Section B - Investment Process and Portfolio Risk Management » 1. Investment Process » 8. Best Execution

Provider: MFA

Practice:	Guidance:
1. A Hedge Fund Manager should seek best execution in its trading activities for the benefit of the Hedge Funds it manages.	1. Generally, when seeking best execution for all types of instruments, a Hedge Fund Manager should execute transactions in such a manner that the execution quality on an aggregate, periodic basis is the most favorable under the circumstances. In assessing whether this standard is met, a Hedge Fund Manager should consider the full range and quality of a counterparty’s services. Factors a Hedge Fund Manager may consider in seeking best execution include, but are not limited to: prompt and reliable execution; the quality, comprehensiveness, timeliness, and frequency of available research and market information provided by the executing broker; the financial strength, integrity, and stability of the broker or counterparty; the ability of the executing broker to execute transactions (and commit capital) of size in liquid and illiquid markets without disrupting the market for the security; the competitiveness of commission rates in comparison with other brokers satisfying the Hedge Fund Manager’s other selection criteria; and the ability of the executing broker to maintain confidentiality. Due to the lack of transparency in the market for certain non-equities, such as certain structured products and derivative products, the review process and analysis of best execution for such products will be different than for equity trades (e.g., the factors listed above may be weighted differently) and will involve additional factors specific to structured and derivative products transactions. A Hedge Fund Manager should be mindful of actual conflicts of interest that arise when transacting with brokers and counterparties and disclose them as appropriate. (See Section 2 - Responsibilities to Investors, Recommendation 2.3.) For regulatory guidance on the subject of best execution, a Hedge Fund Manager should review the SEC’s release on Guidance Regarding Client Commission Practices Under Section 28(e) (www.sec.gov/rules/interp/2006/34-54165.pdf), and the FSA’s Consultation Papers on Best Execution (www.fsa.gov.uk/pubs/cp/cp154.pdf) and Bundled Brokerage and Soft Commission Arrangements (www.fsa.gov.uk/pubs/cp/cp176.pdf).
2. As part of its compliance policies and procedures, a Hedge Fund Manager should periodically review the firm’s relationship with each counterparty executing transactions on behalf of every Hedge Fund it manages to assess whether the counterparty continues to provide best execution.	2. The degree to which a Hedge Fund Manager engages with a particular counterparty will largely determine the need for and frequency of these periodic reviews of counterparty relationships. In its review, a Hedge Fund Manager should use a methodology that is appropriate for its business.

Practice:

Guidance:

1. A Hedge Fund Manager should seek best execution in its trading activities for the benefit of the Hedge Funds it manages.

1. Generally, when seeking best execution for all types of instruments, a Hedge Fund Manager should execute transactions in such a manner that the execution quality on an aggregate, periodic basis is the most favorable under the circumstances. In assessing whether this standard is met, a Hedge Fund Manager should consider the full range and quality of a counterparty’s services.

Factors a Hedge Fund Manager may consider in seeking best execution include, but are not limited to:

prompt and reliable execution;
the quality, comprehensiveness, timeliness, and frequency of available research and market information provided by the executing broker;
the financial strength, integrity, and stability of the broker or counterparty;
the ability of the executing broker to execute transactions (and commit capital) of size in liquid and illiquid markets without disrupting the market for the security;
the competitiveness of commission rates in comparison with other brokers satisfying the Hedge Fund Manager’s other selection criteria; and
the ability of the executing broker to maintain confidentiality.

Due to the lack of transparency in the market for certain non-equities, such as certain structured products and derivative products, the review process and analysis of best execution for such products will be different than for equity trades (e.g., the factors listed above may be weighted differently) and will involve additional factors specific to structured and derivative products transactions. A Hedge Fund Manager should be mindful of actual conflicts of interest that arise when transacting with brokers and counterparties and disclose them as appropriate. (See Section 2 - Responsibilities to Investors, Recommendation 2.3.)

For regulatory guidance on the subject of best execution, a Hedge Fund Manager should review the SEC’s release on Guidance Regarding Client Commission Practices Under Section 28(e) (www.sec.gov/rules/interp/2006/34-54165.pdf), and the FSA’s Consultation Papers on Best Execution (www.fsa.gov.uk/pubs/cp/cp154.pdf) and Bundled Brokerage and Soft Commission Arrangements (www.fsa.gov.uk/pubs/cp/cp176.pdf).

2. As part of its compliance policies and procedures, a Hedge Fund Manager should periodically review the firm’s relationship with each counterparty executing transactions on behalf of every Hedge Fund it manages to assess whether the counterparty continues to provide best execution.

2. The degree to which a Hedge Fund Manager engages with a particular counterparty will largely determine the need for and frequency of these periodic reviews of counterparty relationships. In its review, a Hedge Fund Manager should use a methodology that is appropriate for its business.