Portfolio Equity Index Option Overlay Strategy Manager Questionnaire
Product Under Consideration: _________________________________________
Firm Name:
________________________________________________
Contact Person:
________________________________________________
Address:
________________________________________________
Telephone:
________________________________________________
E-mail:
________________________________________________
Date Completed:
________________________________________________
ORGANIZATION
1) Please provide an overview of your firm’s asset management capabilities and product offerings,
including traditional security selection and overlay strategies.
2) Describe the ownership structure. Describe the percentage owned by employees and nonemployees and its distribution. What percentage does the majority owner hold? Please provide
the name, relationship and percentage ownership of:
 Each parent organization
 Other affiliated organizations
3) Describe the material developments in your organization (changes in ownership, personnel,
business, etc.) over the past three years in detail. Are there any changes anticipated in the
coming year?
4) Provide an organizational chart diagramming the relationships between the professional staff as
well as the parent-subsidiary, affiliate, or joint venture entities.
5) Describe the levels (U.S. dollar amounts) of coverage for SEC-required (17g-1) fidelity bonds,
errors and omissions coverage and any other fiduciary coverage which your firm carries. List
the insurance carriers supplying the coverage.
6) Please indicate whether the firm is certified as a Minority, Women, or Disabled Business
Enterprise (MWDBE) as defined by the Illinois Business Enterprise for Minorities, Females, and
Persons with Disabilities Act. If so, please provide a copy of the firm’s certification.
State Universities Retirement System of Illinois
7) Over the past five years, has your organization or any of its affiliates or parent, or any
officer or principal been involved in any business litigation, regulatory or legal
proceedings? If so, provide a detailed explanation and indicate the current status.
8) Based on your firm’s legal structure, asset management and trading activities please provide a
summary of which regulatory bodies you are required to be registered with, including the SEC,
CFTC and National Futures Association.
9) Has your firm been the subject of an audit, censure (fine), inquiry or administrative action by the
SEC, IRS, CFTC, DOL or other regulatory agencies in the past 7 years? If so, explain findings
and provide a copy, as well as evidence of any changes in procedures implemented as a result of
such audit.
10) Discuss your organization’s compensation and incentive program. How are professionals
evaluated and rewarded? What incentives are provided to attract and retain superior individuals?
If equity ownership is possible, on what basis is it determined and distributed? How is the
departure of a shareholder treated?
11) Provide information regarding the expiration date of current employment contracts with key
personnel. Please include discussion of long term incentives, options or performance clauses.
12) Please provide details on the financial condition of the firm (i.e., most recent annual report filed
with the SEC).
13) When was your firm’s last external audit? Identify the firm that conducted the audit. Please
discuss any material findings. Has the firm changed auditors in the past three years? If so,
explain.
STAFFING
14) Please provide an overview of your firm’s overall staff compliment and break-down of the
number of individuals by role, including overall firm management, marketing, client service,
portfolio management, research, risk management, trading and back office functions
(accounting, reporting, administrative).
15) For employees classified as Investment Professionals please answer the following:
a) What other duties do the portfolio managers/research analysts have? Do the analysts provide
inputs used in any other strategy? If so, please explain.
b) Describe your firm’s backup procedures in the event a key investment professional assigned
to this account/product should leave the firm.
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c) Who will serve as the client service officer for the account? How often will the person
be available for client meetings?
d) Please provide a list of key investment professionals who have joined or departed over the
past five years.
16) Please provide biographies for all of the investment professionals that contribute to the proposed
product, including month & year of hire, prior work experience, education and certifications.
17) Provide any other information about your staff that you consider material including
reassignments of responsibility, committee changes, prospective additions, etc.
CLIENTS/ASSETS
18) Please provide an overview of all of the equity-oriented index option strategies managed by your
firm, including both overlay accounts (report target notional value) and fully-funded
commingled strategies (report client assets).
19) Please provide assets under management information (AUM) and number of clients as of the
following dates: 12/31/2014, 12/31/2013, 12/31/2012, and 12/31/2011.
a) Firm-wide
b) Proposed strategy assets
i) Include a break-out by client vehicle type (separate account, commingled fund, mutual
fund)
20) If possible, provide the names of clients who are invested in the proposed product. Include
inception date and market value of each account. Please identify any clients that are large public
plan sponsor investment programs.
21) Does the firm have a policy limiting assets under management for the proposed strategy? If so,
what is the level at which your firm would close the strategy to new business? Please describe
how your firm evaluates this product’s capacity?
PRODUCT INVESTMENT STRATEGY
22) Please describe the design of your proposed equity-index option overlay strategy, including
overall investment philosophy, role within or as compliment to an institutional investor’s
existing equity portfolio, return (or yield) and risk parameters, eligible option contracts, and
framework for measuring the success of the product.
State Universities Retirement System of Illinois
23) Please describe your firms approach to evaluating current and historical options market
pricing and implied volatility as part of the investment decision-making process for the
proposed product.
24) Please discuss the types of equity index option instruments utilized in managing the proposed
product, including underlying indices targeted, exchange-traded vs. OTC, American vs.
European style, and any limits on the level of exposure to individual instruments.
25) Please provide an overview of the quantitative and qualitative evaluations processes that
contribute to the portfolio construction process, including sources of information used.
26) Discuss the risk-control and monitoring systems utilized by your firm to measure and manage
the portfolio risk of the proposed equity-index option overlay product. How does the portfolio
manager evaluate the trade-off between maximizing yield premium income and risk of loss (as
% of notional target)?
27) Please discuss the various risks inherent in managing an equity index option overlay strategy?
28) Please discuss all specific risk measures that are monitored and how you ensure these parameters
are consistent with portfolio guidelines.
29) Please describe your approach to determining number and sizing of individual put and call
positions.
30) What is the average or typical range for notional exposure coverage (% relative to maximum or
limit)?
31) Please explain your firm’s portfolio management in terms of strike selection, maturity, timedecay evaluation and roll date process.
32) How does the portfolio management process and team manage the portfolio’s overall delta
exposure or range
33) Is the proposed strategy global or U.S. focused in terms of underlying index-option exposure
targeted?
34) Please discuss the funding and collateral requirements or alternatives for the proposed strategy,
including expectations for level of cash collateral relative to targeted notional exposure
35) Please discuss the use and management of cash collateral in the product. Is the strategy designed
to be fully invested at all times, or can market exposure be reduced under certain market
conditions or environments?
State Universities Retirement System of Illinois
36) Does this strategy utilize leverage in any way? If so, please describe. What is the expected
and maximum leverage employed in the strategy?
37) Have you made or are you planning any modifications to your overall investment philosophy or
portfolio management process over time? If so, describe the process used to identify and effect
the change. Evaluate the relative success or failure of the change.
38) What do you believe to be the best way to benchmark or evaluate the success of the proposed
product over time?
39) Please provide a range of likely monthly returns in a worst case drawdown scenario? A best case
or above average return scenario? Please describe the type of market environment in each case
or relate to recent market conditions experienced over the last 10 years.
40) What are the product’s return expectations over a full market cycle? Provide the history of the
yield premium targeted and generated by calendar year for the last 10 years or since inception (if
shorter than 10 years).
41) What is your firm’s view of the current index option pricing environment and the opportunity to
generate yield premium relative to past market conditions? Under what market conditions will
the proposed equity index-option overlay product perform well or poorly?
42) Provide a sample of the proposed product’s fully discretionary investment guidelines when
managed via overlay account.
TRADING PRACTICES / INTERNAL CONTROL
43) Does your firm utilize soft dollars?
44) What compliance system does your firm employ? How is compliance implemented in your
firm’s operations?
45) Provide a detailed summary of your firm’s internal control structure. Who serves as your firm’s
compliance officer? Does the firm conduct periodic risk assessment?
46) Have you ever violated a client guideline in the proposed strategy? If so, please describe the
violation and the resolution.
47) Please describe your firm’s approach to evaluating and managing counter-party risk in the
execution of the proposed strategy (if applicable).
48) Please provide a copy of your firm’s Personal Trading policy and procedures document.
State Universities Retirement System of Illinois
49) Describe your firm’s process for monitoring trades of the underlying managers. Include
information regarding:
a) Does the firm use electronic trading systems to monitor trading? If so, please describe.
b) How are trading costs monitored? How are costs minimized?
c) SURS encourages its investment managers to utilize the services of brokerage firms
owned by minorities, women, and persons with a disability (MFDB). Further, it is SURS
expectation that the investment managers meet certain minimum levels of MFDB broker
participation. Please comment as to your ability to execute and monitor usage of MFDB
brokerage firms by the underlying managers. What do you believe is a realistic
minimum level that you would be likely to achieve?
MANAGEMENT FEES
50) Please provide a proposed fee structure or schedule for the overlay strategy under consideration,
including any breakpoints. Are these fees negotiable?
51) Please provide an overview of all other fees and expenses that would be incurred by SURS if it
was to invest in the proposed product, including fees associated with transactions and the
custody and administration of overlay account paid to third parties or the general partner (asset
manager).
52) Would you be willing to include a “Most Favored Nations” clause in your contract? If not,
please provide an explanation of why not.
Once a manager has been selected, negotiations of the fee structure may become necessary in order
to account for the size of funding, the increments of funding, and any clarification. In no case will
the negotiations result in a fee that is higher than the fee contained in the proposal.
MISCELLANEOUS INFORMATION
53) What are the key factors that differentiate this product and give it a competitive advantage over
the others in the marketplace? Why do you believe this advantage is sustainable?
54) Please provide an electronic copy of your organizations Code of Ethics and SEC Form ADV
(Parts I and II) as an attachment to your response.
State Universities Retirement System of Illinois
55) For any commingled fund vehicles proposed please list the following vendor relationships:
A.
B.
C.
D.
E.
Auditors
Prime Brokers
Administrator
Custodian
Legal Counsel
56) Please discuss your firm’s business continuity/disaster recovery practices.
57) Has your firm adopted the Principles for Responsible Investment? If so, when? If not, has there
been any discussion regarding the Principles? If so, what were the key issues or concerns
surrounding the PRI?
58) Please provide information on the type of reporting provided to clients, including timing of
reports and details included. Provide a sample reporting package.
59) Briefly discuss the transparency of underlying information. Will SURS have online access to
the underlying holdings?
60) Do you offer monthly or quarterly calls to review the overall portfolio? Do you hold annual
investor meetings/conferences, etc.? Do you provide an annual strategic overview of the
portfolio/market?
State Universities Retirement System of Illinois