The following article is part of our Emerging Managers Insight Article Series. Read more articles from the Series HERE.
What are the keys to starting a hedge fund? How does an emerging manager ensure success in a constantly-changing world of legal and regulatory guidelines, increasing investor expectations and evolving technology platforms?
In order to answer these questions, Asset TV and the Hedge Fund Association recently gathered an expert panel for a video roundtable focused on hedge fund startups. Our own Managing Director, Vinod Paul, was featured on the panel, along with experts from The Kingdom Trust Company, Eisner Amper LLP, and Thompson Hine LLP. Watch the video below to learn more about a variety of topics important to new fund launches, including:
Technology Infrastructure Priorities
Dodd-Frank & Regulatory Requirements
Cybersecurity is one of the hottest buzzwords in the industry right now – but it’s also a serious concern for hedge funds and investment firms. So much so that the Securities and Exchange Commission has taken formidable steps in 2014 to assess the cybersecurity landscape and provide guidance to registered broker dealers and investment advisers around what policies and technical safeguards should be in place to protect them.
With so much information being shared and so many industry changes around this topic, we asked our cybersecurity experts – Steve Schoener and Lisa Smith – to talk us through what’s happening in the world of hedge fund cybersecurity and provide direction for firms looking to comply with the SEC’s latest guidelines. Following is a brief recap of a webinar we held earlier this week doing just that. To watch the full replay of the event, click here.
Industry Update: How did we get here?
Before we dive into what expectations the SEC has for registered firms in regards to their cybersecurity practices, let’s first take a look at how we got to this point. Among the host of high-profile security incidents we’ve seen dominate the news of late, these few resonate the most:
Dec 2013: Target data breach results in customers’ personal data stolen
Feb 2014: Crytolocker ransomware holds data hostage
April 2014: Heartbleed vulnerability poses potential data exposure threat
April 2014: Internet Explorer vulnerability puts technology at risk, leaves PCs open to being hacked
As a result of these and other security concerns, the SEC has taken steps to ensure hedge funds and investment firms are prepared for the next incident. In a Risk Alert issued last month, the SEC announced it will perform examinations of at least 50 registered firms and also provided a lengthy sample questionnaire for firms to use as a guide in their preparations. The seven-page document addresses various aspects of a firm’s technical infrastructure and corporate policies and sets expectations that firms should meet a set of standard criteria in order to comply with the new guidelines.
The following article is part of our Emerging Managers Insight Article Series and was contributed by CFS Group. Read more articles from the Series HERE.
There are many layers to creating a successful launch of a hedge fund, and often one that is overlooked is implementing the right furniture, while keeping in mind budget, timeline and dimensional restraints for your new office space. For someone starting a fund, and relying on your own capital, creating an office space within a budget is essential. In order to do so, you must partner with a furniture dealership that understands the marketplace and has the creativity to provide a solution that is light on the wallet but has the feel of stability and success.
As you would expect, just like many other businesses, the commercial furniture industry is a very competitive, relationship-driven sale, and unfortunately the client is usually on the raw end of the stick. Let’s give an example:
Hedge fund A has six traders, and in their mind “we need a trading desk.” But the fund's users only have one PC and two monitors each, which equates to a minimal technology requirement. The fact is that a full-blown trading desk can range from $2,000 to $5,000 (for height adjustable product) per user.
Here is what the fund manager needs to know. There are other options that will adequately handle your technology, save you up to 60-70% and give you the look and feel of a trading desk solution - savings of $10,000 just by having the proper relationship and information.
Regulatory oversight, competition for assets and investor due diligence concerns have left investment management firms with more pressure than ever to succeed. And technology innovations like the cloud have turned the traditional hedge fund operations model on its head. The questions remain: how do fund managers evolve in 2014 and meet the increasing demands of the financial services industry? And how do firms compete with the incoming crop of new launches that continue to emerge and vie for investor allocations?
The following presentation takes a closer look at these key transformations within the hedge fund industry and examines the shift firms are making from traditional, on-premise IT infrastructures to cloud-based platforms. It also highlights managed disaster recovery services and offers best practices for security in the cloud.
Take a look, and if you can, join us in New York on Tuesday, May 6 as a panel of experts discusses these topics and more at our Transformation seminar.
In the latest news coming out of the security world, Internet Explorer has been found to have a serious bug that could give hackers access to your PC. The vulnerability, known as CVE-2014-1776, affects IE versions 6 through 11 and could allow a hacker to mirror your rights as a user – and more importantly, as an administrator.
According to PC World, “that means a successful attacker who infects a PC running as administrator would have a wide variety of attack open to them such as installing more malware on the system, creating new user accounts, and changing or deleting data stored on the target PC. Most Windows users run their PCs under an administrator account.”
The bug is serious enough that the U.S. Department of Homeland Security is recommending Internet users rely on other browsers until an IE update is available. The bug is particularly distressing for Windows XP users still remaining after Microsoft discontinued support for XP earlier this month.
It was widely predicted that XP’s end-of-life would be an opportunity for hackers to exploit the OS, since security updates are no longer being pushed to users.
Categorized under: Security
The following article is part of our Emerging Managers Insight Article Series and was contributed by Wells Fargo Global Fund Services. Read more articles from the Series HERE.
Traditionally, for most investors, the main concern when investing in a hedge or private equity fund was whether the manager could generate a sufficient level of return for an acceptable level of investment risk.
But operational matters have increased in importance and operational due diligence has now evolved to the point that many investors will reconsider an investment on operational grounds alone, regardless of the return profile.
Operational risk can take many forms, but valuation is a good place for investors’ initial focus: are the holdings of the fund accurately valued, and is there a process in place to ensure that they are accurately valued at each dealing period?
Valuation risk is particularly critical for more complex strategies, such as structured credit, where the risk of pricing irregularities is significantly higher. However, it is also important to review and understand pricing policies and procedures for strategies that trade listed securities. For example, it is useful to know whether the manager marks their equity longs at the bid, mid or close and, if it is the mid, if the manager determines the impact on the portfolio if priced at the bid.It is also important to understand if adjustments are made for large positions, less liquid holdings, or for securities that trade less frequently.
How the holdings of a fund are valued is important for many reasons: it drives the net asset value (NAV); it sets the price for subscriptions and redemptions; and it determines the level of performance fees. While this point may be obvious for most investors, many investors are often unsure of what detailed valuation related questions to ask the manager and, equally as important, the administrator who is responsible for producing the NAV.
Categorized under: Launching A Hedge Fund
The SEC last week provided even more clarity into its growing focus on cybersecurity at broker dealers and registered investment advisers. A key takeaway in a Risk Alert issued on April 15, 2014, is that the Office of Compliance Inspections and Examinations (OCIE) will be conducting examinations of more than 50 registered broker-dealers and registered investment advisers, focusing on areas related to cybersecurity.
In order to help compliance professionals prepare and assess their firms’ responsive cybersecurity preparedness, OCIE has created a sample cybersecurity request document that outlines the types of questions firms can expect. OCIE is good to point out that these questions should not be considered all inclusive of the information that OCIE may request. OCIE will alter its request for information as it considers the specific circumstances presented by each firm’s particular systems or information technology environment.
You can find the Risk Alert and questions HERE.
As part of our Emerging Managers Article Series, today’s article looks at technology considerations for launching a hedge fund. The technology landscape is changing quickly, especially with the adoption of cloud services and the heightened regulatory focus on cybersecurity. So we’ll dive into these two topics as well as touch on preparing for the inevitable disaster and common technology mistakes to avoid. Read more articles from the Series HERE.
The Cloud: Every Hedge Fund is Doing It
Here at Eze Castle Integration, we see that 9 out of 10 hedge fund startups are selecting a cloud-based solution versus a traditional on-premise solution. If you aren’t already sold on the cloud, here are a few reasons we typically see clients select the cloud:
Easy and Complete IT Package: Cloud computing can support front-, middle- and back-office functions – everything from business applications and client relationship management systems to data management solutions and accounting systems
Cost Containment: CapEx to OpEx: While building out a Comm. room or data center requires capital expenditures, using an external cloud service that offers a pay-as-you-go service falls into ongoing operating expenditures. The transition to a cloud service provides many cost-savings beyond just eliminating the need to purchase and refresh equipment.
Improved Flexibility and Scalability of IT: Cloud computing is uniquely flexible and scalable, operating on a utility basis - allowing firms to pay as they go and only for the resources they will use.
Simplified IT Management = Less Maintenance: With cloud services, firms no longer need to handle server updates, patches, hardware installs and other computing maintenance issues. This saves firms from having to hire dedicated IT resources or allows them to focus IT staff on higher value projects.
Meeting the SEC's Cybersecurity Expectations
Regardless of whether your firm opts for an on-premise solution or the cloud, security is fundamental when considering a fund’s technology setup and network infrastructure. It is so important that the SEC this month issued a risk alert providing additional clarity into how it will examine registered investment firms regarding their cybersecurity practices (Download the sample SEC security questions here.).
Categorized under: Launching A Hedge Fund
On January 9, 2014, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) published its 2014 examination priorities for its National Exam Program (“NEP”). While the examination priorities include multiple areas that OCIE believes are higher-risk areas of the business and operations of investment advisers, this article focuses on the NEP’s initiative (the “Initiative”) to conduct focused, risk-based examinations of investment advisers who have been registered with the SEC for at least three (3) years (including non-U.S. advisers) but have not yet been examined by the NEP and are not subject to the “Presence Exam” initiative discussed herein (“Covered Advisers”).
The examinations conducted by the NEP in accordance with the Initiative focus on two approaches. The first approach consists of risk-assessment reviews which allow the NEP to obtain a better understanding of each Covered Adviser and include a high-level review of the Covered Adviser’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on the Covered Adviser’s disclosure documents. The second approach utilizes focused reviews which emphasize certain high risk areas of the Covered Adviser’s business and operations, including the following:
Compliance Program: NEP staff will examine the Covered Adviser’s compliance program and the effectiveness of such program (including a review of its books and records, even such records existing prior to such Covered Adviser’s registration with the SEC) to determine if a Covered Adviser has adequately identified conflicts of interest and compliance-related risks, adopted appropriate policies and procedures to mitigate and manage those conflicts and risks, and empowered a competent chief compliance officer to administer the compliance program;
Categorized under: Launching A Hedge Fund
The following article is part of our Emerging Managers Insight Article Series and was contributed by Rothstein Kass. Read more articles from the Series HERE.
In Part One of Rothstein Kass’ Should I Go With the Flow Into Liquid Alts? Critical Questions for Alternative Managers Weighing a Move Into the Retail Space, we examined five key questions and critical considerations to help guide alternative investment managers through the decision-making process when weighing a move into the growing liquid alternatives market, including:
Will a registered product cannibalize my existing private fund business?
Will my strategy fit inside a mutual fund?
Do I understand the distribution landscape?
Should I use a stand-alone trust or a series trust? If a series trust, how do I choose the right one?
Is a registered fund too expensive?
In Part Two, we conclude our examination of several other key questions and considerations.
6. Do I understand all my product options?
All registered funds are not created equal. There are many different varieties of mutual funds and closed-end funds, each with different:
Reporting requirement, and
Managers should have an understanding of all the options and determine what works best for their strategy and their business.
Categorized under: Launching A Hedge Fund