A Quantitative Approach for Evaluating the Impact of Side-by-Side Management

Case Study

In this case study we explore how traditional transaction cost analysis (TCA) models using alternative benchmarks can accurately identify trades that appear to benefit one account or fund over another. We’ll also demonstrate how Sentry – our post-trade compliance solution – enables global investment management firms to establish a systematic, quantifiable, and repeatable process for evaluating side-by-side management conflicts.

Regulatory Background

Advisers are required to adopt policies and procedures designed to ensure that all funds are treated fairly and equitably over time, regardless of investment strategy, legal or fee structure. This is enforced in The United States under Rule 206(4)-7 of the Advisers Act and in the United Kingdom under Principle 3 and Principle 8 of the FCA’s Principles of Businesses, which require an investment adviser to manage conflicts of interest fairly between itself and its customers, and between customers and other clients.

Results

Using Sentry, the Adviser has conducted account impact analysis for four consecutive years. Their monthly review validates that all accounts are trading on average within 20 basis points of their peer account, regardless of strategy or legal structure. Using data filters, the Adviser is also able to more closely monitor affiliated and proprietary accounts to ensure that no preferential treatment of these accounts exists. Each time trade impacts are identified that contribute substantially to account impact ratios, the Adviser validates that orders were handled in accordance with aggregation and sequencing policies and that no conflicts of interest influenced the execution or allocation decision.

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