Financial Times Guide to Investing in Funds

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Front and back office operations

We can break this approach down by taking a look at both the front

and back office workflows in further detail.

Front office workflow

Trade authority

From the front office you need to see who is allowed to trade and

how any trading restrictions are recorded and supervised. In practice

only a few asset managers/traders or ‘executors’ will have the right to

pass orders. The front office systems should set this out quite clearly.

You ought to be able to have a list of those who have the authority

to handle the assets of the fund. You should also ensure that this has

been communicated to the broker(s).

Once you know who has the right to spend your money, you need

to understand how they work on a day-to-day basis, how they record

what they do and how that information is passed onto their team in

the middle and back office. Usually a lot of this is done electronically

using proprietary or professional software.

Trade recording

The recording of trades as they are made is crucial as it allows those

investing the fund’s money to know what their trade book looks like,

including how much available cash there is. Many a trading error has

been the result of asset managers not knowing their exact cash position

and overspending, so this is important. Proper recording will also give

the risk management team access to the data it needs to determine if the

trades are in line with the investment policy of the fund for example.

Common industry practices are still pretty rudimentary and asset

managers/traders often type orders through so-called chat systems

or through online brokerage systems specifically tailored to the cor-

responding broker or prime broker. Where a manager uses multiple

brokers, the gathering of the information will be dependent on a

number of different interfaces. The operational burden increases sub-

stantially, therefore, and this is made worse where trades are made

over the telephone and not necessarily recorded in a timely fashion.

This happens quite a bit too ...