Global Asset Management. Strategies, Risks, Processes, and Technologies. Edited by. Michael Pinedo. and. Ingo Walter. P8lg<vvt'

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1 Global Asset Management Strategies, Risks, Processes, and Technologies Edited by Michael Pinedo and Ingo Walter P8lg<vvt' macmiuan B StrategyLab

2 Contents List offigures ListofTables Preface on Contributors xiv xviii xx xxii Part I Global Asset Management - Introduction and Overview 1 The Asset Management Industry Dynamics of Growth, Structure and Performance 3 Ingo Walter 1.1 Introduction Mapping the global asset management industry Pension funds Mutual funds Hedge funds and private equity funds Insurance Private banking services Structural change and competitive dynamics Summary Bibliography 35 2 What Do We Know About the Mutual Fund Industry? 36 Massimo Massa 2.1 Is there an engine in the car? How do you seil a car with no engine? A view to the future Policy and normative implications Part II The Crisis of and its Aftermath 3 Macroeconomic Perspectives on the Financial Crisis and Its Aftermath 59 Ole Risager 3.1 Introduction 59 v

3 vi Contents 3.2 Roots of the crisis: low interest rates, excessive risk appetite and the boom-bust global housing cycle Macroeconomic consequences of the financial crisis The outlook for the global economy The Euro crisis and the depression in Spain Conclusion Some Lessons from CDO Markets on Mathematical Models 74 David Lando 4.1 Introduction The modeling of cash flow CDOs and synthetic CDOs - a non-technical introduction Conclusions The Credit Crisis of 2007 and Its Implications for Risk Management 93 John Hull 5.1 Introduction The origins of the crisis The products that were created Risk management Conclusions After the Storm: Four Innovations Changing Investment Management 107 Adam Schneider 6.1 Introduction Innovation going forward Conclusion ]2o Avoiding International Financial Crises: An Incomplete Reform Agenda, 22 Jean Dermine 7.1 Introduction The Origin of the 2007 financial crisis and the reform agenda ] Three proposals to complete the reform agenda Conclusion ^

4 Contents vii Part III Key Risk Factors in Asset Management 8 Managing Growth and Strategie Risk Mathias Schmit and Lin-Sya Chao 8.1 Introduction 8.2 Literature overview 8.3 A suggested definition of Strategie risk 8.4 The world's top 50 banks and Strategie risk 8.5 Impacts of uncontrolled growth on Strategie risks 8.6 Conclusion 9 Wall Street's Management of Risk: Why It Failed John H. Biggs 9.1 Introduction 9.2 The Wall Street style 9.3 The accountability model 9.4 Sources 9.5 Risk management 9.6 Steps to take to embed risk management in the line Organization 9.7 JPM's 2012 $6 billion hedging loss and MF global's 2011 bankruptey 9.8 Summary and conclusion Appendix: Selected comments on risk management in public reports of Wall Street firms 10 Reputational Risk and the Financial Crisis Ingo Walter 10.1 Introduction 10.2 The special character of financial services 10.3 What is reputational risk? 10.4 Sources of reputational risk 10.5 Valuing reputational risk 10.6 Conclusions

5 Contents Risk Management for Pension Funds and Endowments Aaron Brown 11.1 Motivation and goals 11.2 A generic pension fund/endowment 11.3 Why is an independent risk manager needed? 11.4 Endtoend 11.5 Getting data right 11.6 Constant, rigorous, exact, objective verification 11.7 Conclusion A Stitch in Time... Kosrow Dehnad 12.1 Introduction 12.2 Examples of quality control and error-detection techniques 12.3 Conclusion Part IV Regulation^ and Governance Corporate Governance and the Financial Crisis Steen Thomsen 13.1 Introduction 13.2 Agency problems in financial institutions 13.3 Executive pay 13.4 Board supervision 13.5 Information systems 13.6 Active ownership 13.7 Capital structure 13.8 Reputation 13.9 Conclusion Governance and the Financial Crisis: More Convergence, Less Risk? Renee Adams 14.1 Introduction 14.2 What is a well-governed financial firm? 14.3 The governance of financial firms-what are the facts? 14.4 Is governance to blame for the problems at banks?

6 Contents ix 14.5 Variation in governance practices decreased following governance reform What lessons can we learn? Financial Regulation and Risk Governance 274 Caspar Rose 15.1 Introduction New regulation often follows a crisis The many faces of the regulatory failure Why we cannot live without financial regulation The regulatory framework for risk management Tougher regulation under way for EU banks How to move forward Game Change in Asset Management 288 Karel Lannoo and Mirzha de Manuel Aramendia 16.1 Introduction The asset management industry The UCITS regime Creating an EU regime for 'alternative' funds Money market funds The interaction with MiFID Impact of the changing supervisory setup Towards a horizontal asset management regime Conclusion The Asset Manager's Guide to Sustainable Regulatory Advantage 308 Anders Bidsted Andersen and Carsten Kunkel 17.1 Introduction A history of regulation Impact of regulation on the Operations of asset managers Implications of regulation for Software design Fundamental concepts Applying the fundamental concepts in practice Regulatory lessons learned Summary

7 x Contents Part V Operational Processes and Costs 18 The Interrelationships between Processes, Costs and Risks in Asset Management 345 Michael Pinedo 18.1 Introduction Processes, costs and risks in general Processes, costs, and risks in asset management Trade-offs and optimization in asset management Conclusions and new research directions A Best Practices Framework for Operational Infrastructure and Controls in Asset Management 354 Ümit Alptuna, Manos Hatzakis and Reha Tütüncii 19.1 Introduction The importance of governance in the Investment management process Key issues pertaining to operational best practices Operational and control issues related to the management of multiple portfolios Outsourcing Investment management Operations Summary and conclusions Managing Costs at Investment Management Firms 377 Adam Schneider 20.1 Overview Key issues in examining Investment management firm cost structures Value chain, processes and functions Cost management and benchmarking Cost management and benchmarking in practice Investment manager cost control Summary Strategie and Tactical Cost Management in the Asset Management Industry 393 Marcelo Cruz 21.1 Introduction Survivor mode: analyzing how asset managers are faring in the long winter after the crisis 395

8 Contents xi 21.3 Cost reduction programs at asset managers Using risk management as a productivity tool for asset managers Conclusions Transaction Costs and Asset Management 414 Yakov Amihud and Haim Mendelson 22.1 Introduction What are transaction costs? The structuie of transaction costs Transaction costs and asset returns Implications for asset managers Concluding remarks Part VI Operational Platforms and IT Strategie«23 Operational Platform and Growth: A Strategie Challenge 435 Jacob Eisborg 23.1 The consequences of lacking an operational platform strategy The Strategie framework Model framework of an operational platform The basics of an operational platform analysis The analysis Basic analytical framework: process analysis Conclusion Addressing the Data Management Challenge in Asset Management 456 Howie San 24.1 Introduction The current data problem(s) The inevitable consequences The answer(s) to the problem(s) Making the impossible possible Conclusions

9 Contents The Use of Advanced Technology in Global Asset Management Anders Kirkeby 25.1 Introduction 25.2 Cloud Computing 25.3 Global business architecture 25.4 Global operating models 25.5 Data and analytics 25.6 End-user application platforms 25.7 Security and operational risk 25.8 Conclusions Note Fit-For-Future Enterprise Architecture: Supporting Strategie Business Challenges Marc Schröter 26.1 Introduction 26.2 Post-crisis Strategie business challenges for asset managers 26.3 Traditional enterprise architectures 26.4 A fit-for-future enterprise architecture 26.5 Conclusion Part VII Future Challenges and Growth The Strategie Imperative of Creating and Capturing Value Paul Verdin 27.1 Introduction: uncertain and challenging times 27.2 An increasingly competitive business 27.3 Value creation and Innovation 27.4 Beyond cost-cutting and lean programs 27.5 A renewed focus on creating value for the customer 27.6 From value attributes to value proposition 27.7 Value attributes and the dynamics of competition 27.8 A Strategie roadmap for growth 27.9 Conclusion: are you 'ready for growth'? Check or Checkmate? Game-Changing Strategie: for the Asset Management Industry Martin Huber, Philipp Koch and Johannes Eisner 28.1 Introduction 28.2 Analyzing the State of play

10 Contents xiii 28.3 Aligning to the new chessboard Mastering the changing chessboard Outlook Designing Products for Reluctant Investors: Applications of Behavioral Finance 562 Alistair Byrne 29.1 Introduction The growing importance of Defined Contribution Research method Governance of DC Investment? Default funds Investment choice Recent trends Conclusion Current and Future Challenges Faced by Investment Funds 582 Martin }. Gruber 30.1 Introduction Risk challenges Cost challenges Growth challenges Conclusions 599 Note Current and Future Challenges Faced by Asset Managers 601 Stephen f. Brown 31.1 Introduction Risk challenges Cost challenges Challenges Interconnection of risk, growth and cost Conclusions Current and Future Challenges Faced by Pension Funds 618 Massimo Massa 32.1 Overarching issues Risk challenges Cost challenges Growth challenges Conclusions 635 Note 636 Index 637