THE BLOG

02
Oct

Launching a Registered Fund: Is it Right for You?

This is part one of a series about determining if you’re a fit to start a registered product and how to get it off the ground.

You have a successful investment strategy idea. Perhaps you’re currently using it in your SMAs. You’ve done the math and know that you’re missing out on revenue by turning away smaller accounts. You know there’s demand for your strategy, but you’re hesitant to start a registered fund (mutual fund or ETF) because you don’t know if it’s right for your firm and because you’re concerned about the resources you’ll need to get it off the ground. That’s understandable, and it’s wise to critically evaluate your business and all potential scenarios before taking the leap into fund management.

What to consider

What benefits might I gain?

Recouped revenue
As you know from using our mutual fund calculator, creating a mutual fund can help you alleviate that pain of turning away assets because they don’t meet your SMA minimums. A fund may help you recapture or gain some of that recurring revenue you might be missing out on.

Potential efficiencies
In addition to extra revenue you may earn from operating a fund, you may also realize efficiency benefits such as reduced trading costs/activity and the ability to leverage research and investment ideas across your fund clients.

What’s it going to cost?

  • Setup and organization: $45,000 to $100,000, depending on the fund’s complexity and service providers selected. These expenses may be recouped by the advisor from the fund, subject to certain conditions.
  • Annual fund operational expenses: variable, but average approximately $200,000 based on a minimum fee structure. These are considered fund expenses and are generally paid by the shareholder, subject to the fund’s expense cap.
  • Distribution: extremely variable, depending on if your primary objective is to gain operational efficiency or if you are looking for additional distribution opportunities. Please contact us to discuss.

If my objective is to grow my business, how is operating a fund going to help me find new clients?

It’s all about distribution. No matter how strong your strategy is, distribution is truly key to the success of your fund, and one for which you must budget adequately. Beyond setup and ongoing operational costs, much of your investment should be earmarked for continuous sales and marketing. These costs are variable and, beyond compulsory platform fees, the amount you want to allocate to them depends on your desire to make your fund available to new investors through new channels. Although they don’t involve a defined cost, these dedicated distribution resources will be instrumental in your fund’s growth. Along with a great idea, to expand your distribution, you must have an entrepreneurial spirit and be committed to building a sales-driven organization.

Before considering a fund, it’s important to evaluate common characteristics of accounts you’re regularly turning away or not efficiently managing, as recording this type of demand in the planning stages will go far toward understanding the potential market for your fund. You will need to have a firm understanding of your potential target audience, taking into account varying market conditions, investment trends, and shortages in market offerings. Understanding your target client and how they approach investing is a crucial step in developing your fund; this is an area you can’t overlook. Good ideas must be marketed to a specific, appropriate group.

Check back next week, when we’ll go into more detail about how we help you determine appropriate fund structures, fee structures, and distribution platforms.

7756 GFS 10/1/2018 | 2139-NLD-10/2/2018

27
Jun

Don’t Let Malware Make You “Wanna Cry”

On May 12, 2017, an unprecedented wave of ransomware spread via the internet hitting organizations and individuals around the world. The ransomware known as “WannaCry” quickly became front page news.  The purpose of the ransomware, developed by cyber-criminals, was to extort money. The way it accomplished this was to infect unpatched Windows PCs and encrypt 176 different file types (picture files, documents, spread sheets, video files, database files, etc.) leaving the files inaccessible. Then, to unencrypt the files, a ransom had to be paid using the cryptocurrency known as Bitcoin. Average ransom amounts started at $300 and increased incrementally over time until, at seven days, if unpaid, all encrypted files were permanently deleted from the user’s system and lost forever.

The malware was delivered through a hyperlink that could be embedded in emails, web page advertisements, or in a Dropbox links. If a user clicked on any of these links, the PC secretly accessed a website where the virus resided. If the PC did not have the appropriate PC patches or anti-virus software installed, the PC downloaded malicious code which then started the file encryption process and displayed the following message:

message.png

Hundreds of thousands of PCs around the world were impacted by this virus. Hospitals, banks, and telecommunications companies were some of the hardest hit industries.

NorthStar Financial Services Group, LLC (NorthStar), and our subsidiaries (CLS, Orion, and the Gemini Companies*) avoided this outbreak. But how?

At NorthStar, before any computer traffic enters the network, it has to pass through a series of hardware devices and software which closely inspects all bits and bytes for malicious content. Based on very complex and sophisticated rules, logic, and algorithms, some traffic is blocked outright, some is quarantined for review, and the rest is allowed onto the network. However, even with these tools in place, it is possible for new variants of malware to come up and make it past these tools. In the event something does slip through our perimeter defenses, NorthStar also has tools that reside on servers, desktop PCs, and laptops to contain and mitigate any compromise. These tools add an additional layer of protection to detect, prevent, quarantine, and clean malicious content from end-point devices (PCs, Laptops, SmartPhones, etc.).

For those who are interested in technical details, below is a list of many of NorthStar’s security tools and what they do:

  • Email Security Gateway: this product scans all inbound emails and searches them for malicious attachments and embedded links that could take users to malicious sites. If found, the software will quarantine the emails for review or outright delete them if known to be malicious.
  • Intrusion Detection\Intrusion Prevention Systems (IDS\IPS): These systems inspect network traffic at a very low level (bits and bytes). Upon detection of suspicious content, they will automatically block it before it can enter NorthStar’s systems. In addition, these systems filter out traffic from specific geographical locations known to be the source of malware (e.g. Russia, Iran, etc.).
  • Advanced Network Anti-Malware: These systems scan for and detect attacks and malicious network packets as well as command and control communications. “Command and control communications” is when malware communicates back to a home base for additional attack code or content. WannaCry is an example of malware that uses command and control communications.
  • Web Filtering: Web filtering programs block access to sites that have known malicious content. NorthStar’s web filtering software is actively updated with lists of malicious sites, so as soon as any site is registered or detected to have the ability to spread malicious content, it is automatically updated and will block users from accessing those sites.
  • Advanced EndPoint Anti-Malware: This is advanced anti-malware tools installed on the end-point (PC installed). It works similarly to and in conjunction with NorthStar’s Advanced Network Anti-Malware, but on the PC level as opposed to the network level.
  • Anti-Virus Software: This is a traditional Anti-Virus program which actively scans and monitors traffic to and from each PC looking for malicious software. In addition, the software utilizes traditional anti-virus scans of a PC’s local hard drive to detect anything that might be on the hard drive, but not active.
  • Log Collection: This is a system which collects and analyzes PC, server, and network logs looking for questionable activity WITHIN the internal networks searching for activity that could get in via an internal source like a PC USB port, a DVD, or personal computer plugged into a company network port (which is strictly forbidden in our Employee Policy Manual).
  • NorthStar also has robust data recovery tools that can be used to quickly recover systems and data if such an attack like this was successful and original files needed to be restored.

In addition to having the above tools in place, NorthStar ITOC took the following additional steps and precautions when the WannaCry outbreak was discovered:

  • NorthStar double checked that the appropriate Microsoft patches were installed which stop this virus.
  • NorthStar enabled Snort Rule 42340 – A new rule for our IDS\IPS systems which was developed to stop WannaCry once it was detected and started spreading.
  • NorthStar confirmed firewalls were blocking malicious traffic on the specific ports\channels the virus communicated over.
  • NorthStar confirmed TOR network blocking – TOR is an external anonymous network that is notorious for spreading malicious content, so we doubled checked our settings to make sure we were blocking this traffic.
  • NorthStar confirmed all Advanced Malware Protection systems and software had been updated to detect this ransomware signature.
  • NorthStar confirmed the email security gateway was scanning for this specific malware signature.

As you can see, NorthStar takes cybersecurity very seriously. From the technical tools in place to the audited and certified ISO 27001 processes and controls, NorthStar is committed to investing the necessary time and money for industry leading technology, processes, and people.

*The Gemini Companies include: Gemini Fund Services, LLC; Gemini Alternative Funds, LLC; Gemini Hedge Fund Services, LLC; Northern Lights Distributors, LLC; Northern Lights Compliance Services, LLC; and Blu Giant, LLC

7444 GFS-6/26/2017
2147-NLD-6/26/2017

27
Jun

Don’t Let Malware Make You “Wanna Cry”

On May 12, 2017, an unprecedented wave of ransomware spread via the internet hitting organizations and individuals around the world. The ransomware known as “WannaCry” quickly became front page news.  The purpose of the ransomware, developed by cyber-criminals, was to extort money. The way it accomplished this was to infect unpatched Windows PCs and encrypt 176 different file types (picture files, documents, spread sheets, video files, database files, etc.) leaving the files inaccessible. Then, to unencrypt the files, a ransom had to be paid using the cryptocurrency known as Bitcoin. Average ransom amounts started at $300 and increased incrementally over time until, at seven days, if unpaid, all encrypted files were permanently deleted from the user’s system and lost forever.

The malware was delivered through a hyperlink that could be embedded in emails, web page advertisements, or in a Dropbox links. If a user clicked on any of these links, the PC secretly accessed a website where the virus resided. If the PC did not have the appropriate PC patches or anti-virus software installed, the PC downloaded malicious code which then started the file encryption process and displayed the following message:

message.png

Hundreds of thousands of PCs around the world were impacted by this virus. Hospitals, banks, and telecommunications companies were some of the hardest hit industries.

NorthStar Financial Services Group, LLC (NorthStar), and our subsidiaries (CLS, Orion, and the Gemini Companies*) avoided this outbreak. But how?

At NorthStar, before any computer traffic enters the network, it has to pass through a series of hardware devices and software which closely inspects all bits and bytes for malicious content. Based on very complex and sophisticated rules, logic, and algorithms, some traffic is blocked outright, some is quarantined for review, and the rest is allowed onto the network. However, even with these tools in place, it is possible for new variants of malware to come up and make it past these tools. In the event something does slip through our perimeter defenses, NorthStar also has tools that reside on servers, desktop PCs, and laptops to contain and mitigate any compromise. These tools add an additional layer of protection to detect, prevent, quarantine, and clean malicious content from end-point devices (PCs, Laptops, SmartPhones, etc.).

For those who are interested in technical details, below is a list of many of NorthStar’s security tools and what they do:

  • Email Security Gateway: this product scans all inbound emails and searches them for malicious attachments and embedded links that could take users to malicious sites. If found, the software will quarantine the emails for review or outright delete them if known to be malicious.
  • Intrusion Detection\Intrusion Prevention Systems (IDS\IPS): These systems inspect network traffic at a very low level (bits and bytes). Upon detection of suspicious content, they will automatically block it before it can enter NorthStar’s systems. In addition, these systems filter out traffic from specific geographical locations known to be the source of malware (e.g. Russia, Iran, etc.).
  • Advanced Network Anti-Malware: These systems scan for and detect attacks and malicious network packets as well as command and control communications. “Command and control communications” is when malware communicates back to a home base for additional attack code or content. WannaCry is an example of malware that uses command and control communications.
  • Web Filtering: Web filtering programs block access to sites that have known malicious content. NorthStar’s web filtering software is actively updated with lists of malicious sites, so as soon as any site is registered or detected to have the ability to spread malicious content, it is automatically updated and will block users from accessing those sites.
  • Advanced EndPoint Anti-Malware: This is advanced anti-malware tools installed on the end-point (PC installed). It works similarly to and in conjunction with NorthStar’s Advanced Network Anti-Malware, but on the PC level as opposed to the network level.
  • Anti-Virus Software: This is a traditional Anti-Virus program which actively scans and monitors traffic to and from each PC looking for malicious software. In addition, the software utilizes traditional anti-virus scans of a PC’s local hard drive to detect anything that might be on the hard drive, but not active.
  • Log Collection: This is a system which collects and analyzes PC, server, and network logs looking for questionable activity WITHIN the internal networks searching for activity that could get in via an internal source like a PC USB port, a DVD, or personal computer plugged into a company network port (which is strictly forbidden in our Employee Policy Manual).
  • NorthStar also has robust data recovery tools that can be used to quickly recover systems and data if such an attack like this was successful and original files needed to be restored.

In addition to having the above tools in place, NorthStar ITOC took the following additional steps and precautions when the WannaCry outbreak was discovered:

  • NorthStar double checked that the appropriate Microsoft patches were installed which stop this virus.
  • NorthStar enabled Snort Rule 42340 – A new rule for our IDS\IPS systems which was developed to stop WannaCry once it was detected and started spreading.
  • NorthStar confirmed firewalls were blocking malicious traffic on the specific ports\channels the virus communicated over.
  • NorthStar confirmed TOR network blocking – TOR is an external anonymous network that is notorious for spreading malicious content, so we doubled checked our settings to make sure we were blocking this traffic.
  • NorthStar confirmed all Advanced Malware Protection systems and software had been updated to detect this ransomware signature.
  • NorthStar confirmed the email security gateway was scanning for this specific malware signature.

As you can see, NorthStar takes cybersecurity very seriously. From the technical tools in place to the audited and certified ISO 27001 processes and controls, NorthStar is committed to investing the necessary time and money for industry leading technology, processes, and people.

*The Gemini Companies include: Gemini Fund Services, LLC; Gemini Alternative Funds, LLC; Gemini Hedge Fund Services, LLC; Northern Lights Distributors, LLC; Northern Lights Compliance Services, LLC; and Blu Giant, LLC

7444 GFS-6/26/2017
2147-NLD-6/26/2017

10
May

A Gemini Evolution

The latest issue of the Exchange is online now! If you are not subscribed to the newsletter, click here!

Our May issue highlights the evolution of Gemini as Kevin Hesselbirg takes the helm as CEO, true costs of mutual fund distribution, adding to your value proposition, and much more!

Click here to read the May issue of The Exchange!

 

7361 GFS-5/10/2017

2123-NLD-5/10/2017

04
May

What’s the Best Way to Manage Risk?

By Andrew Rogers, former CEO, The Gemini Companies

There are many different methods to calculate and monitor portfolio risk. However, many believe that the best approach starts with, and is generally driven by, the philosophy and requirements of the investor within the context of the investment mandate and portfolio goals. Effective risk management therefore combines a rigorous due diligence process with the establishment of investment guidelines, and leads to the definition and implementation of risk policies and procedures. From there, it then evolves to a continuous monitoring of exposures using a variety of advanced risk metrics and strategies.

Thorough due diligence is a prerequisite for any effective portfolio risk management process, and a full quantitative analysis of the track record is an important first step. In a relatively recent development, we have seen trading advisors greatly increase their data transparency and are generally happy to provide information on returns, holdings, allocations and historical margining. These data points can be used to determine information about volatility, historical drawdowns, correlations to benchmarks, return distributions, etc., and serves a dual purpose—to fact-check the manager-provided metrics as well as to provide a framework for additional research. Trading advisors can provide this information to investors to fill in any gaps about a specific investment strategy, how risk is managed internally, and the operational framework for doing so.

In this way, a strong understanding of the investment process allows investment risk to be both understood and managed on an ongoing basis. As part of their continual risk-management monitoring, investors should, at a minimum, be able to confirm that the trading advisor is adhering to their stated investment and risk guidelines. This involves monitoring the portfolio to make sure that mandates are not being broken with regard to the size of positions and the markets that are traded. While this measure is necessary for good governance, this is especially important to avoid any unforeseen concentration risk, liquidity risk, and geographical risk. Additionally, ensuring that a portfolio is properly liquid and diversified, a prerequisite for the efficacy of standard risk metrics, also generally allows investors and advisors to better manage extreme, or “tail,” risk events.

Among the most common risk analytics applied to portfolios are variants of Value-at-Risk (VaR) calculations as well as stress-testing. Interestingly, the strength of VaR is also its weakness—while effective at calculating potential losses at a given confidence interval, VaR does not forecast the magnitude of losses in periods of tail risk.

Stress-testing with both custom and historical scenarios can partially fill this gap, but they are only as strong as the scenario being presented. By their nature, no two financial crises are ever identical, with the resulting correlations between markets being difficult to predict. In those cases, the explanatory power of both Monte Carlo and discrete event stress-test models can generally be limited.

Therefore, while VaR statistics and mathematical modeling can be useful, many believe a robust approach towards risk management should include an overall-exposure-based strategy. This allows for the forecasting and management of actual losses when correlations between markets and asset classes diverge from their modeled or historical patterns.

It is for these reasons that we see many top trading advisors employ this type of proactive methodology. They combine traditional risk strategies with limits on exposures to markets and asset classes, as well as a top-down portfolio-level view of risk. When trading advisors set and adhere to comprehensive risk management policies and procedures that augment this approach, they can generally implement a sensible way to both forecast and manage losses in multi-standard deviation events—and provide a strong framework with the potential for total returns consistent with mitigating potential losses, thereby benefiting investors as well as their firms and strategies.

 

7341 GFS-5/1/2017

2115-NLD-5/1/2017

27
Apr

Bus Factor

How Not To Get Hit By It

By Scott Spratlen, Senior Vice President of Technology

When you hear the term “bus factor,” I imagine a few different images come to mind. Maybe it’s the impending headlights of a bus heading straight for you or a fleet of busses trekking across the country.  In and of itself, the term bus factor doesn’t sound like a negative term. On the contrary, it almost sounds powerful, unless you have already been exposed to it, or have experienced it firsthand.

The term bus factor represents the risk an organization or team takes when only one or a few individuals have key knowledge or skills which are not possessed by others on the team or organization.

To evaluate the bus factor in an organization or team, ask the question, what would happen if this person was no longer available or “hit by a bus” (hence the term)? Would the team be able to survive and at what cost? If the answer to that question results in not being able to operate without that individual, then the bus factor is very high and immediate attention is needed.

In smaller organizations, bus factor is common and almost unavoidable. As growth occurs and teams expand, it is also common for the bus factor to rise. This is because new employees, hired during a reactionary growth period, hit the ground running and pick up new tasks or simple tasks and begin to create their own bus factor while solidifying the bus factor of those already on the team.

Mitigating bus factor is an intentional process and sometimes a difficult one. Many of those holding onto knowledge and skills will feel vulnerable, and even expendable, when approached about passing items off. They will often react defensively and resist the change. As a company grows it is imperative to reduce and even remove bus factor in order to make continued and even exponential growth scalable.

The team I work with was wrought with bus factor, and it was only getting worse. We needed to do something quickly before it devastated our productivity. Our team of developers is a distributed team (not collocated), and essentially made up of two teams, one in each location, making this challenge even more daunting. So we did what seemed counter-intuitive, but necessary, we setup team leads and assigned them team members that are not collocated to them. Each team lead was given specific challenges to rotate the work items and a pair program was developed to share knowledge.

What came of this process was nothing short of miraculous. Efficiencies are skyrocketing, and team morale is continuing to rise. Why?  Because team members get to work on different projects all the time. They are no longer pigeon-holed for the bus factor project only they were stuck on, even if they were the ones intentionally holding on. Queues are shifting and workloads are much more balanced.

Benefits of Removing Bus Factor

– Knowledge and skills that are scalable

– Better leadership that communicates and shares

– Better collaboration and trust among the team

– Employees who provide value instead fearing being expendable

Side Effects of Bus Factor

– Siloed knowledge and skills

– Lack of sharing and trust among team

– Poor collaboration

– Selfish mentality

– Log jams in queue waiting for one person to work on them

It is essential to reduce and even remove bus factor, whenever identified, in order to reduce risk and improve efficiency. It is a difficult challenge to overcome if you are facing it, but one well worth the fight!

 

7324 GFS-4/24/2017

2111-NLD-4/27/2017

12
Apr

Understanding The True Cost of Mutual Fund Distribution – Part Three

This is part three in a series on The True Cost of Mutual Fund Distribution. Part one focused on product placement, click here to read it first. Part two focused on active sales and marketing, click here to read part two. Part three focuses on tracking capabilities.

Tracking Capabilities

An investment manager will need to evaluate needs and determine what types of technology should be utilized. Although these costs are optional, it is important to evaluate each one and determine if any are necessary for the business.
Types of Technology Costs

  • CRM Tools
  • Sales Reporting
  • Omni/SERV

Customer Relationship Management Tools (“CRM”) – Customer relationship management tools help organize and document sales calls, email campaigns, and meetings. Most commonly utilized CRMs are Salesforce, Redtail, SalesPage, and ACT.

Sales Reporting – Aggregation tools provide consolidated data from custodians, broker-dealers, and other intermediaries. This type of service provides more detailed sales reporting to assist in managing territories, tracking sales traction, and determining market share. Providers may include Celera, AccessData, MARS Salesfocus Solutions, and SalesConnect.

OMNI/Serv – As more intermediaries are moving to Omnibus trading, Omni/SERV is an optional service to see account and rep level transparency for Omnibus trading. Although this is optional, it is important to have rep level data on trades.


Questions Advisors Should Consider

  • How can you use a CRM tool to your advantage?
  • How are you currently tracking sales data? Would using a CRM tool help your sales tracking?
  • Do you have Omnibus business? If so, does Omni/SERV make sense for your business?

 

2093-NLD-4/5/2017

7266 GFS-4/5/2017