The Member Magazine for Investment ProfessionalsMay/June 2014ExpandingHorizonsGlobal expansion isa tricky balancing actfor asset managersMay/June 2014COVER STORY30 Expanding HorizonsGlobal expansion is a tricky balancing act for asset managersBy Rhea Wessel34 The Art of Knowing Nothing BrilliantlyHow does a successful quant know which strategies will work? First, throw out the word know, says Cliff AsnessBy Nathan Jaye, CFA38 Hope and UncertaintyMembers of CFA Society Ukraine describe changes in their lives and businessBy Nathan Jaye, CFA40 Double, Double Toil and TroubleIf inflation metrics are wrong, mischief could be brewing for marketsBy John Rubino30COVER ILLUSTRATIONKelly Alder40343801-IB14-724CH657Interactive Brokersfor Institutionsinteractivebrokers.com/cfaInteractive Brokers LLC is a member of NYSE, FINRA, SIPC.Why become an independent RIA on Interactive Brokers platform?Please see the answer at:CFA INSTITUTE NEWS6In FocusShaping the Future of Finance TogetherBy John Rogers, CFA9EMEA VoiceThe Ethical Gap between Principle and PracticeBy Nitin Mehta, CFA10APAC FocusAsia Pushes BackBy Paul Smith, CFAVIEWPOINT14In the DarkThe latest allegations about market rigging by high-frequency traders overlook more serious problemsBy Dennis Dick, CFA16Job Satisfaction and Investment ProfessionalsProfessionals who focus on compensation may deceive themselves and mismanage othersBy Usman Hayat, CFA17The Value of Geopolitical AnalysisAlthough most investors say geopolitical analysis is important, many fail to grasp its real significanceBy Jason Voss, CFAPROFESSIONAL PRACTICE20Finding profitable high-yield anomalies24Compensation trends for analysts27Stopping boards disorganized crimesETHICS AND STANDARDS46Market Integrity and Advocacy Crowdfunding and investor protection Reforming preemption rights in Asia CFA Institutes role in the MiFID II debate Are self-regulatory organizations obsolete?55Professional Conduct Notices of disciplinary action5In Summary56Chapter 10May/June 2014AS ONE CHAPTER CLOSES AND ANOTHER BEGINS IN THE MIFID SAGA, CFA INSTITUTE WILL REMAIN RESOLUTE IN STANDING UP FOR INVESTOR INTERESTS IN THE REGULATORY REFORM PROCESS.485650CFA Institute Magazine (ISSN 1543-1398, CPM 400314-55) is published bimonthlyin January, March, May, July, September, and Novemberby CFA Institute. Periodicals postage paid at Charlottesville, VA, and additional mailing offices. POSTMASTER: Send address changes to CFA Magazine, 915 East High Street, Charlottesville, VA 22902.Statements of fact and opinion are the responsibility of the authors alone and do not imply an endorsement by CFA Institute.Copyright2014byCFAInstitute.Allrightsreserved.Materialsmaynotbe reproduced or translated without written permission. CFA, Chartered Financial Analyst, and the CFA Institute logo are just a few of the trademarks owned by CFA Institute. See www.cfainstitute.org for a complete list.Annual subscription rate for CFA Institute members is US$40, which is included in the membership dues. Annual nonmember subscription rate is US$50.THE AMERICAS915 East High StreetCharlottesville, VA 22902USAPhone: (800) 247-8132 or +1 (434) 951-5499477 Madison Avenue, 21st floorNew York, NY 10022 USAPhone: +1 (212) 754-8012EUROPE, MIDDLE EAST, & AFRICA131 Finsbury Pavement, 7th FloorLondon EC2A 1NTUnited KingdomPhone: +44 (20) 7330-9500ASIAPACIFIC23/F, Man Yee Building68 Des Voeux RoadCentral, Hong KongPhone: +852 2868-2700BRUSSELSNCI LOCARTIS European ParliamentSquare de Mees 38/401000 Brussels (Belgium)Phone: +32 (02) 401-6828May/June 2014Vol. 25, No. 3EDITORIAL ADVISORY TEAMShanta AcharyaBashir Ahmed, CFAJim Allen, CFAJonathan Boersma, CFAJarrod Castle, CFAMichael Cheung, CFAJosephine Chu, CFAFranki Chung, CFADarrin DeCosta, CFANick Dinkha, CFAJerry Donohue, CFAAlison Durkin, CFAKenneth Eisen, CFAWilliam Espey, CFAJulie Hammond, CFABurnett Hansen, CFAM. Mahboob Hossain, CFAVahan Janjigian, CFAAndreas Kohler, CFAAaron Lai, CFAKate Lander, CFACasey Lim, CFAMichael Liu, CFABob Luck, CFAFarhan Mahmood, CFADennis McLeavey, CFASudip MukherjeeJerry Pinto, CFALinda RittenhouseCraig Ruff, CFAChristina Haemmerli Schlegel, CFADavid Shen, CFAArjuna Sittampalam, ASIPLarry Swartz, CFAJacky Tsang, CFAGary Turkel, CFARaymond Wai Pong Yuen, CFAJames Wesley Ware, CFAJean WillsCFA INSTITUTE PRESIDENT & CEOJohn Rogers, CFAjohn.rogers@cfainstitute.orgMANAGING EDITORRoger Mitchellroger.mitchell@cfainstitute.orgONLINE PRODUCTION COORDINATORKara HiteADVERTISING MANAGERTom Sourstom.sours@cfainstitute.orgPUBLISHERRay DeAngeloray.deangelo@cfainstitute.orgASSISTANT EDITORMichele ArmentroutGRAPHIC DESIGNCommunication Design, Inc.tim@communicationdesign.comCIRCULATION COORDINATORJennette Townsendjennette.townsend@cfainstitute.orgEARN A PRESTIGIOUS MASTERS DEGREE WHILE PREPARING FOR YOUR CFA EXAMINATIONS.TO LEARN MORE, CALL 866-717-6365 OR VISIT ONLINE.CREIGHTON.EDU/CFAMAG Taught exclusively by faculty who have earned the prestigious CFA charter, Creighton Universitys Master of Security Analysis and Portfolio Management program allows students to earn a highly-respected masters degree while simultaneously preparing for success in the CFA Program.* The practitioner-based knowledge and skills students acquire are essential to those seeking top jobs in the competitive and challenging eld of investment management. This state-of-the-art curriculum is delivered either exclusively online or in residence. WORLD-CLASS CURRICULUMCreightons MSAPM faculty is comprised of educational professionals who have all earned the CFA charter as well as advanced academic degrees. The faculty includes: Robert Johnson, Ph.D., CFA: Former DeputyCEO of the CFA Institute Randy Jorgensen, Ph.D., CFA: MSAPMProgram Director Lee Dunham, Ph.D., CFA: Associate Editor, CFA Digest Charles Braymen, Ph.D., CFA Marc LeFebvre, M.S., CFA Ken Washer, D.B.A., CFA Melissa Woodley, Ph.D., CFA*CFA Institute does not endorse, promote or warrant the accuracy or quality of the products or services offered by Creighton University. CFA Institute, CFA, and Chartered Financial Analystare trademarks owned by CFA Institute. The CFA Institute is the sole grantor of the CFA Charter designation. 2014 Creighton UniversityRank keed by UU.S. Neewws and World RReport Ammong the e Topp 20 GGraduate Finaanc ce Prooggrams4CFA Institute Magazine May/June 2014May/June 2014 CFA Institute Magazine5Riding a Bicycle in the Dark without a LampA mans brain whizzes along for years exceeding the speed limit, and something suddenly goes wrong with the steering-gear and it skids and comes a smeller in the ditch. P.G. Wodehouse, Right Ho, JeevesFor a man with no practical responsibilities, Bertram Bertie Wooster has a rather complicated simple life. An amiable young English gentleman educated at Eton and Oxford and endowedwithfamilywealth,heseemstospendmostof his time doing little more than living in high style. But he always manages to entangle himself in the absurdly convo-luted misadventures of old school chums and family rela-tions. Again and again, the task of rescuing Bertie and com-puny liom sociul iuin lulls to Beitie's vulet, tle unuppuble and all-knowing Jeeves.If the servants of 1930s-era British upper classes had a professional code analogous to the CFA Institute Code of Ethics and Standards of Professional Practice, Jeeves would exemplify the highest standard of conduct. A case study in servant leadership, he would embody the ideal that every duy, youi uctions not only ieect youi own cluiuctei but ulso impuct tle ieputution ol youi im und tle piolession more broadly (In Focus, 6). Berties friends and relations trust Jeeves to advise them on untying the most perplexing knots of personal life and business affairs. Whereas many people in much loftier professions deceive themselves into believing that ever-greater compensation will lead to satis-faction, Jeeves presumably would agree with Usman Hayat, CFA, when he explains why results, recognition, and rela-tionships are worth more than material rewards (Job Sat-isfaction and Investment Professionals, 16).Bertie marvels at Jeeves loyalty when people try to hire Jeeves away and offer to double his pay, a method of acquir-ingtalentthathasbecomelessfamiliarwherethecom-pensutionolnunciulunulystsisconceined(PuyDuze,` 24). Why Jeeves stays with Bertie is unclear. I suspect that lecouldneveindunotleimusteisogeniulwlowould also be an inexhaustible source of amusing follies. And he would miss Berties penchant for uttering ridiculous prov-erbs, such as Spilt milk blows nobody any good or There is a time for studying beetles and a time for not studying beetles. Perhaps Jeeves also would have enjoyed working for AQR founder Clifford Asness, whose quick wit leads to more truly insightful quips. For example, Asness puts the knowledge belind piotuble investment stiutegies in pei-spective when he says, First, throw out the word know. We dont actually know anything. We make bets that are right a little bit more than 50% of the time, and we congratu-late ourselves on that track record long term when it really adds up (The Art of Knowing Nothing Brilliantly, 34).Although Bertie is more like a short-term market timer thanalong-terminvestor,hedoeshaveakeensenseof stiutegy. Wlen le nds limsell ut un event wleie eveiy-thing is about to go wrong in spectacular and embarrass-ing fashion, he tells the reader, The essence of strategy on these occasions is to be as near the door as possible. For investors,thegravestdangercomeswheneveryonesud-denlyperceivesathreatsimultaneouslyandtriestoget through the door at the same time. Under such conditions, those with a proper understanding of geopolitical analysis may have an advantage because it can provide high levels of predictability, according to Jason Voss, CFA (The Value of Geopolitical Analysis, 17).One of the predictable patterns examined by Voss is Rus-sias interest in Ukraine and the Crimea region in particular. As a result of recent developments, members of CFA Society Ukiuine nd tlemselves deuling witl ciicumstunces tlut their professional colleagues in many other markets never have to contemplate, yet they persevere in trying to advance a vision of progress. In the words of Anna Reshetova, the societys administrative director, Its our great hope and expectution to quulitutively clunge tle nunciul muiket in Ukraine (Hope and Uncertainty, 38).Forinvestorsinmorestableenvironments,hopeisa tricky thing because it can easily turn into optimism. Naive optimism is invariably where Bertie goes wrong when he decidestohelpsomeonewithoutconsultingJeeves.The two have very different approaches. The wise valet operates with a shrewd understanding of psychologyhow people will actually behave in a given situationbut Bertie usu-ally proceeds on wishful thinking. According to high-yield specialist Jochen Felsenheimer, the same thing can happen with investment models. Its never the model, he says. Its alwaysthepeopleputtingassumptionsintotheirmodels wlo uie too optimistic` (Tle Omnivoie's Diet,` 20).Is the latest controversy over high-frequency trading a case ol optimism gone wiong (HFT ims getting cuiiied uwuy by irrational high-speed exuberance) or a knee-jerk overreaction based on widespread ignorance of market microstructure? Tukingutiudei's-eyeviewolmutteis,DennisDick,CFA, argues that people are overlooking the most serious prob-lems cuused by ligl-liequency tiudeis (In tle Duik,` 14).Some of us can identify with the situation in which Bertie nds limsell neui tle end ol Right Ho, Jeeves. When one of Jeeves plans appears to have gone awry (temporarily), Bertie must ride a bicycle at night over unfamiliar roads to a village nine miles distant. For life or investing, riding a bike in the dark without a lamp often seems like an apt met-aphor. Bertie would advise us to remain calm, pour a restor-ative drink, and make ourselves comfortable. After all, as he says, It isnt so dashed easy to stagger when youre sit-ting in an arm-chair.Roger Mitchell, Managing Editor (roger.mitchell@cfainstitute.org)IN SUMMARYShaping the Future of Finance TogetherBy John Rogers, CFAJustoverayearago,CFAInstitute launchedtheFutureofFinanceinitia-tive, a long-term global effort to shape a tiustwoitly, loiwuid-tlinking nunciul industry that better serves society. Our purpose was to identify the issues that are most important to the future of the industry and determine where we have the greatest ability to make a difference. We have learned much along the way.Fiist, we leuined tlut tlis is dilcult but impoitunt woik. As un oigunizution, we luve enguged in udvocucy elloits loi many years and published countless articles on best practices loi tle piolession, yet tlis initiutive lus biouglt oui oigunizu-tion togetlei in u new wuy to see tle bioudei iumicutions ol our work. While the list of challenges remains daunting, we have been encouraged by comments from many who view our oigunizution us uniquely quulied to tuckle tle tougl issues. Our years of excellence in administering the CFA Program, combined with our steadfast dedication to ethical principles, give us great credibility in the global marketplace.The Future of Finance initiative has drawn on wisdom from leaders throughout the profession, and through con-versations with hundreds of volunteers, members, and other industiy expeits, we identied six locus uieus loi tle Futuie olFinunce:puttinginvestoisist,nunciulknowledge, transparency and fairness, retirement security, regulation and enforcement, and safeguarding the system.Second, we have seen how we can have greater impact witl u unied voice. Tle Futuie ol Finunce lus become u platformtodemonstratetoourmembers,theclientswe serve, and the public that we are more than a membership oigunizutionolcompetentundetliculpiolessionulswe also are a leadership oigunizution loi tle industiy.Our effort has been supported by the Future of Finance Advisory Council, which is an esteemed group of experts wloluveledussetmunugementims,seivedusiegulu-tors, run sovereign wealth funds, and published extensively. Moreover, the Future of Finance initiative has been fueled by the passion and enthusiasm of our members, with more than 50 of our member societies actively involved already. The Future of Finance has inspired such efforts as the Finan-ciul Fitness Run, oigunized by CFA Society Plilippines. Tlis society of approximately 130 members recently held a race with nearly 3,000 runners, featuring a different right from the Statement of Investor Rights at each kilometer marker. Meanwhile, other societies are holding gatherings for local leaders to talk about improving business practices and host-ing educational events for their members, often collaborat-ing witl otlei inuentiul oigunizutions.Third, it is a long journey toward industry change, and we can all play a part. Although our members are globally dispersed, we share a common experience: dedicating long hours to exam study, awaiting results after test day, and rec-ognizing tlut becoming u cluiteiloldei slould meun moie than adding three letters after your name. This is our indus-try, and we are part of a community of exceptionally tal-ented investment professionals. While we cannot predict the future, we can do our part to make it better and to better prepare ourselves for it. Our global advertising campaign states, The Future of Finance Starts with You, and there are many ways to participate. Every day, your actions not only ieect youi own cluiuctei but ulso impuct tle ieputu-tion ol youi im und tle piolession moie bioudly.We encouiuge you to visit www.cluinstitute.oig/lutuie-nance, where we will continue to publish research and prin-ciples that support the focus areas of the Future of Finance. Read through the Integrity List of 50 action items to dis-covei wuys to build tiust und enlunce youi im's ieputu-tion. Encouiuge youi imoi tle ims you liieto udopt the Asset Manager Code of Professional Conduct or to have employees outside the investment process sit for the Clar-itasexam.GivetheStatementofInvestorRightstoyour clients. Join one of our online forums to debate important issues. Participate in CFA Institute member society events tlut liglliglt tle putting investois ist` tleme, especiully duiing tle montl ol Muy. Dozens ol societies uie doing uctiv-ities, ranging from getting a US state governor to declare u Putting Investois Fiist Duy to puitneiing witl locul stock exchanges for bell-ringing ceremonies to holding member events.Theyareallworkingtogethertoraiseawareness of the importance of aligned incentives and doing the right thing for clients.We are building tools for change. We invite you to use tlem us we slupe tle lutuie ol nunce togetlei.John Rogers, CFA, is president and CEO of CFA Institute.CFA INSTITUTE NEWSIN FOCUS6CFA Institute Magazine May/June 2014THE FUTURE OF FINANCE IS A PLATFORM TO DEMONSTRATE THAT WE ARE MORE THAN A MEMBERSHIP ORGANIZATION OF COMPETENT AND ETHICAL PROFESSIONALSWE ALSO ARE A LEADERSHIP ORGAN-IZATION FOR THE INDUSTRY.#FutureFinanceEveryone who works in finance helps shape its future.Kamolwat Ratanachai,Student, Claritas Certificate Holder C C FAFA Ins Inssss nnstit tit ttit tttit tit ti it tit tit tit ttttute uute 20 20114.. CCFA FA, C , CIPM IPMMM IP, a , ndd Clarittasar are r e regi egiste st red trademar m ks ofo CFA C A In In nsti stiitu ttuttteeeeee ii eeee n mmany any co count untrie ries t s thro hroughout the worl r d.We all play a role in bringing positive change to the finance industry.Explore cfainstitute.org/FutureFinance to learn more.#FutureFinance THE FUTURE OF FINANCE STARTS WITH YOU2014 INVESTMENT MANAGEMENT WORKSHOP711 July 2014Harvard Business SchoolBoston, Massachusetts, United StatesOffered by CFA Institute and Harvard Business SchoolFor more than 40 years, the Investment Management Workshop has played an essential role in shaping the principles and practices of investment management across the globe. This renowned program brings together highly accomplished faculty and leading executives from around the world to confront the ever-changing challenges that define the investment management industry. KEY TOPICS FOR 2014The effects of changing macroeconomic risks on asset allocationInvestment management products and services in the global marketplaceLiquidity management in uncertain timesRisk management in a portfolioand in a business Disruptive innovations in the money management industryThe program was a useful insight into alternative investment approaches available to our clients; it gave me a better understanding of the broad competitive landscape and our place in client portfolios.JOHN KELLY-JONESPartner and Chief Operating OfficerIndependent Franchise Partners, LLP2012 IMW attendeeLearn more and apply now at www.cfainstitute.org/execedQuestions? Contact us at university@cfainstitute.orgFOLLOW US ONLIKE US ONFOLLOW US ON 2014 CFA InstituteCFA INSTITUTE NEWSEMEA VOICEThe Ethical Gap between Principle and PracticeBy Nitin Mehta, CFAIn2013,CFAInstitutecommissioned the Economist Intelligence Unit (EIU) to undertake research with C-suite execu-tives from across the investment indus-try to understand the view from within on ethics and educationat the highest levels of organisations and institutions. The results (published this past Novem-ber in the report titled A Crisis of Culture: Valuing Ethics and Knowledge in Finan-cial Services) are fascinating and highlight some of the areas where work is still needed to address the gap between prin-ciple and practice in upholding ethical standards.In the study, we asked executives from across key sec-torsasset,wealth,andfundmanagement;commercial, investment,private,andretailbanking;andinsurance undieinsuiunceimsubouttlestunduidsinpluceut their organisations, how these standards were adapted and enforced, and where the knowledge gaps exist. One message was clear: There was a resounding acknowledgement of the importance of codes of conduct as a driver of reputation and value, with 91% of respondents placing equal importance on etlicul beluvioui us on nunciul success ut tleii im.More worryingly, however, 53% went on to say that career piogiession ut tleii oigunisutions would be dilcult witl-out being exible` on etlicul stunduids, und just 37% lelt tlut tleii ims' nunciul iesults would impiove us u iesult of better ethical conduct.This response demonstrates that although businesses in the investment industry understand that they must display an ethical culture externally, enforcement of ethical stan-dards is not yet embedded in the reward systems and daily piuctices ol ims.This research addresses a great need in our Future of Finance Starts with You campaign as we try to understand the views of those leading the industry, because it is clear to all involved in this mission that change must come from the top. CFA Institutes own Global Market Sentiment Survey shows that CFA charterholders remain much more acutely awareoftheimportanceofupholdingethicalstandards, withoverhalfofourmembersbelievingthatthelackof etlicul cultuie in nunciul ims lus been tle biggest con-tributor to the lack of trust in the industry.TheEIUstudyalsofoundthateventhough97%of iespondents suid tlut tley uie well quulied loi tleii own role, 62% admit that their colleagues know very little about wlut goes on in depuitments beyond tleii own. Tlis nd-ing shows that a silo culture is pervasive in the industry, with departments acting unilaterally rather than viewing themselves as part of the wider business, which suggests that integrated functional and management approaches for iisk-pioong oigunisutions iemuin weuk.Ibelievethatourroleistotackletheseissueswitha solutions-focused approach, which is why we continue to engage our global membership in this debate and to broaden the product portfolio that we can offer the industry. The launch of the Claritas Program last year, which includes a strong focus on ethics as part of a curriculum aimed at all participants in the industry (whatever their profession), is an important part of this effort.Ignorance can be no excuse for failings in conduct, and all parties must fully understand the consequences of this so-culledexibleuppioucltoiigoiousetliculstunduids. The report examines case studies of institutions facing sig-nicunt, globul iepututionul clullenges tlut luve iesulted from reckless investment behaviour, losses for clients, and the decline in public opinion about particular brands, and it showcases examples of projects being undertaken to restore trust, improve performance, and bring about the cultural changes within organisations that are long overdue.With this valuable information about how executives see the world, CFA Institute cantogether with our member-shipwork with our partners in industry to address areas in the chain of command that may still need reinforced mes-sagingabouttheimportanceofrobustconduct,enforce-ment,undincentivisutiontobuildunindustiytloitle future, with the interests of clients, colleagues, and com-panies addressed in equal measure.The report A Crisis of Culture: Valuing Ethics and Knowl-edge in Financial Services can be downloaded at www.cfa-institute.org.Nitin Mehta, CFA, is managing director of Europe, Middle East, and Africa (EMEA) at CFA Institute.THIS RESEARCH ADDRESSES A GREAT NEED IN OUR FUTURE OF FINANCE STARTS WITH YOU CAMPAIGN AS WE TRY TO UNDERSTAND THE VIEWS OF THOSE LEADING THE INDUSTRY, BECAUSE IT IS CLEAR TO ALL INVOLVED IN THIS MISSION THAT CHANGE MUST COME FROM THE TOP.May/June 2014 CFA Institute Magazine9Asia Pushes BackBy Paul Smith, CFANearly 30 years after Europe invented the highlysuccessfulUCITS(Undertakings for Collective Investment in Transferable Secuiities) scleme, Asiu is nully tuking seriousstepstowarditsownversionof funds passporting. The plans will allow direct cross-border distribution of Asian investment products and are thus expected to develop the breadth and depth of the regions investment management industry.Atthemoment,threeinitiativestowardthisgoalare under way: the Hong KongChina mutual fund recognition scheme; theAssociationofSoutheastAsianNations(ASEAN) Framework for Cross-Border Offerings of Funds, proposed by Malaysia, Singapore, and Thailand; and tle Asiu-Pucic Economic Coopeiution (APEC) Asiu Region Funds Passport, proposed by Australia, New Zealand, Sin-gapore, and South Korea.The Hong KongChina mutual fund recognition scheme is expected to be achieved sooner than the other two initia-tives. (The APEC passporting is scheduled to be operational by 2016.) In anticipation, three-quarters of the top 100 global fund managers have established a licensed entity in Hong Kong over the past few years. They hope to get a free pass into the Chinese market under the scheme.Whytheurgenowtointegratethefundmanagement markets in Asia? The answer is simple: Asian regulators are pusling buck uguinst tle inux ol Euiopeun-mude invest-ment products and the increasingly inappropriate regula-tions that come with them. The Asian regulators are trying to tuke gieutei contiol ol investment ows into tleii mui-kets. A majority of the funds sold in Hong Kong, Singapore, and Taiwan are currently UCITS funds established in Lux-embouig und Dublin. Only ubout 1S% ol lunds cuiiently uutloiized loi sule in Hong Kong uie locul lunds.Following tle globul nunciul ciisis und tle consequent focus on product mis-selling, regulators are asserting con-trol over the regulations of products that are sold in their markets, especially the more complex UCITS III and IV prod-ucts.InHongKong,forexample,everyUCITSfunddis-tiibuted in tle muiket lus to be sciutinized und uppioved by the Securities and Futures Commission (SFC). This was relatively easy under UCITS I, when regulations were basic and straightforward. As UCITS has evolved, regulators in Asia have become increasingly uncertain that these more soplisticuted pioducts t locul ietuil muikets. Tle Lelmun minibonduscoin20082009inHongKongundSingu-pore supports this uncertain feeling. Thus, Asian regulators have stepped up their efforts to build a regional passport-ing scheme. And investment managers have found getting UCITS pioducts uutloiized in Asiu incieusingly uiduous.Moreover,strategically,theeffectofproductdomicil-iationonjobcreationhasbecomeincreasinglyapparent. When UCITS exploded in use in Asia after the 1998 Asian nunciulciisis,loculpioductlumiliesweieliquidutedoi collapsed into European-domiciled funds. Asset managers olten lound it equully convenient to centiulize usset munuge-ment ioles in Euiope. Buck-olce opeiutions lollowed ulong.Today, the balance of power is shifting. European asset munugeisneedAsiuninvestmentlundowsmoietlun Asian investors need European products. This new era will be less hospitable to foreign-domiciled products. The change slould be good loi Asiun nunciul seivices in teims ol job prospects and for Asian investors as products are developed primarily for local market needs.Of the three initiatives, the Hong KongChina mutual rec-ognition scheme has the most potential to excite. However, while a game changer, it is not a Big Bang. The scheme is likely to start as a conservative pilot program, applying only to Hong Kong-domiciled, SFC-approved unit trusts and products approved by Chinas Securities Regulatory Com-mission. The pace will be measured, and UCITS funds are unlikely to be rendered obsolete overnight.What is Chinas motivation in entering into a passporting scheme with Hong Kong? Probably not to open its market toforeignplayersbutrathertostrengthenthecapability of domestic fund management companies to compete glob-ally. The Chinese industry is young and lacking in depth of product experience. But it does have access to one of the worldslargestpoolsofdomesticsavings.Chinawilluse Hong Kong, with its international expertise, as a learning ground to master how to run world-class asset management compunies. Wlen Clinese compunies nully do leuin tlese skills, it wouldnt be surprising if they give the big global players a run for their money.PaulSmith,CFA,istheCFAInstitutemanagingdirectorfortheAsia-Pacific region.CFA INSTITUTE NEWSAPAC FOCUS10CFA Institute Magazine May/June 2014Domestic Fund vs. Cross-Border Fund RegistrationsNumber of foreign Number ofcross-border funds Countrydomestic funds*notified for sale*% of foreign fundsChina913Not availableNot permittedHong Kong2331,24084%Japan4,176892%Singapore5582,12579%South Korea9,4882803%Taiwan61385558%Source: PricewaterhouseCoopers. *As of Q4 2011.May/June 2014 CFA Institute Magazine11CFA INSTITUTE NEWSOnline Quiz Guides Students to Finance CareersCFA Institute is reaching out to university students around the world with a new prospecting campaign. Engaging and relevant, the campaign is built around a Career Quiz, which encourages students to register their interest in a career in finance before taking the quiz. In most cases, the students arent familiar with CFA Institute, but through a series of 10 career-oriented questions, they are guided toward suggested finance roles they might consider.The CFA Institute marketing team is using the data collected to keep in touch with the students who take part by providing periodic updates about the industry, sharing relevant content from CFA Institute, and encouraging them to register for the Claritas Investment Certificate Program or the CFA Program. Take a look at the new quiz by visiting careermapping.cfainstitute.org, or share it with a student who is interested in pursuing a career in finance.Global Brand Awareness Campaign LaunchesAievitulizedglobulcumpuignsup-portingtheCFAInstitutebrandand theFutureofFinanceinitiativewas launched in March and runs through July.Whatsetsthisinnovativecam-paignapartfrompasteffortsisthat itpromotesthemissionofCFAInsti-tute while representing all of our pro-gramstheCFAProgram,theCIPM Program, and the Claritas Program.To launch the campaign, eight mem-bersoftheCFAInstitutecommunity participated in an intensive three-day interviewandphoto-shootsessionin New York City in order to be featured in video spots as well as digital and print media. The resulting collateral focuses on CFA charterholders, a CIPM profes-sionul, und u Cluiitus ceiticute loldei who bring the you to The Future of Finance Starts with You message.You can view the videos by visiting the Future of Finance hub on the CFA Institute website, which is also where you cun nd tle lutest updutes in oui effort to shape a trustworthy, forward-tlinking nunciul industiy tlut bettei serves society.President, CEO Departure AnnouncedCFA Institute President and CEO John D.Rogeis,CFA,willstepdownliom his position at the end of the current sculyeui.RogeislusledCFAInsti-tute since January 2009.I have thoroughly enjoyed my time withCFAInstitute.Ibelievethatthe oigunizution is in u position ol stiengtl, ielevunce,undinuenceundisveiy well placed to move to the next level of success and impact. The extraordinary warmthandcommitmentofmycol-leugues lus inspiied me tlese pust ve-plus years during which we have taken greatstridestowardsdeliveringthe mission of CFA Institute, said Rogers.Charles Yang, CFA, chair of the CFA Institute Board of Governors, paid trib-utetoRogersachievements:John has been an inspiring leader through-outhistenureandhassuccessfully advanced the CFA Institute mission to lead the investment profession globally bypromotingthehigheststandards of ethics, education, and professional excellenceloitleultimutebenetol society.IcannotthankJohnenough for his tremendous contribution to our oigunizution."Duiing lis ve yeuis ut CFA Institute, Rogers has been instrumental in lead-ing several calls to action to the invest-ment industry, most recently through its Future of Finance initiative, which aims to shape a trustworthy, forward-tlinking nunciul industiy. He lus ovei-seen the launch of a new educational program, the Claritas Investment Cer-ticuteu loundution-level piogium on tleessentiulsolnunce,etlics,und investmentrolesandsupportedthe advancement of CFA Institute to that of u tiuly globul oigunizution witl mem-bership in more than 145 countries.TheBoardofGovernorsofCFA Institutewillinitiateaglobalsearch to select tle oigunizution's next piesi-dent and CEO.Out-of-the-BoxThinking (Literally)Wins Video ContestGan Jun Mao and Cheah Zi Chuin from the University of Malaya won the CFA Institute Future of Finance Video Contest. As part of the 2014 Global Research Challenge, stu-dents were asked to create a video to answer the question, What should the financial industry do to better serve investors and soci-ety? Using a common household item, the winners creative por-trayal of how to help investors feel secure impressed the judges. You can watch the video on the Future of Finance hub at the CFA Institute website or on YouTube.New eBook Focuses on Career Planning and ManagementCareer Success: Navigating the New Work Environment examines the changing enviionment in wlicl investment piolessionuls nd tlemselves munuging tleii careers. This free, downloadable content includes a model of intentional career munugement und cuieei plunning tlut emplusizes deep uwuieness ol sell und the professional setting. Guided exercises and case studies for applying the prin-ciples learned, as well as multimedia content and interviews with leading investment professionals, help put this new work landscape into perspective. Work/life balance and other contemporary topics encountered in todays modein woild but not tiuditionully tuken into consideiution in tle nunce pio-fession are handled respectfully and thoughtfully by the authors.12CFA Institute Magazine May/June 2014CFA INSTITUTE NEWSResearch Prizes Recognize Asia-Pacific ProjectsAcademicresearchplaysacrucialroleinenhancingour comprehensionofcapitalmarketsandthecomplexityof ouiindustiy.Toiecognizevuluublecontiibutionstoucu-demicliteratureandthesharingofthisknowledgewith globalinvestmentpractitioners,CFAInstituterecently uwuided ieseuicl piizes to piolessois liom Tsingluu Uni-versity, Sungkyunkwan University, and Sogang University.Professor Jia Ning of Tsinghua University in Beijing was awardedtheCFAInstituteResearchAward2013forher woik on tle iesouices und stiutegies tlut loieign ims con-ducting an initial public offering (IPO) can use to reduce cross-border information friction and its associated costs. Jiu's study slowed tlut u pie-IPO nuncing ielutionslip witl investors from the country of listing can effectively mitigate cross-border information asymmetries at the time of the IPO and reduce the cost of foreign equity issuance. Jia, an asso-ciate professor of accounting and the associate director of the China Business Case Center at the School of Econom-ics und Munugement, wus uwuided tle piize ut tle Austiul-asian Finance and Banking Conference (AFBC) in Sydney.CFA Institute ulso iecognized ieseuicleis liom Sungkyunk-wan University and Sogang University in Seoul, South Korea, witl tle Asiu-Pucic Cupitul Muikets Awuid 2013 duiing tle Auckland Finance Meeting in Auckland, New Zealand. The study by Professor Park Tae-jun, Professor Lee Youngjoo, and Professor Song Kyo Jik on trading before earnings shocks pro-vides insiglt on wletlei institutionul investois tiude piot-ably around positive or negative earnings surprises. The study showed that the trading volume decreases only before nega-tive events because of information asymmetry among inves-tors. They also found that institutions sell their stock prior to an earnings shock whereas individual and foreign investors do not anticipate the bad news. Park is a professor at Sung-kyunkwan University and senior researcher at Korea Capital Muiket Institute. Lee is u piolessoi ol nunce ut tle Sogung Business School of Sogang University, and Song is a profes-soi ol nunce ut Sungkyunkwun Univeisity. All tliee pioles-sors are based in Seoul.CFA Institute Reseuicl Piizes uie uwuided to ieseuicl projects to improve the standards of practice of the invest-mentcommunityintleAsiu-Puciciegion.Tlewinning researchpapersarepostedontheCFAInstitutewebsite, cfainstitute.org. Go to the Insights & Learning menu and select Reseuicl Foundution` to nd tle occusionul pupeis.`CFA PROGRAM SCHOLARSHIPS ARE AVAILABLEscholarships@cfainstitute.orgwww.cfainstitute.org/scholarshipsACCESS SCHOLARSHIPSAccess Scholarships provide needs-based scholarship opportunities for those unable to afford the full price of the CFA Program enrollment and registration fees. AWARENESS SCHOLARSHIPSAwareness Scholarships are designated for key influencers in the academic and financial communitiesand the media. University faculty and students enrolled in CFA Institute Program Partners and Recognized Universities and employees of governmental securities regulators and central banks are eligible to apply.Awareness Scholarshipsavailable:Student ScholarshipsProfessor ScholarshipsRegulator ScholarshipsMedia Scholarships CFA Institute 2014.CFA, CIPM, and Claritas are registered trademarks of CFA Institute in many countries throughout the world.2014CFA INSTITUTERESEARCH AWARDCFA Institute Asia-Pacific Capital Markets Research Prizes are presented at reputable academic conferences in the region: Asian Finance Association (AsianFA) Annual Conference Auckland Finance Meeting (AFM) Australasian Finance & Banking Conference (AFBC) Financial Market Association (FMA) Asian ConferenceThe research prizes are designed to encourage research proj-ects that will further improve the standards of practice of the Asia-Pacific investment community.Submit your research paper at those conferences and apply to be considered for the prize.Papers are selected based on value to practitioners, quality of content, readability, and presentation. To learn more about the awards, please contact William Boivin: william.boivin@cfainstitute.org.Congratulations to the winners of the CFA Institute Asia-Pacific Capital Markets Research Prizes!Professor Jia Ningof Tsinghua University in ChinaCFA Institute Asia-Pacific Capital Markets Research Award Winners 2013Professor Park Tae-jun andProfessor Song Kyo Jikof Sungkyunkwan UniversityandProfessor Lee Youngjoo of Sogang University in South KoreaProfessor Matthias Buehlmaierof The University of Hong Kong14CFA Institute Magazine May/June 2014VIEWPOINTIn the DarkTHE LATEST HYPE ABOUT HIGH-FREQUENCY TRADING OVERLOOKS DEEPER PROBLEMSBy Dennis Dick, CFAIs the market rigged? That is the question that many investors havebeenasking eversinceMichael Lewis made the alle-gationontheTV show 60 Minutes. In his new book Flash Boys, Lewis outlines hisperspectiveonhowthemarketis rigged against the little guy, with high-frequency traders using their speed to rip off individual investors.Isthistrue?Isthemarketreally rigged?Inmanyareas,italwayshas been.Beforeelectronictrading,market makersandspecialistshadavirtual monopolyontletiudingooi.Tley contiolled tle oidei ow in tleii indi-vidual stocks and held the order book, givingthematremendousinforma-tional advantage over every other par-ticipant. They could lean on the orders in their book and step ahead of those orderswhenitwasadvantageousto do so. But they were the market inter-mediaries, providing valuable liquidity by quoting a two-sided market. When someone wanted to buy the stock, the marketmakerwouldbetheseller.If someone wanted to sell the stock, the market maker would be the buyer. They provided the liquidity that allowed par-ticipants to get in and out of their stocks. Their payment for providing this ser-vice was the bidask spread.Butwiththeriseoftheinternet andtheevolutionofelectronictrad-ing, competition in the market-maker space became intense. Electronic trad-ersstartedplayingamarket-making iole, und once decimulizution cume in 2001, these electronic traders had the uppei lund. Spieuds got tigltei, squeez-ingtraditionalmarketmakersoutof the game. In their place, a new type of market maker thrivedthe automated market maker, or (as automated trad-ers are now known) the high-frequency trader (HFT).THE NEED FOR SPEEDTheseautomatedmarketmakersare muchmoreefficientatdoingtheir jobthanaretheirhumancounter-parts, which is why speed is essential. Marketmakersarealwaystryingto balance their return (the spread) with the adverse-selection risk (the risk of getting picked off by a more informed trader). HFTs can quickly adjust their market-makingorderstoaccountfor all new information. Whether the new information takes the form of funda-mental news, a movement in the S&P lutuies, oi u sudden oidei-ow imbul-ance,HFTsareconstantlycancelling and adjusting their orders to avoid get-ting picked off.Themostcommonadjustmentis made by HFTs when the quote is about toroll,whichmeanswhenthebidis about to become the offer.Forexample,assumestockXYZis bidat$20.00for20,000sharesand offeredat$20.01for20,000shares. You could say this quote is in equilib-rium. But suddenly, the offer starts to grow and the bid starts to transact. The new quote is $20.00 for 5,000 shares by$20.01 for 30,000 shares. This quote is getting ready to roll. The HFTs quickly cancel their remaining shares that they are bidding at $20.00 and hit the rest of the $20.00 bid. By using co-location anddirectdatafeeds,theycanvery accuratelypredictwhenthequoteis about to roll, and they can do this in amatterofmilliseconds.Thisspeed advantage allows them to lean on the rest of the quote (and the slower trad-ers) for protection. If they just bought the stock at $20.00, they can quickly sell it back at $20.00 when the quote isabouttoroll,scratchingthetrade in a worst-case scenario. This method works as long as they stay at the top of the order queue.And HFTs uie veiy elcient ut stuy-ing at the top of the order queue. Co-location and speed help, but there are also other advantages, such as special order types. For example, take the hide-not-slide order (which Lewis mentions in his book). This order is designed to automaticallyjumptothetopofthe order queue whenever the quote rolls. Again,thisapproachallowsthepar-ticipant using this order to lean on the back of the order queue for protection.But while speed and order types can help HFTs to stay at the top of the order queue,somesignificantadvantages arent focused around speed.Manoj Narang, CEO and founder of HFT im Tiudewoix, iecently uppeuied on Bloomberg TV and said, Speed mat-ters less in todays market than it has evermattered.Afterthatcomment, criticswerequicktoattackhisstate-ment, challenging his claim, but I com-pletelyagreewithhim.Whilespeed helpstoavoidgettingpickedoff,the real advantages arent reliant on speed at all. The real advantages are built on relationships.Andthisiswherethe market starts to get shady.THE REAL ADVANTAGES ARENT RELIANT ON SPEED AT ALL. THE REAL ADVANTAGES ARE BUILT ON RELATIONSHIPS. AND THIS IS WHERE THE MARKET STARTS TO GET SHADY.May/June 2014 CFA Institute Magazine15DARK ADVANTAGESOTC(overthecounter)market-mak-ing HFT ims, known us inteinulizeis, actually have built relationships with online brokers in which they buy order owliomietuilbiokeiugestotiude directly against incoming marketable orders. They pay the retail broker a fee loi tle piivilege ol getting ist dibs` onretailorders.Thefeeisknownin tle industiy us puyment loi oidei ow.Going back to our original example, assume stock XYZ is bid at $20.00 for 20,000 shares and offered at $20.01 for 20,000 shares. Any participant placing an order to buy the stock at $20.00 on thatexchangewouldbebehindthe other20,000sharesthatwerethere ist (piice-time piioiity). But tle HFT inteinulizei cun tiude diiectly uguinst the retail market orders that they have puiclused uccess to (ist dibs), execut-ing against these orders off exchange. Theonlyregulatoryrequirementis that they match or beat the displayed national best bid or offer (NBBO). This uiiungement gives tlem u signicunt advantage.For example, if a retail trader sells 1,000sharesatthemarketinstock XYZ, tle inteinulizei cun buy liom tle retail trader at $20.00 directly, jumping ahead of the other 20,000 shares that areintheorderqueueonthepublic exchange. If another retail trader sends a market order to buy 1,000 shares of stock XYZ, tle inteinulizei cun tiude directly against that order as well, sell-ing the stock at $20.01 and jumping the public order queue once again. In effect, inteinulizeis cun get u liee iide` oll thepublicquote,becausetheyknow thatifthequotestartstogetoutof equilibrium, they can quickly sell the stock they just bought from the retail trader at $20.00 to the market partic-ipant that is bidding at $20.00 on the public exchange and scratch the trade.Tlis puyment-loi-oidei-ow ielution-shiptheyhavewiththeretailbroker allows them to jump the order queue continuouslyandleanonthepublic order queue for protection. Its a slick system, but who is being disadvantaged by this? The person that is actually bid-ding on the exchange at $20.00, because tlut peison's limit oidei is lelt unlled.Thelimitorderwouldhavebeen executed il tle inteinulizei ludn't intei-cepted the incoming market order. This situation discourages displayed liquidity providers, and they quickly learn that the only time their order is executed is when they are getting picked off by a high-frequency trader. As a result, non-HFT traders quote less.DEPENDENCE ON HFT LIQUIDITYTheonlytradersthatcanavoidget-tingpickedoffbytheHFTsarethe otherHFTplayers(againbecauseof their speed). Therefore, these are the only participants that can properly bal-ance the riskreturn tradeoff to play a market-making role. Unlike traditional liquidity piovideis, lowevei, HFT ims luve no ulimutive obligutions to muke a two-sided market. They do not have tobethebuyersoflastresort.When the going gets tough (as we saw in the uslciuslol2010),tleycunsimply stopmakingmarketsandcancelall their orders. With very few other types of participants providing liquidity, we canbeleftwithavacuuminwhich very little liquidity is left in the book.In other words, the liquidity that is on the exchange is becoming too homo-geneous. Too many liquidity providers with similar short-term time frames and playing similar market-making strate-gies are providing the majority of our markets liquidity.Some industry experts estimate that although HFT accounts for 50%-60% of volume, as much as 95% of the visible liquidity on the exchange is being sup-plied by high-frequency traders. That is a scary number. Have we become too dependent on HFT liquidity being sup-plied by traders who can cancel their orders hundreds of times in the blink of an eye? Should we slap these HFT ims witl ulimutive obligutions und muke tlem quote? Tlut is dilcult to do. At this time, we dont even have a im denition ol ligl-liequency tiud-ing.Wliclimswouldbeloicedto quote? Would such a requirement throw out the riskreturn incentive for them to continue providing liquidity?Ithinkabettersolutionwouldbe toincentivizeotleitypesolpuitici-pants to provide liquidity againpar-ticipants who wont cancel their orders at the slightest sign of risk. A good start wouldbetoieguluteinteinulizution undpuymentloioideiow,becuuse thesepracticesdetermarketpartici-pantsfromprovidingliquidity.What isthepointofprovidingliquidityon the public exchange when a privileged participant can step ahead of your limit order at the moment it is about to be executed?Itislittlewonderthatoff-exchange trading volumes continue to climb, approaching nearly 40% of US trading volumes last year. We are driv-ing traders to the dark.There are always going to be some tradersthatarefasterthanothers. Speed is a hard thing to regulate. But thegreaterconcernisanissuethat Lewisbarelytouchesoninhisbook Flash Boysthe handshakes behind the scenes,witlHFTimspuyingietuil biokeis to get u ist look ut tleii oidei ow. Tlese deuls ellectively eliminute theneedforspeedbecauseitelim-inatesthecompetition.Thisareais where our regulators need to look and where the market needs improvement, because this is the area of the market that appears to be rigged.Dennis Dick, CFA, is a proprietary trader at Bright TradinginDetroitandamemberofCFASoci-ety Detroit.WHAT IS THE POINT OF PROVIDING LIQUIDITY ON THE PUBLIC EXCHANGE WHEN A PRIVILEGED PARTICIPANT CAN STEP AHEAD OF YOUR LIMIT ORDER AT THE MOMENT IT IS ABOUT TO BE EXECUTED? WE ARE DRIVING TRADERS TO THE DARK.16CFA Institute Magazine May/June 2014Job Satisfaction and Investment ProfessionalsTHOSE WHO FOCUS ONLY ON COMPENSATION MAY MISLEAD THEMSELVES AND OTHERSBy Usman Hayat, CFADo you luve duys wlen you leel u bit dissutised witl youi job? Duys wlen you cant help wondering whether all thetoilandstressisreallyworthit? But do you know what would increase youi job sutisluction tle most? To nd an answer, I conducted an anonymous opinion poll of readers of the CFA Insti-tute Financial NewsBrief: What would increase their job satisfaction the most?The results, although far from being stutisticully geneiulizuble, uie ieveul-ing.Perhapsunsurprisingly,for37% ofour888respondents,theanswer wasgreatercompensation.Theobvi-ous problem here is that even the most highly paid want more money, which does not seem to make them any more sutised. Wlut I nd moie inteiesting is that more than 60% of respondents did not select greater compensation.Neuily u ltl ol iespondents selected a better worklife balance, and it is easytounderstandwhy.Inthedaily seesaw of work and life, work seems to easily outweigh life. It is your work that pays your bills, so your exercise work-out can wait for tomorrow; children can be kept busy with electronic gadgets; hobbies can be saved for retirement; and your loved ones will hopefully under-stand. After worklife balance, the two other choices that received double-digit responses were more recognition for your contributions and more author-ityandresponsibilityfordoingyour work. Together, these three answers received45%ofthevotes,agreater percentage than those who responded more money (37%).Inthedecisiontorunthispoll,I wus inuenced by Alexundei Kjeiull, u Dunisl munugement consultunt, wlo pieleis tle job title cliel luppiness ol-cer. Speaking at the 2012 CFA Insti-tute European Investment Conference in Prague, Kjerulf argued that we feel happyatworkbecauseofthreeR words:results(achievingsomething thatmakesadifference),recognition (receivingpraiseforachievements), and relationships (having colleagues we like). Kjerulf would probably be happy to know that our poll respondents tend to agree with him.If you are wondering what the busi-nesscaseforimprovingjobsatisfac-tionis,considerthecostofemployee turnover. It includes productivity losses whensomeoneleavesajob,costsof hiring and training the new employee, andlowerproductivityuntilthenew employee catches up. There is also some academic research that shows employee satisfaction improves company perfor-mance rather than representing exces-sivenon-monetarycompensation(for exumple, see Alex Edmuns, Does tle stockmarketfullyvalueintangibles? Employee satisfaction and equity prices JournalofFinancialEconomics(Sep-tember2011).TheCenterforAmeri-can Progress (CAP), a US-based think tunk, lus unulyzed tle cost ol tuinovei. Afterreviewing30casestudiesin11 research papers, CAPs analysis found tlut businesses spend ubout one-ltl ol an employees annual salary to replace thatworkerandjobsthatarevery complex and that require higher levels oleducutionundspeciulizedtiuining tend to have even higher turnover costs.Il tuinovei ol dissutised employees is not bad enough, their staying on is woise. Dissutised employees uie likely tochangebehavioragainsttheinter-est of the employer. They may spend a VIEWPOINTWhat would increase your job satisfaction the most?Greater compensationBetter work-life balanceMore recognition for your contributionsAdditional responsibility and authority for doing your workA promotionFriendlier work environmentOther37%19%14%12%9%5%4%May/June 2014 CFA Institute Magazine17signicuntumountoltimepiucticing the art of look busy, do nothing with-out being detected by the radar of cor-porate accountability. According to the 2013 Wasting Time at Work Survey by Salary.com, 69% of the people surveyed said they waste time at work every single day,andthemostcommonmethod, unsuipiisingly, is suing tle inteinet.Life, however, is seldom as simple as dissutised employees muy wuste time until they leave. Consider, for instance, that employees are often in a position in which by taking small actions, they could save their employer from wasting resources. Employees could speak up to encourage employers to avoid buying expensive equipment or services that tleii oigunizution could do witlout oi point out that a certain idea is not worth spending time and money on because it was tried before and found useless. But liglly dissutised employees ut uny level may look the other way as orga-nizutionuliesouicesgoupinsmoke. It is little wonder that job satisfaction is something that eludes measurement but must be managed.The more I read about job satisfac-tion from different sources, the more I am convinced that what really makes us dissutised ut woik lus u lot to do witl wlut tends to mukes us dissutised in lile in geneiulunluiiness. Oigunizu-tions where things other than reason andevidencewinandwinconsis-tentlyandwherepeopleroutinely treatothersthewaytheywouldnot like to be treated themselves probably have unfairness built into their culture. Nomatterwhatanemployertriesfamilyfundaysorfreedrinksthe work environment wont be very satis-lying. At sucl oigunizutions, moie job satisfaction has to mean more money dJ innirum. But otlei oigunizutions will nd moie lopeund moie woik todoinwhatKjerulfcallsresults, recognition, and relationships.Usman Hayat, CFA, is director of Islamic Finance and ESG at CFA Institute, London.The Value of Geopolitical AnalysisBy Jason Voss, CFAIn a world of bewildering informational complexity, an under-standing of the ways that people, power, personal prefer-ences, und geogiuply conveige to inuence lutuie tiends is essential to investment management success. Studying these convergences is better known as geopolitical analysis. Careful application of the precepts of geopolitical analysis not only provides insight into current events, such as the recent crisis in Ukraine, but also sometimes leads to accu-ratepredictionsoffutureevents.Tosomedegree,many investors appear to be aware that geopolitics is important. A recent poll of readers of CFA Institutes Financial News-Brief shows that 63% of respondents believe geopolitics is very important to their analyses, with an additional 30% statingitisslightlyimportant.(Seechartforcomplete survey results.)Yet, in my experience, people often misunderstand geo-political analysis, thinking that it is simply an awareness of the internal politics of a nation and how that affects overall global politics. Instead, geopolitical analysis is much more lolistic.Despiteitsseemingsuiluce-levelcomplexity,un understanding of geopolitics leads to simpler, clearer, and more accurate predictions of globally important events. In other words, understanding geopolitics is one pathway to investment management success.GEOGRAPHYGeopoliticalanalysistakesintoaccountanationsgeog-raphy and the inevitable consequences of that geography. Importantexamplesincludeanexaminationofthecon-straintsimposedonanationbyitsnaturalresources,its ease of access to the outside world, and its internal transpor-tation systems. For instance, if a nation has limited access to natural sources of energy, then a constant concern will be how the nation can get energy sources and what must be exchanged for that access. Further, landlocked nations have fewer natural trading partners than those that have access to seas and oceans, and being landlocked will likely lead to stunted economic growth and cultural peculiarities. As for internal transportation, consider that a geographi-cal advantage of the United States is that it has navigable How important is an understanding of geopoliticsto your investment decision-making process?THE OBVIOUS PROBLEM HERE IS THAT EVEN THE MOST HIGHLY PAID WANT MORE MONEY, WHICH DOES NOT SEEM TO MAKE PEOPLE ANY MORE SATISFIED. WHAT I FIND MORE INTERESTING IS THAT MORE THAN 60% OF RESPONDENTS DID NOT SELECT GREATER COMPENSATION.Very importantSlightly importantNot important63%30%7%18CFA Institute Magazine May/June 2014iiveis tlut ow noitl und soutl us well us eust und west. Because water transportation is much less costly than over-land transport, the US has a permanent cost advantage com-pared with other major countries.Geographyalsoeitherblessesorcursesnationswith neighbors. Ukraine sits poised between two much larger, better-resourced entities: Russia and Europe. Furthermore, when considering some of the previously-mentioned con-straints (and ease of access to the outside world in particu-lar), you can see that Russia has a much larger vested inter-estinUkrainethandoesEurope.Ukraineslocationcon-strains Russias access to the oceans and thus its ability to trade and project power globally. Additionally, because the border between Russia and Europe is a vast plain, Russia requires buffer states to secure its national boundaries. So, if Ukraine is not in Russias orbit, access to Russias heartland will be largely unobstructed by geographic obstacles, such as mountains. For all these reasons, Russia is permanently interested in Ukraine in a way that European powers, such as Germany, are not and in a way that is almost unimagi-nuble to citizens ol tle United Stutes.In short, geography provides almost unshakable advan-tagesanddisadvantagesfornations.Foranalysts,the permanentqualityofgeographyprovideshighlevelsof predictability.CULTURE AND HISTORYGeopoliticalanalysisalsoconsiderstheculturesandhis-tories of nations and even peoples within nations. In this regard,cultureandhistoryarestudiedaslivingentities, notstaticones.Often,pastrelationshipsamongnations und peoples uie undilleientiuted liom tle ow ol cuiient eventstheculturalcourse,onceset,ishardtochange. Put another way, alignments and differences between cul-tures are hundreds of years in the making and their iner-tia allows for a high level of predictability in analyses. For example, knowing the cultural and historical enmity between Turkey and Greece allows an analyst to better assess the likelihood of Turkeys admittance into the European Union. Or an understanding of the Chinese and Japanese cultures and their mutual histories allows a deeper understanding of why China might balk at Japan modifying its constitu-tional stance on national defense.NATIONAL NEEDS AND EXPECTATIONSGeopoliticalanalysisalsoreliesonanunderstandingof a peoples basic needs as well as expectations about basic needs. Expectations about needs are largely created by a nationsgeography,itshistory,andtheresultingculture. Understandingdifferencesinexpectationsaboutbasic needshelpstoexplainwhydifferentcountries,suchas Biuzil und Luxembouig, luve dilleient nutionul ugendus. In other words, geopolitical analysis treats a nations politics as almost entirely determined by its unmoving geography, its unchangeable history, its long-lived cultural distinctions, und tle expectutions ol people ubout wlut quulies us busic needs.BasicneedsofRussiaincludeitsfamousneedfor access to a warm-water port and its need for energy to heat homes during its long winters.APPLYING GEOPOLITICAL ANALYSISFor a concrete example of how geopolitical analysis works, consider how it would apply to Greece. First, consider its geographyandtheconstraintsofthatgeography.Greece occupies a very mountainous peninsula with very little arable land and few natural resources, yet it rests in the middle of one of the worlds most important seas, the Mediterranean. Because mountains protect and insulate a nation, it is not surprising that Greece as a nation has retained a distinct cultural identity through thousands of years and that it has been conquered only via sea invasion. Further, Greeces lack of natural resources and its mountainous terrain constrain its capital base. (Lenders would want to factor this in before lending!) Given that Greece cannot be an important exporter ofagricultureorofnaturalresources,youwouldexpect Greece to be an exporter of culture and for its economy to be based on its unique geographical position, poised as it is in the middle of an important sea. Not surprisingly, the Greeks throughout history have been known for their sea-faring, and they are still one of the worlds leading shippers.From the 14th through the 19th centuries, the Ottoman Empire(nowTurkey)occupiedGreece.Thus,youcould reasonably expect the history of Greece and Turkey to be one of mutual suspicion and enduring enmity. This obser-vationhelpsonetounderstandthepoliticsofCyprus,a nation divided by the Greeks and the Turks. Greeces geog-raphy and consequent capital-base constraints also make it a natural candidate for allegiances that protect the nation. Again,analystsusinggeopoliticalanalysiswouldnotbe surprised that the nation has partnered with more power-ful nations since the ancient classical period of its history.A similar geopolitical analysis can also illuminate poten-tialglobalhotspots.ThenarrowStraitofMalaccaisthe seaway used to deliver much of Chinas energy. Given Chinas growing energy needs, analysts should expect China to be focused on the nations around the Strait and for those same nations to be thinking carefully about China. Will there be u conict in tlis iegion? It is impossible to ubsolutely pie-dict such an outcome, but given the constraints of geogra-phy, culture, history, and expectations about needs, you can ieusonubly conclude tlut u conict is likely in tle lutuie.The world is ever more interconnected by the global net-works of transportation, communications, culture, and cap-ital. An understanding of the nature of these interconnec-tions, as illuminated by geopolitical analysis, is an impor-tant part of the future success of investment managers.Jason Voss, CFA, is a content director at CFA Institute. A shorter version of his discussion of geopolitical analysis was previously posted on the Enterprising Investor blog (blogs.cfainstitute.org/investor).VIEWPOINTRESUSCITATING JAPAN: RETHINK, REFOCUS,RESTRATEGIZEJAPAN INVESTMENT CONFERENCE2 July 2014, Sankei Hall, Tokyo, JapanAs Japan attempts to make up for its lost decades, its time to rethink the risks, review the assumptions, refocus perspectives, re-examine the opportunities, and reshape your investment strategies in the worlds third-largest economy.Discover fresh investment ideas, learn about emerging market trends, and interact with international and Japanese investors and strategists.SILVER SPONSOR: EXHIBITORS:FEATURED SPEAKERSRichard KooChief EconomistNomura Research Institute, Ltd.Avinash PersaudChairmanIntelligence Capital Ltd.Professor Kazuhito Ikeo, PhDFaculty of EconomicsKeio UniversityProfessor Yasuhiro Yonezawa, PhDGraduate School of Finance,Accounting & LawWaseda UniversityEARLY-BIRD OFFERRegister by 2 June 2014 and save JPY 10,000For more information and to register, visit www.cfa.is/jic2014Hajime TakataManaging Executive OfficerChief EconomistMizuho Research Institute, Ltd.20CFA Institute Magazine May/June 2014PROFESSIONAL PRACTICEPORTFOLIO PERFORMANCEThe Omnivores DietWHY ONE HIGH-YIELD SPECIALIST USES NEARLY ALL EXISTING FINANCIAL INSTRUMENTSBy Rhea Wessel and Fran MelvilleAs managing director at asset management boutique XAIA Investment in Munich, Germany, Jochen Felsenheimer has to sutisly clients wlo wunt tle im to be cieutive` in exploit-ing pricing anomalies in the high-yield space. Yet, with all his expertise, he still faces a very steep learning curve by his own account: On the high-yield side, its a different game, says Felsenheimer. Its learning by doing and learning by making mistakes.Co-founderofXAI A, where he is also co-respon-sibleforportfoliomanage-ment,Felsenheimerholds adoctorateinmacroeco-nomics and is the author of several books and research articlesfocusedoncredit derivativesandcreditmar-kets. He started his career in the research department of Hypovereinsbank, a member of UniCredit Group, where he served as the head of global credit strategy research, cov-ering credit derivatives and structured credit markets.The predecessor company towhatwasrebrandedas XAIAInvestmentluuncleditsistlundinApiil2009. Today, XAIA Investment manages more than 2.8 billion in six different funds, with a focus on negative basis and capi-tal structure arbitrage concepts. In addition to using tradi-tionul tools ol ciedit unulysis, tle im develops, tests, und implements sophisticated proprietary mathematical models.Inthisinterview(conductedFebruary2014),Felsen-heimer shares his views on whats ahead as high-yield mar-kets contend with a low-yield environment and the US Fed-eral Reserves tapering policy, the variety of risks faced by cieditinvestments,undlowlisimusesununconven-tionul uppioucl to identily inelciencies und exploit piic-ing anomalies between market segments.What is your investing approach?Weareveryactiveinthehigh-yieldspace;however,we neverhavelong-onlyhigh-yieldexposureindependent ofacorrespondinghedge.Wegainhigh-yieldexposure both via credit default swaps and via bonds, but we always simultaneously pair default risk with a hedge. Thats what makes us different from traditional high-yield investors.For example, if theres a pricing discrepancy between a high-yield bond and a high-yield credit default swap, and they reference the same underlying entity, then we exploit tlis muiket inelciency.How do you exploit the price difference?We exploit the price difference within the credit market but also between credit and equity. For instance, we purchase a high-yield bond and use equity derivatives as a hedging instrument.This is a pure arbitrage strategy. Hence, our focus is not onunulyzingdeluultiutesoitlepiobubilityoldeluult. Theideaisnottoseekoutandbuythesurvivors.Thats not our approach.It is unusual. Most credit shops focus on credit analysis, but you rely on quantitative models?Thats why my answers in this interview will be different from[theanswersof]others.Ifyouinterviewedatypi-cal long-only, high-yield investor, he or she would proba-bly suy eveiytling is cleup us long us you uie uble to nd the survivors and avoid the fallen angels. My answers are less straightforward.Traditionalhigh-yieldinvestorsfocusonsingle-name fundamental analysisthat is, on the fundamental credit leultl ol u business, bused piimuiily on nunciul stutements. They look at credit protection ratios and try to understand if the market is over- or underestimating default rates for specic numes. Il tle investoi is convinced tlut tle muiket premium for a high-yield bond overcompensates for the risk of default, then the investor will buy the bond. In this bot-tom-up approach, the analysis focuses on single names.You dont care about default rates?I only look at the implied default probability, which you get compensated for in different market segments.Heres a very simple example: If I earn a spread of 1,000 bps from a high-yield bond and, at the same time, Im able to buy piotection viu tle CDS [ciedit deluult swup| muiket onthesamecompanywiththesamematurityandIpay only 800 bps for this protection, then obviously, I can per-form a very nice trade.I cun buy tle bond und simultuneously use tle CDS us u hedge by buying default protection. I earn 1,000 bps, and at the same time, I pay 800 bps, which means 200 bps stay withme,independentofwhetherthecompanydefaults ornot.Hence,ouranalysisfocusesonpricinganomalies between different market segments as opposed to the prob-ability of default.Focusing on implied default probability, not default rate, is the key to finding prof-itable pricing anomalies in the high-yield space. The current low-yield envi-ronment has led to a diver-gence between yields and the risk of default.The current spread level may not provide enough compensation for future default risks, and the next big move in the credit market could be a widening.KEY POINTSMay/June 2014 CFA Institute Magazine21What about counterparty risks, especially in light of what the markets experienced at the height of the financial crisis?We have implemented collateral management for all out-standing derivatives trades. This means that there is a daily exchangeofcashcollateralcoveringmarked-to-market moves, und consequently, we minimize counteipuity iisk.Looking forward into 2014, what do you see as theimpact of the US Federal Reserves tapering policy on the high-yield market?If you look at the monetary policy we have seen over the last couple of years, then obviously, this kind of policy supports lower-rated issuers, simply due to the fact that in the low-yield environment, more and more investors are forced to implement yield-enhancement strategies. They are looking loi liglei yield, wlicl tley nd in tle ligl-yield univeise. Many asset/liability managers, such as insurance compa-nies,uieloicedbywuyoltleiixedliubilitiestomuin-tain a minimum yield on their investments. In the current low-interest-rateenvironment,manyinvestorshavebeen forced to move down the bond universe quality curve and purchase more risky, higher-yielding bonds. The increased demand in the high-yield segment, resulting from the low-inteiest-iute monetuiy policy ol centiul bunks, lus inuted high-yieldpricesandthuscreatedadivergencebetween yields and the risk of default.When [former Federal Reserve Chairman] Ben Bernanke ist tulked ubout tle possibility ol tupeiing lust Muy, tlut was enough to lead to a 200 bp widening in the US high-yield space, which is quite substantial.We must keep in mind that Bernanke only announced a reduction in liquidity from the open-market bond-purchasing program, not an end to liquidity itself. The actual tapering unnouncement tlis pust Decembei lus not lud tlut mucl of an impact on the high-yield market.What is the story behind that?Right now, we have a multi-year low in high-yield spreads, not only in the US but also in Europe. Right now, people believe in higher growth rates in the future, and that is the reason that the tapering announcement did not trigger any dramatic widening in high-yield spreads. The only way out of the policy of excessive money printing is that people buy into risky assets due to positive growth expectations and no longer due to the availability of easy money.And moving forward?From my perspective, the market is too tight. It is not too tight when you look at the historical data, but historical data is something I dont believe in. I believe in the current sit-uation, and I do not think that the economic environment will stay as supportive as people think.Why is that?The problem is simply that the transmission mechanism of monetary policy doesnt work. The money printed by cen-tral banks does not arrive in the corporate sector; it stays within the banking industry. This is triggering asset price inution, us ieected in tle cuiient low-spieud enviionment.I dont believe that the current spread level provides one with enough compensation for future default risks. Many spreads are just too tight due to the fact, as stated earlier, thatmoreandmoreinvestorsareforcedtoinvestinthe high-yieldmarketsimplytocovertheirliabilityside.As moreinvestors,suchasinsurancecompanies,areforced tomoveintotleligl-yieldmuikettogeneiutesulcient yield income, the market becomes more frothy and, even-tually, a bubble begins to form. This is a very risky situa-tion, und I denitely believe tlut we uie in tle lust stuge ol this phase of spread tightening.I expect the next big move in the credit market to be a widening.What is your take on the expansion of high-yield exchange-traded funds?Again, I see a dangerous development because of the dra-matic demand for high yield, not only from traditional high-yield investors but also from more and more people who are forced to move into the lower-rated segment.Exchange-traded funds (ETFs) are becoming more impor-tant as market players. Just think back to the May/June move after the tapering discussion. We saw that ETFs can trigger dramatic volatility in the high-yield market as they behave very similarly in the case of exogenous shocks.ETFs, in tle meuntime, own up to 20% ol some specic issues in the US high-yield market. Yet ETFs do not perform in-depth, single-name analyses. ETFs do nothing but map inows und outows in tle evening und sell oi buy ull tle underlying vehicles in a corresponding volume.Thats not easy. If you manage a huge ETF, your sheer volumemeansyouareaffectingtheprice.Ibelievethat dominanthigh-yieldplayers,suchasETFs,contributeto rising spread volatility.Personally, I like this situation very much. Things become cheap if there is negative news, and the reaction in the high-yield market is more pronounced and volatile than in other market segments.Are you using single-name swaps?Iusemunysingle-numeCDS,butIulsousesingle-nume derivatives on the equity sidemost frequently, put options. I buy a bond, and at the same time, I buy put options to pro-tect me against any default risk.If the company goes bust and I lose money on my high-yield bond, tle equity vulue must be zeio becuuse tle ligl-yield bond is senior to equity in the capital structure (think of the 1974 Merton model of option pricing).One reason I use credit default swaps is simply that its a very liquid market. Its far more liquid than the single-name bond market.Are they cheaper than the put options?It depends. Il it is cleupei to use u CDS us u ledge, I use u CDS. Il it is cleupei to use equity deiivutives, I use equity derivatives.22CFA Institute Magazine May/June 2014Our clients pay us to operate creatively. We use nearly ull existing nunciul instiuments in oidei to exploit piic-ing anomalies.You wrote a book about some of the incidents thatmay have contributed to the credit crisis. People blamed models for errors of judgment. Do you see people shunning models in the meantime?We spent a lot of timeespecially between 2005 and 2008, until Lehman implodedexplaining models on the credit side. Even normal credit models can be rather tricky, but if you go into tle colluteiulized debt obligution (CDO) spuce, for example, it becomes exponentially more complicated.Beloie tle nunciul ciisis, we developed muny models. Nearly everyone who developed models was aware of the potential shortfalls of the models. Obviously, the world is very, very complicated. We use just a few parameters to deter-mine default probability. That is clearly wrong, and most people knew it was wrong. I see many parallels between the pie-nunciul-ciisis enviionment und tle cuiient situution.Due to tle luct tlut eveiybody wus supei-positive und ratingagencieswereverypositiveintheirviews,many investors had a lot of liquidity and they wanted to partic-ipute in tle ciedit lype. Tley just stuited getting luzy in doing a proper analysis. I would not blame models; I would blume people wlo put specic puiumeteis in tleii models that were too optimistic.This is the psychology that we have seen during every boom period. People are too optimistic. I dont want to say that the models we are using are 100% correct. You have to see them as an additional tool. You can use them, but its not the only tool you should use. Its never the model. Its alwaysthepeopleputtingassumptionsintotheirmodels who are too optimistic.How reliant are you on models with your current strategy compared with qualitative credit analysis?There are many things you simply cannot put into a model. It doesnt work because you cannot quantify these things. Our analyses are very simple. For example, if I play a high-yield bond veisus equity, wlut I luve to do ist is ieud tle prospectus of the high-yield bond because there might be some specic covenunts oi lunguuge tlut substuntiully ultei tle iisk piole ol tle bond.For example, I was very active in Greece. We made high-yield investments on the sovereign side as well as the cor-porate side. We did not buy the Greek government bonds that were governed by Greek law. We just bought the inter-national bonds, which were based on UK law.Obviously, Greece defaulted and investors lost a lot of moneyonthebondsthatwerebasedonGreeklaw.But those who had invested in bonds governed by UK law got all their money back, even though it was almost an identi-cal bond to the Greek-law bond.Its as simple as this: The same bondthe same risk in thequantitativemodelwasclosetoworthless,andthe other bond was paid back 100% due to the governing legal regime. Therefore, this qualitative analysis is very impor-tunt becuuse tleie uie some specic leutuies in ciedit invest-ing that cannot be covered by models. You have to combine both qualitative and quantitative analysis.The fundamental analysis that you learn as part of the CFAProgramisaveryimportantpartofthestory,but besidesthis,thelegal,political,andregulatoryrisksare very important features for determining the credit risk of a company or a bond.When I started to work in credit research 14 years ago, the work we did was a joke compared with today. Thats theprocessoflearning.Tobehonest,Ihavedonenoth-ing else for more than a decade, but I still have a learning cuive tlut is veiy steep becuuse so muny ciuzy tlings luve happened over the last years. This doesnt mean that you can skip all the fundamental analysis. Thats a very impor-tant part, but its only one part of the process. You have to do many other things simultaneously to understand credit risk and how it should be compensated.Lets go back to your Greece example. In theory, the market should have built in the difference in price between the two legal structures of the bonds, right?Exactly. Now everybody gets it. But at some point, the UK-law bonds were even cheaper than the Greek-law bonds. Unbe-lievable. But in 2010, that was indeed the case.Nowthatpeopleareawareofthis,theyimplementit into their analyses. Now, I would argue almost every credit investormakessurethatthelegalriskisincludedinthe bond documentation. They put much more focus on ana-lyzing tlut iisk. But loui yeuis ugo, nobody did it, oi only a very small part of the community [did].How do you stay ahead of the curve in understanding what you need to include in your qualitative analysis?Ithinkitsveryimportanttotalktocompletelydifferent types of people in the investment industry about how they see the bond documentation. If you talk to legals, they will always have the legal perspective. If you talk to economists, they will have the economists perspective. Putting all this together is very important, especially in times like these, when these risk factors are becoming more important.Another point is that credit analysis is something that isveiyspecicundidiosynciutic.Neuilyeveiypotentiul investment opportunity is unique. You couldnt, for exam-ple, accurately distill the entire credit evaluation process into a textbook because there is no common rule for ana-lyzing ciedit iisk.Tleie uie so muny unique und specic topics. Il you just lookatthesituationinEurope,asimpleexampleisthat many corporates are guaranteed by the governmentat the local, state, regional, or sovereign level. European govern-ments provide certain corporate entities with guarantees. PROFESSIONAL PRACTICEPORTFOLIO PERFORMANCEMay/June 2014 CFA Institute Magazine23It is true in Hungary, Ukraine, Portugal, Italy, and so on. To get an idea what the guarantee is worth, you need to imple-ment a process that allows for a detailed analysis of how strong the guarantee is and ultimately what value it has.Thissoundssimple,butnormally,anETFplayer,for example, doesnt do this and might not be equipped to do so.Manyhugefundinvestors,whichareforcedtomove down the credit quality curve just because they have to earn a higher yield on their investments, do not have the expe-iience to look ut tlese specic minutiue piopeily. I would uigue: Do not buy unytling you do not undeistund.Today, you can buy Greek asset-backed security (ABS) structures that are backed by Greek airspace rights. They are single B iuted. To be lonest, I cunnot unulyze tlis witlin two louis. I cunnot unulyze it witlin one duy. Altei two duys, I came to the conclusion that these ABS structures were not attractive investments. Normally, if we go through our uni-verse, we come to the conclusion that at least 75% of the names or target investments are not attractive opportunities.Investing in high-yield and other convoluted structures is a very tedious and time-consuming job. Its easier to buy equities because an equity is an equity. When you invest in a stock, you do not luve to unulyze low tle stiuctuie, legul und otherwise, affects the value of the investment. When invest-ing in credit, even something as simple as a vanilla bond, one must unulyze tle stiuctuie und lunguuge ol tle secuiity.In the case of a high-yield bond, you are in the unfavor-able situation that in the capital structure, you are the sec-ond-biggest loser after the equityholder if the company goes bust. Look at the recovery rate you normally get in the high-yield muiket, wlicl is in some cuses close to zeio. Hence, theres not much recovery for the investor in the case of a default.Ontheotherhand,youjustgetacouponinthe best case. You cannot make 100% or 200%, as is the case if you buy distressed equity.In ligl yield, youi potentiul piot is cupped und youi potential loss is as huge as it is on the equity side. Therefore, it is of utmost importance to be very meticulous regarding the details. I am not talking about the BB ratings or crossover names with one investment-grade rating and one high-yield rating. Im talk-ing about CCC or B rated entities.Forexample,ittookustwo weeks of very detailed analysis to understand the capital structure of Caesars Entertainment, with all the loans outstanding and many differ-ent bonds and cross guarantees. Its not simply deciding to buy Caesars credit risk. I have 50 dif-ferent alternatives to buying Caesars risk. I dont need to nd one oppoitunity. I need to nd tle best oppoitunity out of these 50.Scenariosandconvolutedcapitalstructures,suchas Caesars, make the investment processes more complicated.Tleie uie muny books tlut teucl you low to unulyze com-panies. But on the high-yield side, its a different game [com-pared with single-name credit analysis on the investment-grade side]. Its learning by doing and learning by making mistakes. You have to discuss many topics with many dif-ferent professionals to fully understand the many dimen-sions of the investment. I do not know a single guy who can unulyze u complex stiuctuie like Cuesuis und come up witl u denitive evuluution ol tle cupitul stiuctuie und outlook ol tle im. We uie in contuct witl seveiul people to dis-cuss many different features, such as the default schemes in the United States. Its hardcore teamwork.Whats your outlook for spreads in the high-yield market?Credit crises run in cycles. There are only two alternatives for credit markets in a low-yield environment while equity markets are at very high levels. You can increase your prof-its by moving down the credit quality curve, or you can put leverage on your trades, which can be done easily with credit deiivutives und secuiitizution. Il you buy into u CDO, you have leverage on the trade. You probably have better qual-ity with respect to the underlying names compared with the high-yield market, but you put leverage on it. Thats what we saw in an extreme case during the 200507 pre-crisis eiu. Tleie wus tle iecoid issuunce ol CDOs und CLOs [col-luteiulized loun obligutions|, und we suw supei-tiglt spieuds in the high-yield market.We also see super-tight spreads in the high-yield market right nownot as tight as it was six or seven years ago but close to those levels. Currently, we are also seeing a come-buck ol secuiitizution und ciedit deiivutives.Idsaywereinasituationnowthatissimilartothat of 2006 and 2007. If theres a blowout, that will allow us tondveiyuttiuctivenunciulussets.Iwouldn'tbesui-prised if there are some sharper corrections. I dont know il it will be 2014 oi 201S, but it is denitely in tle cuids in the short run.Would you like to summarize?We are focused on and in contact with many universities about the implementation of models that cover legal, reg-ulatory, and political risks.My message for investors is to be careful with political, legal, and regulatoryriskincreditinvest-ments. It will become very impor-tant over the next couple of years.RheaWesselisafreelancewriterbased in Frankfurt. Fran Melville is the director of industry relations at CFA Institute.Current Conditions and Outlook for Corporate and Sovereign Credit Markets CFA Institute Conference Proceedings Quarterly (18 March 2014) [www.cfapubs.org]Contingent Convertible (CoCo) Bonds: A First Empirical Assessment of Selected Pricing Models Financial Analysts Journal (March/April 2014) [www.cfapubs.org]KEEP GOINGBE CAREFUL WITH POLITICAL, LEGAL,AND REGULATORY RISK IN CREDIT INVEST-MENTS. IT WILL BECOME VERY IMPOR-TANT OVER THE NEXT COUPLE OF YEARS.24CFA Institute Magazine May/June 2014PROFESSIONAL PRACTICECAREER CONNECTIONPay DazeWITH ASSETS UNDER MANAGEMENT RISING, WILL COMPENSATION FOLLOW?By Lori PizzaniTle loiecust loi cuieeis und puy puckuges loi nunciul unu-lysts and other investment professionals can vary accord-ing to which expert you ask, but most of those who shared their perspectives for this report are cautiously optimistic about what lies ahead for 2014.There is more movement, more activity, although that activity is not necessarily a lot more hiring, says Roy Cohen, a New York City career counselor, executive coach, and author of The Wall Street Professionals Survival Guide: Success Secrets of a Career Coach. In his view, the risk appetite among Wall Stieet ims lus denitely incieused us tle need to cieute nun-cial security for individuals, including those facing retire-ment, has become a priority.Muny ims luve set tleii sights on attempting to gener-ute outsized ietuins loi inves-tors as the economy becomes moreandmorestratified andincreasingnumbersof people are building enormous wealth.Cohenseesnotable growthofpositionswithin the structured products area (e.g., credit derivatives) and forcomplianceandwealth management jobs.A CHANGING LANDSCAPEThemarketforequityand fixed-incomeanalystshas changed. I am seeing differ-ent analysis, not as in-depth, and research analysis that is moredesignedtogenerate trading activity, says Cohen. In particular, he has observed adeclineininvestmentbankwhitepapersandresearch reports. Instead, he notes, banks want analysts to come up with trade ideas, especially because as a practical matter, trading revenue pays for those research ideas. Moreover, trad-ers arent necessarily interested in reading lots of analytical reports these days. The focus has shifted to actionable ideas.Tle numbei ol Wull Stieet ims lus continued to con-tract, and promising start-up hedge funds have often failed because of their inability to generate interest, even when big names and great reputations have been involved.Despite tle gloom, Colen points out u silvei lining: Tle CFAdesignation,asaprofessionalaccomplishmentand critical professional resource, is even more desirable now.CFA charterholders work in a wide range of capacities around the globe. As of October 2013, self-reported data from nearly 111,000 CFA charterholders show that, on average, 22% work as portfolio managers, 15% as research analysts, and 7% as chief-level executives. Another 11% fall into the catchall other category. Additional career categories are consultunts (6%), coipoiute nunciul unulysts (S%), nun-cial advisers (5%), relationship managers (5%), risk man-agers (5%), investment banking analysts (4%), managers ofmanagers(3%),strategists(3%),accountants/auditors (3%), and traders (3%), with 4% reporting as unemployed. (The numbers sum to more than 100 because of rounding.)Tle geneiul numbeis conceul some signicunt iegionul differences. For example, 17% of CFA charterholders in the United States and 20% of charterholders in the United King-dom work as research analysts, but in Canada the number drops to 10%. Also, a higher proportion of charterholders in the US and the UK (24%) hold positions as portfolio man-agers as compared with those in Canada.The most recent Occupational Outlook Handbook released by the US Bureau of Labor Statistics estimates the number ol nunciul unulysts woiking in tle United Stutes in 2012 ut 2S3,000 und piojects un udditionul 39,300 nunciul unulyst jobs by the end of 2022. The BLS analysis forecasts a 16% giowtl iute loi jobs in tle nunciul unulysis eld (includ-ing not only buy-side and sell-side analysts but also port-folio managers, fund managers, ratings analysts, and risk analysts) over the 10-year period, which is well above the average 11% growth predicted for all occupations.RECENT COMPENSATION TRENDSCurrent and accurate data for salaries, bonuses, and other nunciul incentives (sucl us piot sluiing) uie dilcult to obtain. Results vary greatly depending on who is asked and wlo lus been suiveyed. Dutu ulso vuiy widely uccoiding to geogiuplic iegions/countiies, yeuis ol expeiience, tle size and type of the employer, and other factors.As investment piolessionuls und nunciul unulysts udvunce in their careers, CFA charterholders often grow out of their nunciul unulyst` titles und into titles tlut cun include mui-keting and sales executives, portfolio managers, fund man-agers, and a bevy of C-suite positions. For example, the posi-tion ol cliel investment olcei` belongs in u dilleient cut-egoiy und puy level liom tlut ol u nunciul unulyst. Tlus, ussessing compensution becomes moie dilcult.One way to get an idea of compensation is to cull infor-mution liom online und oline souices und put togetlei u kind of composite picture. This method shows broad ranges Compensation patterns for financial analysts and other investment professionals vary widely within domes-tic markets and across geo-graphic regions.Since 2008, hiring and com-pensation (salaries and bonuses) have been con-strained as US firms