They say the more things change, the more they stay the same. Turns out it’s a pretty accurate assessment of the hedge fund industry then and now.
You see, back in 2011 we hosted a “State of the Hedge Fund Industry” event that yielded some interesting trends and perspectives, and we thought it might be fun to not only look back at those trends, but compare them to what we’re seeing in today’s industry – more than five years later.
Like I said: the more things change, the more they stay the same.
Hedge Fund Market Trends & Challenges
THEN (2011): It’s been an interesting year thus far for hedge funds and other alternative investment firms, as inflows have been high but performance low. In addition to performance challenges, hedge funds continue to deal with increased competition for investments, and thus asset-raising remains a hurdle for many funds – regardless of their size or strategy.
It’s time to take another close look at the results of our 2016 Private Equity CTO Survey, this time with a careful eye on how private equity firms are leveraging outsourcing and cloud services.
Private equity outsourcing is growing in popularity – and we discussed many of the reasons why at length in a September webinar which you can listen to here. Our survey findings tell us that the average private equity firm is outsourcing about 30 percent of IT, with of course, some firms outsourcing less frequently and some outsourcing more.
On the whole, most firms are leveraging outsourced third party providers for between 20 and 40 percent of their IT functions. Firms managing less than $100M in assets are the most likely to outsource greater portions of their IT services, likely given their lack of internal staff and resources.
Overall, firms’ propensity to manage technology via in-house resources, outsourced providers or contract work is expected to stay consistent in 2017, as evidenced by the graph below.
As you probably recall, our 2016 Private Equity CTO Survey – which we released at the end of November – highlights key IT priorities and investment areas driving private equity firms in 2017. And while we shared some high-level findings at the outset, we’d like to take the opportunity to dig a little deeper into some of the survey results over the next two weeks. Since the survey itself covered four primary areas, our next four Hedge IT articles will examine each of these areas independently and highlight some of the most interesting and thought-provoking findings.
To kick us off, let’s start by taking a look at some critical business priorities for private equity firms in 2017.
Drivers for Private Equity IT Investments
We all know and appreciate how technology can impact our day-to-day operations. For private equity firms, advances in technology have enabled their businesses to become more efficient and drive growth across the entire organization.
When asked to identify the top drivers impacting IT spend in the next 12 months, survey respondents highlighted the need for increased protection against growing cybersecurity threats, a desire to improve the investor/client experience, and the goal of improving efficiencies by refreshing outdated or legacy technology.
The best New Year resolutions are the ones you can stick with. So here are our three simple technology resolutions for 2017 which you can use in your personal and professional life.
Resolve to Change Your Passwords, Make them Unique
Passwords are the keys to your virtual kingdom so treat them as such. These days having a password is not enough. Users must have complex passwords that incorporate letters, numbers and symbols and that change often. Here are some other password tips:
Substitute letters for numbers and use phrases to remember and create unique passwords. For example, “I love Gmail” can become “!l0v@gm@!l” – something you’ll remember but is hard for someone to guess.
Avoid using personal information in your password that may be easy for someone to figure out. Things to avoid include your name, address, date of birth, pet’s name and children’s names.
Don’t use the same password for all your accounts – switch it up. For example, you can use the same word but change it up by capitalizing different letters or substituting letters for numbers.
Be sure to change your password often. We recommend changing a password every 30-90 days. Many of our clients already have automated procedures in place to enforce this policy.
Check Your Social Media Privacy Settings & Be Social Aware
The rise of social networking online has reduced privacy expectations across the globe. We must be more aware of the automaticity of our behaviors and tendency to trust sites while browsing the web. In this tug-of-war between security and connectivity, users can regain control of their personal information. Instead of dispensing reams of sensitive data, choose to keep what’s private, private. Adopting an alert awareness while interacting on social platforms and thinking twice before your next “like” could go a long way.
Happy New Year! Seeing how the calendar now reads January (we're still in denial, too) and there are a number of weather systems being monitored across the US, we thought it might be best to kick off the year here on Hedge IT with some helpful weather-related business continuity tips.
Here are eight to keep in mind as the next winter storm approaches.
1. Determine how/where your employees will work in the event of a winter weather scenario.
Some firms opt to identify a secondary work site, but in the event of a widespread or regional event, you may find that location is inaccessible also. You should also consider if transportation is/will be impacted by the weather. If road conditions are bad or public transportation is shut down, employees will have to remain home.
If your firm supports remote access capabilities, ensure employees are prepared with the necessary infrastructure, workload expectations and communication tools.
2017 is already shaping up to be an interesting year. With a new presidential administration taking office and the hedge fund industry coming off the heels of a challenging year, there’s a lot to keep an eye on. We recently hosted a panel with law firm Morgan Lewis to discuss these and many other topics as part of our “2017 Outlook for Hedge Funds: Risk, Regulation and Technology” event.
Read on for some of our panel’s key takeaways.
2017 Regulatory Outlook
While little is known about how a Trump presidency will operate, there could be potential tax savings for managers depending on how the administration chooses to regulate Wall Street.
Firms should expect to see reforms with the Dodd-Frank Act and the Volcker Rule, which could add more competition into the marketplace if limits on bank investments are adjusted.
SEC Focus Areas
Top six areas of focus for the Securities & Exchange Commission will likely be: (1) expenses and fees, (2) trade allocation, (3) material non-public personal information, (4) valuation processes, (5) operating partners and due diligence, and (6) security, privacy, insider trading and business continuity.
Cybersecurity is not necessarily part of every SEC examination, however, the bar will continue to be raised in terms of preparations firms will need to employ.
In 2016, the SEC provided additional guidance on business continuity and transition plan requirements, highlighting the need for hedge fund and financial firms to maintain their fiduciary responsibility to their clients and investors.
Categorized under: Security Cloud Computing Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Outsourcing Infrastructure Business Continuity Planning Trends We're Seeing
Operational due diligence meetings have become impactful moments for hedge funds to impress both current and potential investors. Firms have the ability to answer questions, alleviate fears and market themselves in a one-on-one setting that affords more opportunity than a completed due diligence questionnaire and an up-to-date performance sheet.
But how can today’s hedge funds truly set themselves apart and impress investors during these ODD meetings? Here are five ways:
1. Demonstrate your knowledge of and commitment to regulatory compliance.
Increasing regulatory oversight of investment firms has been a consistent trend over the course of the last few years, and it can be a challenge for hedge funds to keep abreast of changing legislation and regulator expectations. Disclosure and reporting requirements under the Investment Advisers Act of 1940, record-keeping requirements under the Dodd-Frank Act, and growing cybersecurity recommendations as part of the SEC’s ongoing inquiry are just a few of the initiatives to keep track of. But demonstrating to investors that your firm has knowledge of these regulations and takes them seriously will serve you well.
Whether your firm is compliant to the SEC, FINRA, NFA, CFTC, FCA – phew! – or another regulatory body, it’s imperative that you take the time to fully understand your firm’s legislative requirements and, in writing, show investors your level of preparedness. For example, if you’re a registered investment adviser with the SEC, are you aware of the proposed rule that would require firms to implement business continuity and transition plans? Have you compiled a document that outlines the SEC’s 28 points identified in its cybersecurity risk alert? Coming to your next investor due diligence meetings with this knowledge and the appropriate documentation will demonstrate that you take regulatory compliance seriously and are equipped to comply with the necessary requirements facing your organization.
With October being cybersecurity awareness month it is an important time to ensure your firm and employees are aware of and using best practices, and security policies and procedures. Risk mitigation is needed to protect both the firm and its employees from savvy hackers and attacks. Data breaches continue to wreak havoc on businesses, and the cost is continuously rising. According to the Ponemon Institute, the total average cost of a data breach is now $4 million, up from $3.8 million in 2015. Hackers have everything to gain while your firm bears reputational and operational harm.
While companywide policies should reflect long-range expectations and corporate best practices, they should also include tactical recommendations that employees can follow to ensure they are complying with the company’s overall risk strategy. To get started here are just a few pieces of advice we offer our investment firm clients and remember to not only inform employees on what to do, but also what not to do.
As of Wednesday, October 5, 2016, computer models continue to show Hurricane Matthew traveling along the southern eastern states starting in Miami early Friday morning and reaching Norfolk, VA early Monday morning. At this point, it’s too early to determine if Hurricane Matthew will head out to sea once it reaches Virginia or continue up to the Northeastern states.
Whether you’re in the south or north, now is the time to prepare your office and home for a potential impact of the storm. The following is a high level review of continuity steps you should consider:
Communicating with Employees
If you haven’t already, create a communication process to ensure you can notify your employees and/or clients. For internal communications, you can use an employee call tree which can be created in word or excel, create a distribution list in your mobile device or subscribe to an automated notification system. Firms must ensure messages are communicated to employees (or clients) properly and in a timely manner. Using a process will ensure all employees receive the same message immediately via email, phone call and/or text message. Whichever method selected, ensure there is a dedicated employee that is aware of their role and prepared to send the communication when appropriate.
Employees’ Work Locations
If your plan is to have employees work remotely should an incident occur, steps should be taken to ensure that employees will have access to all required resources for performing their daily tasks. This includes checking to see that the company has adequate Citrix licenses and having employees do a test run.
To avoid questions and confusion, work location procedures should be clearly communicated to all employees in advance to ensure that any unexpected challenges are dealt with before any disaster.
Employee Remote Access Test
Before Hurricane Matthew reaches your office or home, validate employees have all of the required resources to work remotely. You can validate this process by having key employees do a remote access test to ensure any issues are addressed before an incident impacts your office. Here are some recommended steps to have your employees follow as part of the testing process:
Validate successful communication to internal and external dependencies
Confirm full functionality of required applications
Perform all critical business functions
Confirm access to vital records (key files and documents)
Ensure employees can receive incoming calls, while working remotely, by activating phone recovery procedures or using phone redirect instructions
Disaster Recovery Activations
Depending on the impact of Hurricane Matthew, some firms may need to activate their disaster recovery systems. We recommend you review the activation procedures now to ensure a smooth transition of the systems, if needed.
The SEC and other financial regulatory bodies have increased transparency demands with regard to cybersecurity in recent years, and as such, registered investment advisers face a long list of requirements to meet on the technology and operational front. In each of its cybersecurity guidance updates, the SEC has called out the need for hedge funds and private equity firms to "indicate whether they conduct periodic risk assessments to identify cybersecurity threats, vulnerabilities and potential business consequences", and if so, who conducts them and how often.
Risk and vulnerability assessments have not only become must-haves for financial firms due to these regulatory initiatives, but also as a result of growing investor calls for transparency. Side note: If you missed the news, Eze Castle Integration has expanded its cybersecurity consulting services to deliver comprehensive vulnerability assessments (as well as penetration testing and third party due diligence audits) across both internal and external networks. Click here to read more about Eze Vulnerability Assessments.
We field a lot of questions about what exactly a security vulnerability assessment is, so we thought it best to review what such a test entails.
Here’s a quick overview.
The type of risk assessment typically associated with information technology/security is an external vulnerability assessment. Essentially, this is the process of identifying and categorizing vulnerabilities related to a system or infrastructure. Typical steps associated with a vulnerability scan or assessment include:
Identifying all appropriate systems, networks and infrastructures;
Scanning networks to assess susceptibility to external hacks and threats;
Classifying vulnerabilities based on severity; and
Making tactical recommendations around how to eliminate or remediate threats at all levels.