The information below was originally derived from the expert panelists who spoke at a 2010 Eze Castle Integration event. Given how important this topic is we’ve updated the article to reflect today’s market.
The subject of hedge fund operational due diligence is one that has risen to the forefront for both hedge fund managers and investors in recent years. Prior to the economic downfall in 2008 and high-profile investment scandals made infamous by Bernard Madoff and others, hedge fund due diligence was viewed as an unnecessary assignment.
Historically, there has been a general lack of transparency within the hedge fund industry; larger funds, particularly, used to balk at investor inquiries. They figured there would never be a shortage of investors, so there wasn't a need to spend extra time satisfying their needs.
Due diligence, as a process, did not gain significant importance until recently. in the past, the responsibilities associated with it would often fall under the role of a CFO, CCO or other executive – someone who had very little time to devote specifically to due diligence. But as the industry has evolved over the last several years, so has the need and desire for operational due diligence.
So what exactly has changed?
Successfully launching a hedge fund is a complex endeavor. Not only must emerging managers evaluate traditional deployment strategies, but consider current factors influencing the financial landscape.
Last week, Eze Castle Integration presented a webinar, “How to Launch a Hedge Fund,” featuring an expert panel that addressed some critical areas for consideration, notably capital introduction, legal and technology. There was quite a bit of content discussed during the 1-hour event, so we’ve pulled out some key takeaways.
Capital Raising (Paul Schultz, Director of Capital Introduction, Wells Fargo Prime Services)
Examine both content and context, i.e. cash inflows and outflows as well as the “big picture” that accounts for volatility
Be aware of the kinds of investors coming into the hedge fund space. Large and institutional pension plans are currently the largest investor base.
Be prepared when speaking to investors. Target those who have a history of being receptive to founder share class and who may offer lower management and performance fees.
Show investors that you have a 3+ year budget for working capital without any performance fees.
Have a well thought-out blueprint. Clarity and intention make all the difference.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing Videos And Infographics
Today’s the day.
The National Futures Association ("NFA") Interpretive Notice Regarding Information Systems Security Programs goes into effect. The NFA's Interpretive Notice to NFA Compliance Rules 2-9, 2-36 and 2-49 entitled Information Systems Security Programs requires Member firms to adopt and enforce written policies and procedures to secure customer data and access to their electronic systems.
The Cybersecurity Interpretive Notice applies to all membership categories--futures commission merchants, swap dealers, major swap participants, introducing brokers, forex dealer members, commodity pool operators and commodity trading advisors.
Rather than taking a ‘one-size-fits-all approach,’ the Cybersecurity Interpretive Notice adopts a principles-based risk approach to allow Member firms some degree of flexibility in determining what constitutes "diligent supervision," given the differences in Members' size and complexity of operations, customer types and counterparties.
But whatever approach is taken, the Cybersecurity Interpretive Notice requires Members to adopt and enforce an information systems security program (ISSP) appropriate to its circumstances.
Information Systems Security Program Key Areas
Similar to the SEC’s expectations, the Cybersecurity Interpretive Notice requires a written information security program to contain:
A security and risk analysis;
A description of the safeguards against identified system threats and vulnerabilities;
The process used to evaluate a security incident, including impact and incident response; and
Description of ongoing education and training related to information systems security for employees.Executive-level participation and annual review of the information security program is expected. Additionally, firms must provide employees training during the onboarding processes as well as periodically during employment.
Categorized under: Security Launching A Hedge Fund Hedge Fund Insiders Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Business Continuity Planning Trends We're Seeing
The following is the second excerpt from our new whitepaper, Launching a Hedge Fund: 10 Keys to Success. Don't forget to visit Hedge IT on Thursday as we reveal the last of our key considerations for starting a hedge fund.
To read part one, click here.
Develop an IT budget for your first 2-3 years.
Operating capital may be limited in the first few years after your launch, so careful budgeting and long range planning will serve your firm well. Your information technology budget should include priorities and figures for at least two to three years, including infrastructure/hardware and software requirements. Some questions you’ll want to consider:
How many offices are you launching with? Do you plan to open additional offices in the near future?
How many users do you have on day one? How many can you expect to have in years 2 and 3?
Where are your offices located? Are there cost differences between domestic and international offices?
What are your trading practices and how does this impact your budget?
What kinds of systems do you need? (Order Management, Portfolio Accounting, Risk Management, CRM, etc.)
Ensure your technology budget coincides with your firm’s growth plan. Do you expect to grow quickly? Open new offices? Expand internationally? You will need to account for these changes.
Understand hedge fund regulations and how they affect your firm.
Governmental oversight of the financial industry has evolved dramatically in the last decade. Hedge funds, private equity firms and registered investment advisers now operate in a world where they are beholden to regulatory bodies with growing expectations and requirements. When launching your hedge fund, you’ll need to be clear up front with any responsibilities you may have to any applicable agencies – in the United States, that means the Securities and Exchange Commission (SEC). Are you required to register? If so, represent your firm accurately and be descriptive of your operations. If not forthcoming, you may open up your firm to serious regulatory and criminal prosecution.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Software Trends We're Seeing
Today's hedge funds are facing an environment defined by regulatory pressure, investor demands and fierce competition. For hedge fund startups, the challenges are even greater, so too are the demands. Successfully operating a new startup beyond the first year is a feat many managers struggle to accomplish, therefore it's critical for emerging managers to gain a full understanding of the industry that awaits them and the hurdles they should expect to face.
While the list of considerations is surely long for new managers, we've whittled it down to 10 Keys to Launching a Hedge Fund Successfully - a guide for new startups to use when setting off on their new journey.
Take a look at our latest video for a quick look at our 10 Keys to Success. And be sure to come back to Hedge IT later this week when we'll be sharing an excerpt from our brand new whitepaper on the same topic!
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing
In today’s competitive market, research management software (RMS) has become a must-have integrated feature for investment management firms. Significant benefits offered via RMS have caused a ripple effect of soaring adoption rates across the global investment industry. In this article we’ll examine how adopting a research management solution could benefit your firm.
With offices, colleagues and clients spread across the world, firms need to consolidate data in an organized fashion. From meeting and call notes, to audits and analyst reports, the demand for readily accessible information is ever burgeoning. Storing information within multiple programs and folders not only welcomes disorder and the opportunity for digression in the workplace, but also increases costs and wastes valuable time. This prehistoric method of aggregating data has been replaced with advanced RMS, a much more viable, flexible and comprehensive solution. Hosting a firm’s data within a user-friendly, central repository simplifies processes, optimizes productivity and uncovers new business opportunities. When selecting a RMS, managers may consider a generic or industry-specific product. While both options present benefits, the latter assimilates seamlessly with an investment firm’s daily workflows, terminology and diverse range of data. An ideal RMS will also offer customization, accessibility and integrate with other applications, such as Outlook.
On December 9, 2015, Wells Fargo Prime Services and Eze Castle Integration hosted a panel on cybersecurity to discuss the current landscape. The panel featured leading industry experts including:
Eldon Sprickerhoff, Founder & Chief Security Strategist, eSentire
Stuart Levi, Partner, New York, Skadden, Arps, Slate, Meagher & Flom LLP
Vinod Paul, Managing Director, Eze Castle Integration
Timothy O’Brien, Supervisory Special Agent, Cyber branch, Federal Bureau of Investigation – New York Office.
Marc P. Berger, Partner, Government Enforcement, Ropes & Gray LLP
Marc Berger’s opening statements emphasized the extent of the cybersecurity threat currently facing firms across a wide swath of industries. He quoted FBI Director James Comey, who stated: “There are two kinds of big companies in the United States. There are those who’ve been hacked … and those who don’t know they’ve been hacked ….” (FBI Director James B. Comey, 60 Minutes, CBS TV Interview, October 5, 2014). Alarming statistics from the Ponemon Institute’s 2015 Cost of Cyber Crime Study, conducted with HP Enterprise Security, found that the average cost to resolve a single cybersecurity incident is $1.9M, and the average time to resolve is 46 days. Perpetrators range from nation-state-sponsored hackers and disgruntled/rogue employees to organized crime units, activists, and other thieves.
With a new year brings new excitement and new ambition. Across the hedge fund and alternative investment industry, firms are devising new strategies and implementing plans to drive growth and increase returns. In 2016, we expect the following industry trends will play a role in shaping many of the decisions hedge funds and other investment management firms make.
Hedge Fund Cybersecurity 2.0
Last year, cybersecurity took center stage across the investment community, and there is little doubt that it will continue to dominate in 2016. If we can assume that firms used 2015 to shore up security practices and have, at minimum, established a baseline for protecting firm assets with firewalls, password protections and penetration testing, we can expect 2016 to take cyber preparedness to the next level in the form of advanced features and analytics including phishing and social engineering tests, designed to increase the level of preparedness held by firm employees. With cyber-attacks increasing in sophistication, firms will need to spend time in 2016 working with managed providers and internal IT teams to continue the education process and identify strategies to outsmart hackers.
Happy New Year! Here at Hedge IT, we’re looking forward to sharing more educational articles with you in 2016, but before we do, let’s take a look back at our readers’ favorite articles from last year.
Cybersecurity Regulations Take Center Stage
The Securities and Exchange Commission took major strides to regulate investment firm cybersecurity practices in 2015, with the release of multiple guidance updates (Click for the September 2015 update). At a high level, the SEC has identified the following six areas as paramount for investment firms to demonstrate preparedness:
In December 2015, we participated in a Wells Fargo Prime Services cybersecurity event and the panelists outlined everything your hedge fund needs to know about the SEC’s security expectations. Read “SEC Cybersecurity Checklist: 6 Areas Your Hedge Fund Better Have Covered” for the full scoop.
Earlier this week we presented at a Wells Fargo Prime Services breakfast briefing on cybersecurity. During the discussion, Stuart Levi of Skadden reminded attendees that the SEC has clearly defined (and communicated) its cybersecurity expectations. He recapped the following six areas advisers must have covered to demonstrate preparedness to regulators.
1. Risk Assessments
4. Access Control
5. Vendor Management
6. Information Sharing
Here's Eze Castle Integration's take on these focus areas:
#1 Risk Assessments
The April 2015 SEC Cybersecurity Guidance Update goes deeper into risk assessments expectations. Here are some key cyber risk assessment takeaways:
Define what confidential data is and determine how it's protected.
You must also understand where your data is located, how it is collected and who and what technology systems have access to it.
Registered investment advisers should have a clear understanding of the threat landscape, including potential internal and external risks as well as unique vulnerabilities specific to the firm. Evaluate a variety of potential scenarios as well as their likelihood to occur.
Once firms understand the risks facing their organization, they must conduct assessments of the existing controls and processes to ensure they account for the risk landscape and put the appropriate safeguards in place.
Be sure to understand the potential impacts of various cyber risk scenarios and outline specific protocols for incident response and quick resolution. The impact of cybersecurity incidents can range from financial to technological to reputational.
Finally, testing and assessing the governance structure, including administrative and technical safeguards, is key to ensuring effectiveness.
Gone are the days of management simply outsourcing responsibility to third-party experts and trusting them blindly. Telling the SEC, “we hired the best security consultant,” won’t cut it. Today management must understand their firm’s security posture and be able to outline the safeguards that are in place to minimize risk.
Additionally, management must instill the importance of security preparedness in all employees by making it a top-down priority.