Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

50 CHAPTER ◆ 4 Managing Design and Development

● Using objective criteria when making go/kill decisions.

● Committing the necessary resources to ensure project success over the following

stage.

● Communicating go/kill decisions throughout the organization.

● Prioritizing individual projects within the portfolio of new and working systems.^6

Top management also sets internal policies and controls, addresses responsibilities

to investors and regulators, proposes transactional practices, and oversees business con-

tinuity planning. In accordance with the MFA ’ s 2005 Sound Practices for Hedge Fund

Managers , some of top managements ’ important responsibilities are also to:

● Oversee the investment, risk, and trading policies of the trading/investment systems

under its purview.

● Impose appropriate controls over its portfolio of trading/investment systems.

● Select reliable third-party vendors on the advice of product teams including data

providers, prime brokerages, risk management, and valuation providers, and moni-

tor their performance.

● Establish firmwide practices for benchmarking third-party vendors.

● Identify regulatory filings and assure compliance with all laws and regulations that

apply to the firm ’ s products.

● Establish written compliance policies with respect to trading restrictions, confiden-

tiality, proprietary trading, disclosures, and other issues.

● Select and monitor performance of clearing and executing brokers.

● Monitor exposures to operational risk with random spot checks, reviews, and inter-

nal controls.^7

The first goal of strategic planning and execution in a trading/investment firm is to

generate returns either by investment in profitable trading/investment systems and/or

by fees paid to the firm by the fund itself. To that end, top management must assess its

organizational strengths (core competencies), weaknesses, opportunities, and threats

(called SWOT analysis), and optimally focus the firm ’ s efforts around value streams, that

is, processes that design and develop trading/investment systems. Once focused, only top

management can authorize the expenditures of money and time necessary to make the

trading/investment system realization process happen. To quote Peter Scholtes:

Quality leadership recognizes—as Dr. Jospeh M. Juran and Dr. W. Edwards

Deming have maintained since the early 1950s—that at least 85% of an organiza-

tion ’ s failures are the fault of management-controlled systems. Workers can control

fewer than 15% of the problems. In quality leadership, the focus is on constant and

rigorous improvement of every system, not on blaming individuals for problems.^8

4.3.1. Assembling Product Teams

In a value-stream organization, management assembles cross-functional product

teams consisting of motivated, highly skilled people in each functional area—financial

engineering, trading or portfolio management, programming or IT, and marketing.