Wk 3 Flashcards
Investment Management
What are the 5 key traps in terms of behaviour in wealth management as outlined by Bachmann K. K., Giorgi E. G. D., & Hens T. (2009) in Week 3 Reading Chapter 8?
What are the main ingredients of the investment management process?
1 - lack of planning
2 - incorrect framing of situation (prospective approach, sunk costs, anchoring)
3 - failures in risk management (false diversification)
4 - not following a strategy
5 - poor attribution
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Assets traded on a financial market never offer bargains, only trade‐offs:
* Needs analysis
* Risk ability
* Risk awareness
* Risk tolerance
* Investment style
* Monitoring
What are the goals of diversification? Is this only about lowering risk? Can it increase returns?
The goals of diversification are to spread investment risk across different assets or asset classes, reduce the impact of any single investment’s poor performance on the overall portfolio, and achieve more stable returns. While lowering risk is a primary goal, diversification can also enhance returns by capturing different sources of growth and opportunities across various markets and asset classes. Yes, diversification can increase returns by enabling a portfolio to benefit from a range of investment opportunities and reducing the impact of underperforming assets.
Do clients of private banks or family offices typically have an implied lack of diversification?
Clients of private banks or family offices may sometimes have a lack of diversification due to concentrated investments in specific assets or sectors, often reflecting personal investment preferences or significant holdings in their own businesses.
So what is the trade-off? Is it possible to ‘cover the field’ of client expertise, and financial market expertise
The trade-off of diversification involves balancing risk and return; while diversification can reduce the overall risk of a portfolio, it may also limit the potential for higher returns from any single investment. It is challenging to fully cover both client expertise and financial market expertise due to the vastness and complexity of both areas. Firms often need to specialize and collaborate to address all aspects effectively.
Is this any different to any ‘sales’ funnel - whether very high end or mass market? How do you find the optimal level of expertise, or focus here?
The approach to expertise in financial services is similar to a sales funnel, where high-end clients receive more tailored, specialized attention, while mass-market clients get more standardized services. Both require a strategic balance between personalization and efficiency.
The optimal level of expertise or focus is found by assessing client needs, market demands, and resource capabilities, and then strategically allocating expertise to match these requirements while maintaining efficiency. Regular evaluation and adjustment are key to maintaining this balance.
How widely do these vary? In a ‘global family office’ or for ‘global wealth management’ - which regulations apply? What are the key elements of regulation?
Global wealth management varies widely due to regional differences in regulations, market conditions, and cultural preferences. Additionally, client needs and market maturity influence the strategies and services offered.
- registration of advisers
- licencing
- restrictions on commissions?
- risk disclosures
Global family offices and wealth management firms must comply with local financial regulations, international standards (like FATF and OECD guidelines), and regional regulations (such as EU’s MiFID II or US SEC rules) depending on their operating regions.
Typical investment styles
● Buy and hold ? Wait and see - what does this avoid?
● Rebalancing ? Where balance in the portfolio is the most important thing
● Momentum ? Is the trend your friend?
● Carry ? Cash is king (distributions / yield)
● Value ? Everything is priced
● Growth ? Picking winners based on growth
Buy and Hold: This strategy involves purchasing investments and holding them long-term, regardless of market fluctuations. It avoids the need for frequent trading and timing the market, focusing instead on the potential for long-term growth.
Rebalancing: Regularly adjusting the portfolio to maintain a desired asset allocation. This approach ensures that the portfolio remains aligned with the investor’s risk tolerance and investment goals, focusing on balance rather than individual asset performance.
Momentum: Investing in assets that are trending upwards, based on the principle that trends tend to continue. This style relies on the idea that “the trend is your friend” and seeks to capitalize on ongoing market movements.
Carry: Focusing on investments that provide a high yield or income, such as bonds or dividend-paying stocks. The idea is that “cash is king” and seeks to benefit from income distributions or yield.
Value: Investing in assets that are perceived to be undervalued compared to their intrinsic worth. This style is based on the belief that “everything is priced” and seeks to find opportunities where the market price is below the asset’s true value.
Growth: Targeting investments expected to grow at an above-average rate compared to others. This strategy aims to pick “winners” based on their potential for future growth and capital appreciation.
What is a total return swap? What is a 13F filing (by an investment bank or a prime broker) ? What is ‘whale watching’ ?
A total return swap is a financial derivative where one party pays the total return (income plus capital appreciation) of an asset to another party in exchange for regular payments, usually a fixed or floating rate. It allows investors to gain exposure to assets without owning them directly. Whale watching refers to the practice of tracking and analyzing the investment activities of large institutional investors or “whales” to understand their market impact and investment strategies. This often involves monitoring 13F filings to see what major investors are buying or selling. A 13F filing is a report that provides insights into the investment strategies and holdings of large investors, such as hedge funds and investment firms.
What do SoF, SoW, KYC stand for and how could these principles have been applied in the case of Bill Hwang.
SoF (Source of Funds) - ensure legitimacy
SoW (Source of Wealth) - origin of wealth and how it was accumulated over time
KYC (Know Your Customer) - prevent money laundering, used to verify identity of clients
SoF and SoW: Adequate verification of the source of funds and wealth could have provided insights into the legitimacy of Bill Hwang’s financial resources. Properly scrutinizing these aspects might have revealed any discrepancies or concerns about the origin of the leveraged capital used in Archegos Capital’s aggressive strategies.
KYC: Rigorous KYC procedures could have helped financial institutions better understand Hwang’s investment activities and risk profile. Enhanced due diligence might have flagged potential red flags related to the high leverage and concentrated positions that contributed to the firm’s collapse.
Are there issues of transparency? Does a concentrated position impact evaluation of any listed company?
Lack of Transparency: Regulatory frameworks sometimes face challenges in ensuring complete transparency, particularly regarding the detailed disclosures of financial institutions and private entities. Limited visibility into the internal workings and risk exposures of firms like Archegos Capital can hinder the ability of regulators and investors to fully assess and address potential risks.
Evaluation of Listed Companies: Concentrated positions can significantly impact the evaluation of listed companies. Large holdings by a single entity can influence stock prices due to the potential for large buy or sell orders, which may distort market perceptions. Additionally, such positions can increase volatility and create risks for other investors if the concentrated investor faces financial difficulties or makes abrupt market moves.
In a ‘global family office’ vs ‘individual clients - which regulations apply?
Global family offices and wealth management firms must navigate multiple regulatory frameworks, including international tax laws, anti-money laundering (AML) regulations, and compliance with local financial regulations in each country where they operate.
Family Offices: Typically face more complex regulatory requirements due to their structure and the larger, more diversified asset pools they manage. They may need to comply with specific investment, tax, and reporting regulations tailored to institutional-like entities, including registration requirements in some jurisdictions and heightened scrutiny under anti-money laundering (AML) laws.
Individual Clients: Generally face fewer regulatory obligations and mainly need to comply with personal tax laws, investment regulations, and AML requirements relevant to their personal accounts. However, high-net-worth individuals with cross-border investments might also need to adhere to international reporting standards like FATCA or CRS.
Assets making up wealth: what concentration are seen in higher net worth tiers? What is significant about insurance at higher tiers?
Higher-net-worth individuals have a diversified asset mix, with larger proportions of wealth held in business interests, stocks, and real estate as net worth increases. Primary residences dominate lower tiers, while billionaires and ultra-wealthy individuals often have substantial holdings in business ownership and stocks. Insurance plays a role in wealth preservation and risk management at these levels, often used to secure legacy wealth for future generations.
