The following article is part of our Hedge Fund Insiders Article Series and was contributed by Eze Castle Integration (us!). Read more articles from the Series HERE.
Technology was historically an afterthought for many hedge funds and a “check-the-box” item at that. Many firms took the approach that they could get away with the bare minimum on the technology front, often overlooking the reality that technology today is a critical component to a hedge fund’s daily operations.
Today’s hedge funds are generally embracing the role technology plays in investment management operations. In fact, in today’s competitive landscape and with investors expecting more than ever from funds, technology has really emerged as a competitive differentiator and an asset that can help grow a firm’s business.
2015, specifically, has posed its challenges for hedge funds and investment firms, as the Securities and Exchange Commission (SEC) and the investor community as a whole have highlighted cybersecurity as one of the most critical areas of focus. Beyond security, hedge fund startups continue to face challenges as they look to keep pace with their established competitors and make their own impression on the marketplace. From a technology standpoint, we’ve identified three top priorities for hedge funds and investment management firms looking to find startup success.
Categorized under: Hedge Fund Insiders
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Meyler Capital. Read more articles from the Series HERE.
So, I'm talking to a friend from the UK the other day when we stumble onto the topic of sports. Every time the word, “football” crosses my lips, he visibly cringes. “Football? You mean that game that you play with your hands? Tell me, JD, how often during a football game does anyone but the kicker actually ever touch the ball with his foot?
Yeah – this argument is not new...football will always mean something different to Americans than everyone else in the world. But it made me wonder the same thing about our business.
Why is it that capital placement agents refer to themselves as "Third Party Marketers"? Does this mean something different to people in these roles than it should to everyone else?
Let's call a spade a spade – there is about as much marketing happening in this industry as “footballing” in the American sport. Sure – there is lots of relationship management happening and certainly plenty of overt selling. But marketing? Not really…
The following article is part of our Hedge Fund Insiders Article Series and was contributed by CBRE Group, Inc. Read more articles from the Series HERE.
As a team focused exclusively on advising hedge funds on their strategic real estate planning, we have observed several trends continuing to proliferate in the market. Below are three real estate-related issues relevant to all hedge funds.
Increasing Construction Costs
Construction costs for office interiors throughout New York City are rapidly increasing and firms that built space 5–10 years ago will find that overall expenditures for the same quality installation have increased 30–40% based on benchmark construction cost data across NYC. Although benchmarking numbers are not available specifically for hedge fund construction, high-end design details like custom millwork and architectural metal and glass are often a significant part of the design and are seeing the most rapid appreciation in cost, driving even more significant increases specific to hedge funds. Additionally, these premium and other critical trades such as HVAC and electrical are in high demand and can cause scheduling delays, pushing associated costs higher than ever.
It is crucial for hedge funds to have an owner’s rep / project manager advisor involved to ensure projects are appropriately budgeted from the initial due diligence phase, assessed on a project-by-project basis throughout the site selection process, and effectively implemented during the design and construction of the selected space.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by TriNet. Read more articles from the Series HERE.
Beginning January 1, 2016 every U.S. firm with 51-100 employees will be migrated to the “small group market” for healthcare benefits, as part of Affordable Care Act (ACA) mandated changes. Currently, in many states the small group market encompasses firms with 50 or fewer employees. But for policies that renew in 2016, this market will be expanded to include companies with up to 100 full-time employees.
Companies with 51-100 employees, who previously enjoyed the “economies of scale” benefits associated with being in the large group health care market, will become part of the small group market as of their first renewal on or after January 1, 2016. While this change will happen across the U.S., we believe its impact will be very significant in New York State.
What mid-size businesses can expect from ACA changes:
Healthcare premiums, on average, will increase – potentially significantly – and the access to a wide-array of rich benefit plans these companies previously enjoyed is likely to be reduced. This is because New York State’s small group healthcare market is “community-rated,” which means the demographics (for example, average age of employees) at a firm have no impact on small group market healthcare pricing. New York State currently prohibits insurance rate variations based on the demographic characteristics of the firm. This is in stark contrast to the rest of the country, where firms are priced based on their employee “census”- thus taking into account their demographic characteristics. We believe this will result, on average, in significantly higher healthcare premiums – especially if the firm has a relatively young average age composition, as so many New York financial firms do.
“Small group” market plans will be “canned,” meaning you will now have to select your benefits from a group of plans that the carrier offers – and plans cannot be modified. This will likely cause firms with 51-100 employees to lose some of the previous benefits they were able to offer employees. As a result, this change is likely to affect deductibles, out-of-network coverage, advanced infertility treatments and lower limits on certain services.
Companies that have 51-100 employees and a relatively young demographic composition will likely be hit with significant healthcare premium increases, as the small group community rates will be much higher than what they currently pay. By my calculations, some groups could see premiums increase as high as 50 percent for plans similar to what they offer today.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Willis Group Holdings Ltd. Read more articles from the Series HERE.
The Cyber risk landscape is rapidly evolving. Governments are facing an unprecedented level of Cyber attacks and threats with the potential to undermine national security and critical infrastructure. Similarly, businesses across a wide range of industry sectors, particularly those in the health care, retail and financial services industries1, are exposed to potentially enormous liability and costs as a result of Cyber incidents and data breaches.
Given the risk landscape, it is no wonder companies of all sizes continue to be subject to increasing data breach liability, both in the form of single plaintiff or class action lawsuits and regulatory investigations and proceedings. Negligence, breach of fiduciary duty and breach of contract are just some of the allegations that a company may face as a result of a systems failure or lax security that compromises the security of customers’ personal information or data.
Plaintiffs in data breach class actions typically allege that businesses failed to adequately safeguard consumer information and gave insufficient and untimely notice of the breach. Companies may also face class actions from banks and credit unions seeking damages for administrative expenses, lost interest, transaction fees and lost customers.
Settlements of data breach class actions can be exorbitant. For example, 25 class action lawsuits were settled in the wake of a retailer’s 2007 data breach involving the theft of data related to over 45 million credit and debit cards. The settlement included: up to $1 million to customers without receipts; up to $10 million to customers with receipts ($30 per claimant); $6.5 million in plaintiffs’ attorneys fees; and three free years of credit monitoring, with total costs reportedly up to $256 million. More recently, in 2014, two major retailers reported that the total costs of data breach and related class action lawsuits (less expected insurance recovery) was estimated at $63 million and $191 million, respectively. And, this year, two major health care companies are separately facing several lawsuits as a result of data breaches that reportedly exposed the personal records of 80 million and 11 million people, respectively. While these matters have yet to be resolved, the anticipated costs of litigation and settlement may set records.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Haynes and Boone, LLP. Read more articles from the Series HERE.
Cybersecurity risks pose an increasingly significant threat to investment advisers. In early 2015, the Securities and Exchange Commission’s (the “SEC”) Office of Compliance Inspections and Examinations (“OCIE”) identified its annual adviser examination priorities which reflect certain practices perceived to present heightened risk to investors and/or the integrity of US capital markets, one of which was cybersecurity compliance and controls. In April 2015, the SEC’s division of investment management (the “Division”) issued guidance (the “Guidance”)  reinforcing cybersecurity as a priority for advisers and suggesting that advisers implement cybersecurity risk assessment plans, response strategies, and written policies and procedures. Included below are measures advisers should consider (some of which are directly from the Guidance) when addressing cybersecurity risks relating to their operations:
Risk Assessment. Advisers should conduct assessments of: (1) the nature, sensitivity and location of information that it collects, processes and/or stores and the technology systems it uses; (2) internal and external cybersecurity threats to and vulnerabilities of the adviser’s information and technology systems; (3) security controls and processes currently in place; (4) the impact should its information or technology systems become compromised; and (5) the effectiveness of the governance structure for the management of cybersecurity risk.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Wells Fargo Prime Services. Read more articles from the Series HERE.
All business relationships are driven by the belief that both sides will receive a mutual benefit that will allow for a long term sustainable partnership between the firms. For a prime brokerage /alternative asset manager relationship this principle is no different. An alternative asset manager (“AAM”) looks for certain services from its prime broker (“PB”): financing, access to balance sheet, securities lending, Capital Introduction, research, Corporate Access, technology and other services that are essential to the AAM as it deploys its strategy. PBs are looking to generate an attractive after cost return based on the revenue generated from the client vs. usage of financial resources such as balance sheet and capital.
Driven primarily by post financial crisis regulatory pressures, banks and prime brokers are being faced with significant new requirements, which has changed the client interaction dynamic and has led to changes in balance sheet strategy, business objectives, and capital markets activity. While the fundamental nature of the business relationship has not changed between hedge funds and prime brokers, AAMs need to understand the impact of regulation on prime brokers and how best to optimize their impact on the prime brokers balance sheet in order to optimize the overall relationship.
While Basel III is the primary driver of this change, perhaps the most significant shift in the PB model has been the introduction of the return on assets “(ROA”) metric on a pre-tax basis as opposed to the pure top line revenue that previously drove the business. In summary, a balance sheet denominator has been added to the revenue numerator creating an ROA equation that now determines the health of a prime brokerage relationship. To be most effective, funds should understand how to minimize the balance sheet denominator as well as their impact on other relevant metrics:
Liquidity Coverage Ratio (LCR)
Net stable funding ration (NSFR)
Tier 1 capital ratio
High-Quality Liquid Assets (HQLA)
Hedge funds operate in a dynamic, ever-changing environment, so to assist managers in staying abreast of hot topics, we are launching a new article series aptly titled, The Hedge Fund Insiders Series. Running right here on HedgeIT during the month of August, we’ll cover a range of topics aligned to investor and regulator expectations, due diligence trends and operational best practices.
Contributors to the Series include senior leaders at Eze Castle Integration, CBRE Group, Inc., Haynes and Boone LLP, TriNet, Wells Fargo Prime Services and Willis Group Holdings Ltd.
Here is a sneak peak of some of the articles we will publish each Tuesday and Thursday starting this week:
Keys to Building an Effective Alternative Asset Manager and Prime Broker Relationship
Wells Fargo Prime Services
Excerpt: All business relationships are driven by the belief that both sides will receive a mutual benefit that will allow for a long term sustainable partnership between the firms. For a prime brokerage/alternative asset manager relationship this principle is no different. An alternative asset manager (“AAM”) looks for certain services from its prime broker (“PB”): financing, access to balance sheet, securities lending, Capital Introduction, research, Corporate Access, technology and other services that are essential to the AAM as it deploys its strategy. PBs are looking to generate an attractive after cost return based on the revenue generated from the client vs. usage of financial resources such as balance sheet and capital.
As summer officially approaches its halfway point, we at Eze Castle Integration hope that everyone is enjoying the beautiful weather. We also want to take this opportunity to remind folks to be mindful that your firm can still be vulnerable, even when the weather is warm and sunny. With heat and humidity rising, power usage is increased to keep offices cool, leaving firms susceptible to power outages. Additionally, with employee vacations prevalent during the summer and offices less crowded, there are fewer gatekeepers protecting your firm from social engineering threats and hackers. Let’s examine some of these factors a little more closely and offer some business continuity and security tips to keep your firm running at full speed in the summer heat.
Impact of the Heat: Power Outages
You are sitting at your desk and recording sensitive information for one of your clients, when all of a sudden your screen goes black, and the office is completely dark. Your firm has experienced a power outage caused by increased usage during the summer months, and you are not sure if your information and technology is protected.
The months of July, August and September are considered the “blackout season” as major cities use the most power during these months, leaving them susceptible to power outages. According to the Energy Information Administration, electrical power outages, surges and spikes in usage bring about more than $150 billion in annual damages to the U.S. economy.1
We take our thought leadership efforts seriously around here, and we’re always interested in educating our clients and partners about technology issues that can affect them. We’re also fortunate to be invited to speak frequently on a variety of hedge fund technology topics – most recently, cybersecurity. Our own Managing Director, Vinod Paul, participated in a panel session last month in New York dedicated to this topic.
Featuring speakers from Eze Castle Integration, Citrin Cooperman, Akin Gump, and CFO Consulting Partners, the panel spoke candidly about how the cybersecurity landscape is evolving for financial services firms and how they can begin to comply with recent recommendations from the SEC and FINRA. Following are some highlights from the event. If you’d like to listen to the podcast of the panel, click here.
Many firms question whether they need to do anything to comply with SEC cybersecurity recommendations. The answer is yes. And it’s more than technology firms need to employ.
Cybersecurity governance is a critical component. Who is in charge beyond the IT team? Someone at the firm needs to take accountability for this process and interface with various functions to ensure compliance. Ideally, a Chief Compliance Officer or Chief Information Security Officer should handle.