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The FSA, best practices and alpha capture

11th February 2013

[Update! – You can read an interview I gave about this at]

In November 2012 the FSA published a letter to the fund management industry. In this letter they highlighted a number of observed breaches in best practice for managing conflicts of interest.

Here we look at how alpha capture and TIM Ideas can help enforce best practice in some of the areas highlighted by the FSA.

Managing Spending on Research and Execution Services

Two examples of good practice noted by the FSA relate to:

  1. Challenging the brokers over which services fund managers should pay for and which were valuable
  2. Setting a maximum spend on research services, after which commissions should be paid for execution-only.

Typically when running alpha capture programs using TIM Ideas:

  • Performance is tracked through rankings for contributors. There are also numerous customised and standard reports available.
  • Fund managers set aside a commission pot ahead of time and then use an objective, allocation methodology based on the actual performance of contributors.

Lack of central organisation for commission payments is mentioned as a specific bad practice. This includes directing business to particular brokers on a trade-by-trade basis with no clear auditing.

  • TIM Ideas makes it easier to objectively commission allocations and we can even help manage it for you.
  • Allocating trades based on who sends you relevant trade ideas is easy to monitor, as everything is electronically recorded.

Performance rankings inside TIM Ideas allow you to objectively assess the value of the trade ideas provided by your contributor base, and usually serve as the basis for commission allocation.

Controlling the allocation of ideas between customers

The FSA noted that some firms had investment processes that were not team-based and where research ideas were not shared between portfolio managers.

TIM Ideas is great for information sharing:

  • Comprehensive permissioning features allow multiple portfolio managers access to the same ideas, but with individual filtering control, including sector and stock watch lists.
  • The software is available at no charge when running an alpha capture program. Our support team can set up accounts for all your portfolio managers.

Regardless of whether a portfolio manager is in the position to adopt alpha capture right away, the pay-for-performance model inherently means both sides are much more accountable. Trade ideas are ideally suited to a systematised apprach to valuation but there’s no doubt that more portfolio managers would benefit if they had objective means to value the information they use to make trading decisions.