Portfolio Management

Structured Products

We manage 28 structured products with total assets of approximately $9.5 billion. Twelve of the structured products are CLOs that invest mainly in bank loans, twelve are CDOs that invest mainly in asset-backed securities, and four are CDOs that invest mainly in corporate bonds. The CDO management teams consist of 20 portfolio managers and analysts.

Bank Loan Team

Our bank loan team consists of 19 members. Jonathan Trutter, Chief Executive Officer, Co-Chief Investment Officer and Co-Director of Bank Loans, and Mark Wittnebel, Co-Director of Bank Loans, lead the team. The team has approximately $4.1 billion of assets under management in 12 collateralized loan obligations (CLOs) and a private investment fund.

ABS and Corporate Credit

Our ABS and corporate credit team consists of 5 members. The team has approximately $5.4 billion of assets under management in 12 ABS CDOs and 4 corporate bond CDOs. The investments in the ABS CDOs include residential mortgage-backed securities (primarily residential B/C loans, home equity loans and residential A loans), asset-backed securities (primarily auto loan receivables, aircraft leasing and small business loans) and commercial mortgage-backed securities. The bank loan team assists the ABS and corporate credit team with credit monitoring for the corporate bond CDOs

RPM Strategy

Since May 2003, Deerfield has offered a duration management product called Return Profile Management, or RPM. RPM is a quantitative fixed income strategy that is designed to add value in relation to a chosen benchmark by dynamically varying the portfolio's duration. RPM is generally structured so as to be both long and short duration in relation to the benchmark. Generally, RPM is implemented using only treasury securities but may make limited use of non-treasury securities such as agency pass-thrus and debentures. Three portfolio managers implement the strategy.

Risk Management

Risk Management is a major focus for us. Our Risk Management program has four main components:

• A robust back office (Operations, Accounting, Counterparty Credit, Investment Guideline Compliance and Internal Audit) that is strictly separated from portfolio management.
• A Risk Management committee of senior managers from various departments that develops risk control policies and procedures to carry out those policies.
• An extensive Operating Policies and Procedures Manual detailing our internal controls.
• An office of Internal Audit that constantly monitors our risk control procedures to determine that they are being carried out and to see if they can be improved.

Our Risk Management team develops procedures for monitoring the portfolio management, operational and related risks of our business. The Risk Management function is strictly segregated from our portfolio management and related activities. Risk Management reports to the Risk Management Committee, which consists of the senior managers of Deerfield and generally meets monthly. The control procedures developed by Risk Management focus on investment guideline compliance, currency risk exposure, portfolio liquidity, counterparty risk exposure, internal audit and performance calculation.

Accounting

Our Accounting group consists of 16 professionals, including five CPAs, four of whom worked for major auditing firms. Accounting provides comprehensive accounting support for our client accounts.   For example, for our CDOs Accounting performs cash flow reconciliations and verification of the monthly reports from the CDO trustees and scheduled investor payments to determine the compliance and accuracy of information compiled and distributed by the trustees, and for separate accounts Accounting monitors cash flows daily and prepares customized monthly financial statements.

Operations

Operations confirms the execution and clearance of every trade for a client account.   trades for client accounts, operating independently from our trading desks.  Each group member is assigned to confirming transactions in a particular instrument, such as government bonds, corporate bonds, and swaps.

Each trading desk must enter its executed trades into DARTS (Deerfield Accounting, Research and Trading System), our proprietary electronic trade processing system.  Operations then retrieves each DARTS-recorded trade and, on the same trading day, verbally confirms its execution with the broker or counterparty. If the verbal confirm does not match the trade details in DARTS, Operations resolves the discrepancy. If the confirm matches, Operations uploads the details to the appropriate custodian for clearance, and the settlement is verified in DARTS.

Internal Audit

Our Internal Audit group tests our compliance with our internal financial and other controls and assesses their effectiveness.  One of the principal such controls is our procedures for managing risks relating to portfolio management, such as valuation of portfolio securities; trade execution, confirmation and settlement; trade ticket verification; and front and back office procedures.  Internal Audit, which has no involvement in portfolio management and reports to the DFR Audit Committee, tests our risk management procedures on a periodic basis.

Technology

We regard our information processing technology as vital to our management of client portfolios. We maintain state-of-the-industry information processing systems designed around a client/server architecture that distributes computing power to each trading and trading support desk. The foundation is a set of servers that perform the transaction processing needed to support real-time portfolio management, accounting and risk management.

Our systems staff consists of programmers and system administrators. The staff's academic credentials include advanced degrees in computer science and applied mathematics. The senior staff members have decades of experience with leading-edge information technology, particularly for financial services. The team provides the design, development, and maintenance of our technology, as well as integration with vendor products.

All computers are connected via a high-speed networking backbone. Data is backed up daily and stored offsite. Our web server gives our clients on-line access to account information. This information is generated, approved and posted through a content management system, combining automated reporting with rigorous verification process. All systems are protected by a secure firewall to prevent outside intrusions.

Legal

Our in-house Legal Department consists of three lawyers and a paralegal.  Each of the lawyers has relevant prior law firm experience, and two of the lawyers have also worked for the SEC. 

Compliance

The primary objective of the Compliance group is to monitor the firm's activities and its client's investment guidelines, to assure the firm complies with the provisions of its written internal compliance procedures and applicable securities laws. The Compliance Department regularly reviews and updates our internal control procedures and evaluates how effective each control is in ensuring compliance with these policies. Among the procedures regularly monitored by the Compliance group are those relating to:

• Daily trade activity
• Trade compliance with regulatory rules
• Reviewing trade activity of DCM's designated Access Persons
• Trade compliance with each fund's investment guidelines
• Review each department's compliance with internal operating policies and procedures
• Perform annual review of fund investors
• Periodic updates of various internal control policies and procedures
• Develop compliance policies and procedures for new products
• Periodic employee compliance training