This article first appeared in HFMWeek's Special Report: How to Start a Hedge Fund in the EU 2015.
HFMWeek catches up with Eze Castle Integration’s executive director, Dean Hill, to discuss the importance of selecting the right business service providers and the key technology factors new funds must consider when starting out in the EU.
HFMWeek (HFM): Are you seeing a healthy market for new hedge fund launches in the EU?
Dean Hill (DH): Yes. I think going into 2016 we will see an increase in terms of the amount of new hedge fund launches across the UK and European markets. Not only are these launches coming more frequently, but their size, structure and launch AuM is greater than anything we have seen in the last two-to-three years. It is certainly on the uptake.
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.
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.
Hedge fund outsourcing is not a new trend, as buy-side firms have long dispersed the responsibility of many functions to third-party service providers more adept and accomplished at said functions. Technology, for example, is an area where many firms choose to leverage outsourced providers to manage complete or partial infrastructures, support projects or supplement on-site IT staffs. The benefits to outsourcing are numerous, but the true measure of a successful service provider relationship comes when an investment firm’s level of risk in using that provider is low.
Risks are everywhere, particularly in today’s cyber-focused environment. But the risk a hedge fund undertakes when outsourcing a function of its business to a third-party is enormous. Not only is the firm relinquishing control to an outside company, it also takes on the added burden of managing that company, in addition to its own.
It’s one thing to put faith in your service providers to do their jobs effectively. It’s another to ignore your own firm’s responsibility to manage that third party as a means of protecting your own firm. Successfully managing risk associated with third-party service provider relationships is a full-time job, especially for financial services firms working with dozens of various parties. Here are a few tips to help your firm properly manage third-party service provider risk:
In the context of information technology, social engineering refers to the act of tricking people into divulging confidential or sensitive business information, and breaking security policies. This form of attack infiltrates companies by targeting their weakest access point, which predominantly is a firm’s employees.
The Art of the Phishing Con
Let’s examine a popular technique for social engineering known as phishing. In a phishing scheme, the hacker broadly disseminates a fraudulent email with aim to acquire sensitive data, such as, login credentials, IT resources or banking information. The message may request the recipient to submit personal information or to click on a link embedded with malware. Although this approach rarely dupes sophisticated users, a distracted employee could make one mistake and compromise a firm’s entire network.
Did you know that the average cost of a data breach is $3.8 million? Or, that the consolidated average cost incurred for each record of lost or stolen sensitive and confidential information has increased six percent (6%) since 2013 from $145 to $154? A recent study of 350 companies spanning 11 countries reported the aforementioned statistics, representing a twenty-three percent (23%) increase in data breach consolidated costs.
We take great pride in helping solve our clients' IT needs and highlighting recent success stories. Our client Wexford Capital LP is one such example who selected the Eze Private Cloud platform for its fully managed, enterprise-grade environment. Wexford Capital gravitated away from its on-premise IT infrastructure and towards the Eze Private Cloud for its multifaceted suite of services and measurable benefits, such as, cost optimization and increased business agility.
Dante Domenichelli, Chief Operating Officer at Wexford Capital, said, “Eze Castle Integration delivers the comprehensive services and expert, reliable support we had been searching for in an IT provider. Transitioning to the Eze Private Cloud has enabled seamless business expansion and improved our operational efficiencies while providing assurances of performance and security.
Written by Ledgex Systems, the following article originally appeared in the Canadian Hedgewatch under the title, "2015 Trends: Investor-centric Approaches for Hedge Fund Growth."
Winning Hedge Fund Strategies
In today's competitive market, winning investor assets is no easy feat. Hedge funds must be nimble and meet increasing investor and regulatory demands, while remaining cost efficient and advancing operations. To foster and sustain these relationships, it’s vital that managers and investors reach equilibrium in regards to their interests and expectations.
Achieving this balance is an ongoing challenge; however, it also offers firms opportunities for improvement. The following are suggested focus areas for hedge funds to differentiate themselves from the competition and attract and retain investors.
Bespoke Fund Productization
Managers that strive to enhance offerings consistently to attract principal growth must focus on investors’ needs during product ideation and development. Aside from exceptional client service, investors expect high performance, availability, transparency and seamless integration with client relationship management data. Hedge funds that invest in building bespoke solutions suitable for investor operations will meet expectancies better while increasing efficiencies and reducing the risk of underperformance.