OTHER INDUSTR PARTICIPANTS
Fund of Funds (FOF)
A fund of fund is a particular type of hedge fund. Traditional hedge funds invest in shares, bonds, derivatives etc. A fund of fund invests in other hedge funds rather than investing in the products directly.
Fund of funds research the performance and history of hedge funds and choose the best ones to invest in. FOFs are an attractive option for investors who want to gain from the high returns in the hedge fund market but do not have the expertise or time to analyse the hedge funds. They give the money to a FOF who invest it for them in exchange for a fee.
The job of an analyst in a FOF is extremely different from an analyst in a traditional hedge fund. An analyst in a FOF assesses the strategy, performance and management of a hedge fund and not individual companies and market sectors like a hedge fund analyst. FOF analysts take a broader view of the market and try to pick hedge funds that have the best strategy for the market conditions at the time.
Prime brokerage is a package of services offered by investment banks to hedge funds. Prime brokers aid the day to day running of a hedge fund. Some of the services provided by prime brokers the provision of equity swap / CFD facilities. Prime brokers hold the equity and bond investments for the hedge fund. They also provide operational support by producing daily valuation statements and information on any upcoming events like equity dividends. The operations and fund accounting staff are in regular contact with the prime broker reps.
All hedge funds employ the services of a fund administration company to independently verify their valuations. This helps to avoid any potential problems of fraud and gives added credibility to the hedge fund industry.
Every month (and sometimes weekly) the fund administrator will produce a valuation of the hedge fund for the investors which shows the investors how well or badly the fund has performed over the period. The fund administrators work closely with the fund accounting and operations staff in the hedge fund to ensure they have received all the correct information on any trades during the period. The fund accountants in the hedge fund and the administrators each produce a valuation and they try to reconcile any differences before sending out the monthly valuation which is called the NAV (Net Asset Value).
The majority of the fund administrators are based in Ireland. Many candidates who have worked for fund administrators would be suitable for fund accounting and operations roles within a hedge fund because the jobs are quite similar.
Trading Systems & External Data Providers
Hedge funds use a software system to input all the trades and accounting entries to produce the monthly valuations. These systems will be used predominantly by the traders, fund accountants and operations staff. Not all hedge funds use the same system and there are quite a few available but the main ones are Tradar, Charles River, Pertrac and Beauchamp. It is an advantage for candidates to have previous experience of a system that a client is using.
Bloomberg is a software system that provides up to date prices and other financial data. It is used extensively by traders and analysts to watch price movements and it is essential that they have experience working with it. It is also used to a lesser extent by operations and fund accountants. Bloomberg prices provide the basis for the monthly NAV. Auditors will check that any prices used are fair and come from an independent source such as Bloomberg and Reuters.