Barclays Wealth: Reignite WAR or Launch AlphaStream Harvard Case Solution & Analysis

The worldwide asset management sector had been badly struck by the global financial meltdown in 2008, with all countries enduring a serious compression in assets. As outlined by EFAMA, assets managed in The European countries sustained a fall of twenty one percent, from EUR 13.6 trillion at end the year of 2007 to EUR 10.8 trillion at end 2008. Due to stock exchange rally as well as the recuperation of net inflows into UCITS, the value of AuM rebounded back in 2009 with an approximated EUR 12.8 trillion at end 2009.

The wreck of the financial market, stock exchange, lack of credit and serious worries about solvency encouraged several investors to redeem their particular investment units. As traders plucked funds out from the marketplace, asset managers needed to cash out their particular portfolio purchases. Furthermore the temperament of trader transformed substantially given the doubtful economic atmosphere. Traders began to place a far higher premium on liquidity together with a desire to purchase products that depicted obvious and basic rules to make sure they can fully grasp and have confidence in their particular investments.

Barclays Wealth Oct '08 report has stated traders possessing a couple of extreme types of financial personas. First being the investors, who don’t take risks; look for stable profits together with minimal drawdown, usually known as absolute return investments. Second being the investors who take risks that happen to be keen on high-risk products and have got self-control to journey the ups and downs of investment decision unpredictability.

Presented with the financial meltdown, out from the mentioned investor personas, there exists a distinct escalation in the quantity of low-risk traders seeking absolute return products that balanced conventional investments in bonds and equities with significantly less cyclical investments.

 

Influence of Financial Downturn on WAR Fund

Barclays Wealth unveiled WAR Fund in March '08 in the overseas funds market which was not regulated, determined by a mix of two sorts of substitute investments. First being, Liquid absolute return funds determined by trading-strategies making use of liquid futures contracts and derivatives. Second being, traditional and a lot more not liquid, and fund of funds hedge funds.

With all this combination, the WAR Fund provided the market players month-to-month ease of purchase and sale. Nevertheless around twenty percent to fifty percent of the underlying portfolio investments had quarterly liquidity. Hence there was clearly a mismatch amongst the liquidity profile of underlying assets and the liquidity accessible to traders, developing a liquidity mismatch risk. Management of Barclays thought that this particular multi strategy technique will offer security in a recession plus would certainly allow them to take care of any kind of decrease in the Fund’s liquidity as a result of month to month redemptions. Having said that their particular supposition appeared to be proven incorrect in the month of January 2009, when investors started off making redemptions demands which eventually totaled almost half of the Fund’s asset under supervision. For Barclays Wealth, the only real option to achieving clients’ payoff demands was to sell out of the liquid positions in the WAR portfolios. Steadily the asymmetry in the fund’s asset allocation was developing in the direction of more illiquidity. The WAR fund has therefore been unsuccessful. In May 2009, capital in the redeemed underlying funds would become available, and by that time, Thomas Fekete, MD at Barclays Wealth, needed to produce a new investment plan.

Problem Statement:

Once the capital through the redeemed underlying funds is made available:
“Which strategy might Fekete implement which would give the most effective way to make investments throughout downturn, benefitting Barclays Wealth and its customers?”

Doable Alternate options
You will find a couple of alternatives scattered before Fekete for making use of the amount of money that might be obtainable in May 2009. Next is the debate on both of these alternatives:

1) Reignite WAR Fund (Unregulated Hedge Fund)
The very first alternative required reigniting of the WAR Fund. The Fund would have following favorable features:

Barclays Wealth would certainly carry on to run offshore in un-regulated hedge fund. This would give the advantages of lesser limitations on leverage, taxation minimization, selling securities short making an investment in illiquid investments (as presently there are a lot fewer limitations on the choice of asset class in unregulated funds market), and asset protection. The Fund would have an absolute return offering targeted at seven percent surplus gain over Libor having a unpredictability of lower than seven percent. Furthermore, the Fund will offer quarterly liquidity to stop liquidity mismatch with the underlying assets as most of them possess quarterly liquidity. Also this Fund is going to be maintained Barclays fund managers since it would allow them to put money into much wider array of underlying approaches which they feel would improve overall performance. Another advantage will that WAR Fund could be quickly revived, which is another plus. Also the present information technology facilities would require no more betterment.

2) Introduce Alpha Stream---UCITS Compliant Hedge Fund

The other alternative concerned terminating of the WAR Fund and establishing a fresh fund of UCITS regulated funds domiciled in The European countries with UCITS certification. The brand new retail fund Alpha Stream would've following impressive features:
The Fund would have an absolute return and day-to-day liquidity. The day-to-day liquidity provision will fit the liquidity of underlying assets of which ninety percent give day-to-day liquidity and the remainder of ten percent provides weekly liquidity. The Fund would be an appropriate reaction to investor’s request for added liquidity, transparency and product quality all of which are attributes of a regulated fund environment. Also the fund will switch Barclays Wealth concentration from a restricted buyer base composed of institutions, endowments and very wealthy individuals to focus on more well-off but

fragmented source of assets in the retail world. Furthermore, the Fund would have a reduced fee structure as compared to unregulated funds. Lastly, the fund is going to blend the key benefits of alternate investment strategies of hedge funds by providing it beneath the coverage of conventional UCITS regulated funds. Consequently Barclays Capital will likely be offering the retail trader with all the advantages of an array of investment decision tactics provided by hedge funds within the safety, transparency and monitored risk management of the regulated funds.

Reviewing Potential Options

A critical analysis of the strengths and weaknesses of the two options would further help in evaluating which option should be adopted.

In the case of going for the Alphastream option, there is a time restriction as clients would have to be shifted from the War Fund investment to the Alphastream before May 2009.

Evaluating the War Fund Investment:

One of the major issues is the cash shortage that was seen in 2008 in the assessment management industry. Investors started getting shaky because of the instability and problems of liquidity back then and proposing the unregulated hedge funds in the market after such a crisis was itself is a problem. What the investors needed was something that could bring their confidence back and Barclays Wealth needed to work on creating an alternative plan of investment.

Currently the main investor stream of Barclay’s Wealth was looking towards investments which could reduce their risk without any liquidity crisis. The war fund would create an alternative niche market where Barclay’s Wealth would be able to focus on a specific segment of the market which would be willing to take a risk for a higher return.

Evaluating the Alphastream Plan:

A completely new team would be needed in this case as now the experience of handling regulated mutual fund and working with hedge markets was needed simultaneously. Mutual Funds managers may not have the appropriate risk management skills of hedge funds managers whereas the latter would lack the expertise of mutual funds managers in handling stable long term investments. So a balance had to be created by bringing the two together for a strong committed team which could would simultaneously.

What was further needed was the identification of further investment strategies backed by funding that could be brought into the UCIT portfolio since complaint hedge funds were limited in number.  Likewise, because of the limitations of hedge funds such as excessive leverage, shorting and liquidity, most of the important strategies could not be applied to UCITS funds.  The restriction in availability of choice would certainly be affecting the scope of investment and would ultimately affect the performance of the funds overall.

Barclays has imposed a firm set of internal rules that need to be followed when working with UCITS funds and if AlphaStream has to be adopted then a full compliance with those rules has to be ensured as well which again limits the performance of the funds. Firstly liquidity and counterpart risk had to be managed through strict controls along with concentration management. For instance the exposure of Alphafunds to a fund or any fund management house would be restricted to 7% and 12% of NAV respectively.

Ultimately for handling such a portfolio and making sure that there was a severe adherence to the specified standards and guidelines of UCTIS Funds, there would be a need for upgrading the technological operations if AlphaStream is adopted. The new system would need to make sure that the daily monitoring and reporting was in accordance with the guidelines set by UCITS Funds.

Opting for AlphaStream Funds

It is evident from the current market situation that investors are looking for investments which promise stability and liquidity rather than higher returns. In such a scenario, going for War Funds may prove to be risky and unprofitable especially as it would be a niche market that may not be readily available for investment. AlphaStream hedge funds which fit the criteria of being less risky with adherence to UCITS regulations would be a better alternative for now.

Investors are now more cautious about investing in funds about which they lack in-depth knowledge. In such a scenario, investment managers would also need to work further on clarifying the risks involved in investments and in improving the communication channels with the invertors to gain their trust once again especially after the crisis of 2008 which has left investors shaky about their expectations from the asset management industry as a whole. This could require extensive efforts such as bringing in new products for retail investors, redefining offerings in the market, bringing in new strategies for risk and liquidity management and making sure that the credibility is maintained through delivering what is promised.

The Alphas Stream option’s main strengths would be their adherence to UCITS Fund’s regulations since that would promise firm control and would give a clearer picture to the invertor. This would prove to be an effective choice bringing in the benefits of alternative investments along with the stability of UCITS hedge funds.

Alternative Investments for Diversification

Even Asset managers have preferred to invest in AlphStream given the current financial situation and the loss of confidence in the financial market.  The concept of alternative investments has gained strength in the recent past for a number of reasons.  Traditional methods are also becoming increasingly popular such as using mutual funds as alternative investments. This allows the investment managers to show a diversified portfolio to the investor which not only reduces the risk aspects but also helps in fighting off competition as competitors are coming up with better strategies every other day to capture a greater market share, Now even retail investors are seen as a potential customer base . Investment managers use alternative investment options to defend their asset base and see it as a means to increasing revenue for the invertors. This also works as a good alternative method of revenue generation for the investment bank as these investments act as special product and so higher fees can be charged.

 

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