algorithm-driven investment, as well as the threat technology giants pose as potential asset managers in the near future. |
9 | Regulation in the Asset Management Industry – an overview of the regulatory environment in which asset management operates globally, with a particular focus on the UK, EU, and US. |
10 | Risk, Compliance, and Regulatory Trends – an exploration of the future of regulation, covering emerging rules, as well as the hot topic of risk and risk strategies in asset management. |
11 | Taxation – a brief guide to taxation within the asset management industry. |
12 | Regional Trends – a comparison and analysis of regional trends affecting asset managers, as well as the asset management industry outside of the core blocs of the UK, EU, and US. The future of offshore is also debated. |
13 | Future Trends – so where does this all lead us? This chapter considers makes some predictions for the next ten years. |
Finally, I hope you enjoy this book, as well as learn from it. I have tried not to hold back from voicing my opinions or the opinions of others. Occasionally, I have been deliberately provocative. The funds book is technical and a little dry, whereas this book does contain an element of my own philosophy and personality, and with that (as people that know me would attest) comes both a long historical perspective and a healthy dose of humour.
Taking yourself too seriously, or not casting a questioning eye on either yourself or others makes for dullness and mild flattery.
Enjoy! – London, March 2019