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Investment operations: a critical link

May 3, 2011

An investment operation area deals with a high level of complexity on a daily basis — arguably more complexity than any other area in a fund management company. It provides a critical link between the front office and the back office and interacts regularly with all the service providers to a fund, from the transfer agent to the pricing services, from the independent auditor to the prime broker. (For more on the sources of complexity in investment operations, read the excerpt from The Fund Industry: How Your Money is Managed below.)

On May 19, NICSA is sponsoring its third Investment Operations Seminar. Please join us to hear speakers from Citi, Mercer Sentinel Group, State Street Corporation, Goldman Sachs & Co., Wellington Management, Eaton Vance Management, Brown Brothers Harriman, The Depository Trust & Clearing Corporation and MFS Investment Management. They’ll talk about some of the toughest issues that investment operations professionals are facing today: balancing operational efficiencies with customization, globalization and corporate actions management.

NICSA Investment Operations Seminar
Thursday, May 19
8 am to 11:30 am
The Downtown Harvard Club
One Federal Street, 38th Floor, Boston
For more information and to register, click here.

For an overview of investment operations, we’ve included an excerpt from The Fund Industry: How Your Money is Managed, by Robert Pozen, chairman emeritus of MFS, and Theresa Hamacher, president of NICSA. The book, an update of the definitive text on the fund business, was published by Wiley in February 2011. NICSA members can order at a discounted price by clicking here.

Investment Operations: A Critical Link

A key role in portfolio processing is played by the investment operations area—also known as the investment back office—which handles all the operation support for a portfolio management team. Investment operations professionals must deal with a high level of complexity in three ways:

1. They are responsible for many different types of accounts. A portfolio team may oversee separately managed accounts, collective trust funds, hedge funds, single client accounts, and offshore funds, such as European UCITS funds—all in addition to 1940 Act mutual funds. Each type of account is governed by different regulations, and each individual fund will have its own set of investment policies and restrictions.

2. Investment operations will keep track of many different types of securities, some with complex features. Derivatives pose particular challenges. Funds using derivatives may have to post collateral or to make or receive payments based on market movements during the term of the contract. Many of these instruments are customized to the particular needs of a fund, and investment operations must stay on top of all their unique features. Because the complexity of the derivatives market increased the strain on the financial system during the credit crisis, the Dodd-Frank financial reform legislation passed in 2010 encourages greater use of standardized derivatives—which might help reduce the stress on investment operations professionals as well.

3. Finally, investment operations must interact with many different parties, including the trading desk, fund accounting, the custodian, and the broker-dealers who execute transactions for the fund. If the fund uses derivatives extensively, it may also have a prime broker, which is a broker-dealer that coordinates centralizes settlement and collateral for those instruments. Investment operations will help to coordinate the work of all these service providers and serves as a critical link among them.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Fund Industry: How Your Money is Managed. Copyright © 2011 by Robert Pozen and Theresa Hamacher. This book is available at all bookstores, online booksellers and from the Wiley web site at, or call 1-800-225-5945.

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