Case study:

Providing derivative expertise for a large fund manager.


We were hired by a large London-based fund manager to provide derivative expertise.

Client requirement:

The client was a global asset manager, head-quartered in London, with approximately £249bn assets under management. Risk management had become concerned that they did not have the in-house expertise to fully understand the risks incurred by the use of derivatives within their funds, and wished to run an informal audit of the use of derivatives within the organization. This would also include some guidance, informal training and knowledge transfer to colleagues within the Risk department.


For a period of two months we worked on-site at the firm’s offices for two days a week. We ran the following process:
1, Identified those funds which were allowed to trade in derivatives, and under what conditions.
2, Checked that funds not allowed to trade in derivatives did not do so.
3, Had meetings with fund managers that did trade derivatives to check that:
– The fund manager understood how derivatives work.
– The fund manager understood the risks posed by derivatives.
– The fund manager understood the limits and conditions under which they were allowed to trade derivatives (e.g. efficient portfolio management).
4, Checked that the trades performed by the fund manager were consistent with the answers received in meetings.

Colleagues in the firm’s Risk department were involved in the process all the way through – meaning they were educated and trained on the derivatives being traded and the risk items of which they should be aware. As can be envisaged, this process required a great deal of diplomacy and tact on all sides.

The deliverable of the project was a report which contained the results of the informal audit, with some recommendations for what could be done to improve matters / reduce risks.