Front running controls and coinvestment

[cordura21]

Hi guys. I was trying to think about ways of controlling fair execution and specifically front running when you coinvest in a strategy with some other investor. Using a separate managed account and requiring the full logic of the strategy seems to be a starting point (although it is said that almost nobody but undercapitalized managers will agree to share too much info with you out of fear that you will steal the edge).



Is there a common way to do this? I was thinking about actions like post day audting of trades, pre trade compliance,e tc... depending on the frequency of the strategy and the risk you want to assume. But there is also the risk that you get front runned at the broker, or even with 'undeclared' money that is anticipating the strategy and that you don't know about.



I know there is a lot of skepticism about this, many people think there's not much you can do, and even the creed that some companies create employee owned funds that dump trades against the clients (which by the way not only happens in exchange traded products but mostly in products where big managers have a lot of uncomfortable inventory).



But I am pretty sure many of you guys are hands on on these stuff and I would like to know what do you do and what are the common ways.



TIA, Cord

[Nonius]

normally front running controls are implemented by Compliance, who have the mandate to a) implement PA trading policies b) monitor the PA accounts of FO personnel and c) implement disciplinary action in the event of violations and generally monitor whether internal desks are front running even for the institution's benefit. Despite those controls, I think Front Running is pretty common place in banks (probably less so in hedge funds, don't know about institutional investment management companies). In a bank, for example, a swap desk that services LDI strategies on behalf of pension funds is almost surely going to have grey area info about loads of long swap flows coming, and they will almost surely position their books ahead of the flows....it's all very grey how to unravel those market abuses, I think.