Last week we sponsored the 4th Annual Hedge Fund Ops & Tech conference in NYC, where nearly 100 hedge fund professionals gathered to discuss the top hedge fund operations and hedge fund technology issues facing the industry. Not surprisingly the Dodd-Frank Act was a hot topic as was headline risk, data management and disaster recovery.
For those of you who couldn’t attend, we’ll do a two-part recap of the event. This article will cover panelists' comments around headline risk, data management and Dodd-Frank. Next Tuesday we’ll cover insights from the hedge fund disaster recovery and business continuity planning panel our own Vinod Paul moderated.
Headline Risk (a topic that came up on multiple panels): Headline risk goes against the old adage that “there is no such thing as bad publicity.” This risk is tied to the possibility that negative news could spook the market and investors. Across the board, hedge fund COOs indicated that headline risk is something that keeps them up at night and drives spikes in investors’ calls.
The hedge fund industry is reactive, so panelists advised attendees to be proactive in monitoring news coverage and communicating to investors. Be ready when the investor calls to answer whether your hedge fund was invested in a certain asset.
Also, use high-profile cases (i.e. fraud, insider trading) to test a firm's internal safeguards to determine if you would have fallen prey to the fraud. For example, ask yourself if you would have invested in Madoff – be truthful and mindful that hindsight is always 20/20. One panelist said his firm did an all-day roundtable exercise where they used public cases to determine if their internal controls would have caught the fraud.
Employee Trading: Panelists agreed that a standard practice is to either have restricted lists, which employees can reference, or require certain trades to be pre-approved by the firm’s managing directors. One key process element is to ensure that the restricted list is reviewed and updated regularly. Some firms were also looking at using technology to automate monitoring of employee trading.
From the fund-of-fund perspective, it can be harder to monitor so the policies tend to vary more across firms.
The Data is Exploding! To appease investors and regulators, hedge funds are creating more and more data that must be managed and quickly accessible. Investors today expect rapid responses to questions making the ability to pull reports in real-time essential to operations. One COO commented that while a hedge fund’s investment returns can be great, it is operations that can be the straw that breaks the camel’s back.
Another panelist commented that technology doesn’t stand by itself. It is not uncommon for users to only know how to use 20% of the functionality offered by an application. This lack of training and knowledge can result in a hedge fund professional being unable to pull a report or execute a request from an investor or SEC auditor. Firms must wrap procedures, controls, training and internal testing around hedge fund technology systems.
Dodd-Frank & The SEC: While the registration deadline may be pushed back, panelists agreed that hedge funds should start the prep work now. SEC registration is “easy” some panelists said referring to the paperwork – it is the internal processes and safeguards that must be in place to be compliant that are hard. Give yourself at least 6 – 8 weeks to get internal systems compliant.
Another reoccurring theme was that you never want to give the SEC a reason to do a second probe as they only get deeper, harder and more time intensive. When the SEC comes calling be prepared to answer all of their questions thoroughly and if you say you’ll do something, do it. The SEC can throw a vast amount of resources into examining your hedge fund deeper if they don’t like what they see on the first pass. Read our articles on preparing for an SEC audit.
Come back next Tuesday, April 26th for more on the hedge fund disaster recovery panel. Or, just subscribe to our blog and the article will come to you!