Mechanics of Actively Managed Certificates (AMCs): How They Function

At their core, Actively Managed Certificates function as “strategy tracker” notes: the issuer of the certificate promises to pay investors returns based on the performance of an underlying strategy portfolio, which is actively managed over time. Understanding the mechanics of Actively Managed Certificates (AMCs) involves looking at both the structuring of the product and the ongoing management process:

Structuring and Issuance: The life cycle of an Actively Managed Certificate (AMC) begins with an idea for an investment strategy and the collaboration between an asset manager (strategy provider) and an issuer (typically a bank or specialized SPV). The issuance process is relatively lean and quick: after agreeing on the strategy and terms, legal documentation (prospectus/term sheet, investment management agreement, etc.) is prepared, and the certificate can be launched often within weeks​.

Once issued, the Actively Managed Certificate (AMC) gets an ISIN code and often a listing, making it a transferable security​.

Ongoing Management: Once the Actively Managed Certificate (AMC) is live, the designated strategy manager actively manages the underlying portfolio on a continuous basis. In practical terms, the manager will send investment instructions to the issuer’s trading desk or platform to execute trades – for example, “buy 100 shares of X, sell 50 shares of Y” within the certificate’s portfolio. These trades are carried out within the AMC’s reference account, and the AMC’s value (net asset value per certificate) is recalculated accordingly. Many issuers provide an interface or portal for the manager to submit rebalancing instructions and enforce any pre-defined rules. For instance, if the strategy has limits (say no more than 50% in a single stock), the system will check compliance pre-trade​.

Throughout each trading day, a number of operational activities occur behind the scenes to keep the Actively Managed Certificate (AMC) functioning smoothly​:

• Valuation and Portfolio Accounting: The issuer (or an independent calculation agent) continuously values the underlying holdings and publishes an up-to-date certificate price or NAV (often daily or even intraday). This involves computing index values or portfolio NAV based on market prices of constituents, then adjusting for fees.
• Hedging and Execution: If the issuer is guaranteeing the performance, it will typically hedge its exposure by mirroring the trades in its own book (for on-balance sheet) or by ensuring the SPV does so (for off-balance). Efficient execution of the manager’s orders is crucial – the issuer’s trading desk often acts as market maker and counterparty for trades, especially if the assets are less liquid.
• In/Outflows: If the Actively Managed Certificate (AMC) allows new subscriptions or redemptions after launch, the issuer manages the inflow/outflow by buying or selling the underlying assets as investors enter or exit. Some Actively Managed Certificates (AMCs) are open-ended (continuous issuance/redemption), others are issued in a fixed size – in either case, the issuer may provide secondary market liquidity by quoting bid/ask prices​.
• Fee Processing: Actively Managed Certificates (AMCs) usually charge a management fee (and sometimes performance fee) to the strategy manager, plus any platform or structuring fees. These are periodically deducted from the NAV. The issuer’s systems will calculate fees daily and account for them in the valuation​.
• Reporting: Both issuers and managers produce reports – the issuer may provide daily holding reports and performance updates to investors and the manager, while the manager may provide commentary. Modern Actively Managed Certificate (AMC) platforms often have investor dashboards showing current portfolio composition, performance metrics, and any changes made, ensuring transparency.

Timeline: The typical lifecycle of an Actively Managed Certificate (AMC) spans from initial structuring and issuance through active management, periodic rebalancing, investor reporting, and eventually payout or maturity. Each stage involves coordination between the issuer and the strategy manager to ensure the product operates as intended.

In terms of investment strategies, an Actively Managed Certificate (AMC) is extremely flexible. The rules can be as simple or as complex as desired: some Actively Managed Certificates (AMCs) follow a discretionary trading strategy where the manager has wide latitude to pick assets (e.g. a global macro strategy that shifts allocations based on market outlook). Others follow a rule-based strategy (sometimes called an index strategy) where the manager implements a predetermined algorithm or set of criteria. Common use cases include:

• Tactical Asset Allocation: where the manager frequently shifts the mix of asset classes (stocks, bonds, cash, etc.) to capitalize on short-term market views​.
• Market Timing Strategies: that attempt to increase exposure ahead of expected market rises and cut back before declines, using technical or macroeconomic signals​.
• Sector or Thematic Rotation: focusing on rotating among industries or themes (e.g. rotating into tech stocks then into healthcare) based on which sectors are expected to outperform​.
• Long/Short or Hedging Strategies: where the Actively Managed Certificate (AMC) can take both long and short positions (often via derivatives) to generate alpha regardless of market direction – something akin to hedge fund strategies but delivered in certificate form​
• Multi-Asset Income Portfolios: combining dividend stocks, bonds, REITs, etc., actively adjusted to maintain a yield target.
• Alternative Assets Basket: combining things like private equity funds or hedge funds to offer a diversified alternatives exposure that the manager rebalances periodically (for example, maintaining target weights in different hedge fund strategies).

The AMC’s documentation will spell out the allowable assets and strategy guidelines. Some are very broad (almost like a mandate: e.g. “the manager may invest in any stocks in MSCI World Index with up to 150% leverage”); others are specific (“portfolio of 20 named hedge funds, rebalanced quarterly”). In all cases, the manager’s active decisions drive the performance. The Actively Managed Certificate (AMC) itself typically does not have a fixed maturity (many are open-ended or perpetual certificates), although some Actively Managed Certificate (AMC) structures do set a maturity date at which the product ends and pays out the final portfolio value to investors​. If an Actively Managed Certificate (AMC) has a maturity or when an investor redeems, the underlying assets are liquidated (or delivered in-kind if specified) to fulfill the payout.

Importantly, the manager is compensated via fees embedded in the AMC. A management fee (e.g. 1–2% annually of assets) is common, and in more sophisticated strategies a performance fee (e.g. 10–20% of profits above a hurdle) may be included. These fees are disclosed in the term sheet and are deducted from the certificate’s NAV​. The issuer may also take an administrative fee. Investors thus should be aware that the gross performance of the underlying strategy will be reduced by these fees in the net returns they receive.

In summary, the mechanics of Actively Managed Certificates (AMCs) involve a close partnership between the strategy manager (providing investment decisions) and the issuer (providing the product infrastructure and execution). The manager’s active asset allocation is transmitted into the certificate via trading and rebalancing, and the issuer takes care of the plumbing: custody of assets, valuation, trade execution, and delivering the strategy’s performance to investors in the form of price changes or redemption value. This symbiotic process allows Actively Managed Certificates (AMCs) to function as a “fund in a note”, bringing the efficiency of capital markets to active portfolio management.