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Previously alternative investments had several restrictions such as they required a heavy initial investment and needed adherence to severe regulations and could only be handled through private investment options. In the current scenario, smaller investment teams and individual managers with expertise can handle alternative investments. Because of the change in these trends, there has been a move towards hiring managers in investment banks who would handle the portfolio for several investors rather than one private manager being restricted to handling the funds for a very large investor. So even retail investors have moved towards alternative investments as these provide ease and availability along with expertise which were previously unattainable through simple means.

 

Risks and Concerns for Introduction AlphaStream as an Alternative Investment

Adoption of AlphaStream would not come without risks and when Barclays Wealth goes for this option, it may have to face several issues when targeting retail investors.  The traditional products that were being offered are totally different from the alternative investments that AlphaStream plans to bring in and new strategies have to be followed for managing this unique portfolio.

Barclay’s Wealth needs to focus on specific areas such as:

  • Sales and distribution fee
  • Clarity of funds
  • Customization for integrating products across all platforms
  • Management Fee
  • Keeping a strict Control
  • Supervisor of the Broker
  • Client specific offerings

Product Development Concerns

There are multiple issues that need to be addressed when launching new products especially in the case of products which are being introduced under the blanket of alternative product investments.

The following diagram Fig.1 gives the possible issues that need to be dealt with in launching an alternative investment plan such as AlphaStream:

Initial Screening                                                        

Jumping right away into the AlphaStram option would not be a preferred strategy and requires some ground work such as getting the distributors involved beforehand to find out whether clients would be interested in such alternative investments. This would help in further determining which investments should be selected, how much would these investments bring to the firm , how much the clients are willing to invest etc. This would also help in evaluating a plan of action for attracting investors to Barclays Wealth’s products.

Prior Market Research

Since Barclays Wealth plans to introduce a fund which would be following the UCITS guidelines, it would require appropriate research beforehand to make sure that the investment banker knows what he is getting into. An appropriate strategy needs to be planned out beforehand and specific research into what the competitor is offering in terms of alternative investments also needs to be done to make sure that the right competitive strategies are being followed throughout.  Not only would this require a broad offering to be available for the investor, this would also need a constant update to the client about availability of alternative options so that the client remains involved in the investment plans and the investment manager can gain credibility and confidence of the client.

Approval for AlphaStream

Other than the guidelines provided by UCITS, there are additional regulations that would need to be followed in case of AlphaStream. For instance, the funds would need approval from an internal compliance team as well. This would require the input of the senior management and the key stakeholders of the firm along with following the regular controls which are applied to investments. Since new products are risky, the committee formed for approvals would need to be involved in doing a thorough check and for assessing the legal risks that AlphaStream would be bringing in for the firm.

Adherence to Regulations

Since UCITS is involved in this product, the team for AlphaStream needs to make sure that they are in touch with the UCITS regulatory team from the very beginning and any concerns and questions that they may have about the risks and issues involved with the launch of this product should be addressed accordingly.  Since these funds already seems complex compared to other alternative investments and are being introduced to retail investors for the first time, processes of recordkeeping, selling and supervision levels should be discussed beforehand.

Basic Training for Stakeholders

A new team needs to be brought in for handling these funds and everyone involved in the distribution and supervisor of these funds needs to go through an extensive training program which highlights the main concerns and processes of handling these funds. The training would not only be in terms of processes but also in terms of the compliance of regulations and so would need to be conducted by professionals who have a full command over the case.

Suitability of Investment Plan

According to the regulations of UCITS, investors would not be encouraged to invest in portfolios which do not match their investment profile.  Investors who are not aware of the risks involved may end up investing in alternative investments without knowing about these risks in depth unless the investment managers give them a clear picture of what they should be ready to face.  As per the regulations, Barclays Wealth would have to follow the rules set by UCITS and would need to inform investors about what type of investments are most suitable for them.  This needs to be communicated to the stakeholders involved in AlphaStream during the training process, the New Product Approval Process and ultimately during the actual introduction of the funds.

Documentation for Marketing & Information

For educating the investor about these alternative investments, Barclays Wealth should follow the plan of action as implemented by UCTIS IV where they have documented information for the investor to make the investment process simpler and easier for him. Although this would be part of marketing the product, it should be remembered that the risks involved in AlphaStream should be clearly mentioned in the documentation so that the client is fully aware of what he is getting into. Along with the documentation, the investor should be told about the difference in ‘mutual funds’ and ‘AlphaStream’ personally by the investment manager in depth so that any point which has not been cleared out in the documentation should be cleared personally.

Advanced Training for Compliance

Other than the simple training of the back office and front office supervisors, there should be an in depth training highlighting the areas which need to be taken care of in case of to avoid red alerts for the organization and in case these are incurred then there should be a proper training guiding all those involved in the marketing and supervision of these funds as to how they should act according to the UCTIS guideline. The risks and objectives in involved in the whole process would be cleared in the training. Likewise there should also be an explanation regarding product switching so that the investor knows how he can shift his investment from one fund to another and where he has restrictions.

Upgrade/Update in Operations

As AlphaStream would be a new product altogether, the system may need to be updated or upgraded to make it work efficiently. Perhaps some sort of customization may be required in the legacy system to make it work appropriately for AlphaStream.

Conclusion

Although a number of challenged have been mentioned above, it should be remembered that they are part of any new product introduction and in case of financial investments extra care is needed in any case because of the risks involved so these challenges are expected . However, these are easily manageable if there is a dedicated team and the right framework for introducing the processes.

AlphaStream offers a lower fee to the investor along with the benefits of lesser risk in the form of stable liquidity and clarity in the form of adherence to UCITS’s guidelines. In such a case the investor would be finding it as a product which would suit his current needs. The funds seem well suited for Barclay’s Wealth as per the current market situation and apprehensions of investors.

The above graph shows that there has been a considerable growth in the alternative hedge funds in the last 12 years.  Both the AuM and alternative funds have shown an increase other than the situation shown by the AuM situation of 2008 where there was a fall.  Since 2008, both figures have shown an increase with the AUM rising by 29% and number rising by 23%.

 

References:

2013 Hedge Fund Outlook  Some gains, more pain,

http://www.deloitte.com/assets/Dcom-CaymanIslands/Local%20Assets/Documents/2013_Hedge_Fund_Outlook.pdf

 

Understanding their role in a portfolio ALTERNATIVE INVESTMENTS, http://www.proshares.com/media/documents/alternative_investments.pdf

 

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