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Hedge Fund Industry Outlook: What can you expect in 2013?

By Dina Ferriero | Tuesday, February 5th, 2013

Last week, we hosted a webinar on the Hedge Fund Industry Outlook for 2013 with speakers Deborah Prutzman, CEO of the Regulatory Fundamentals Group, and Mary Beth Hamilton of Eze Castle Integration.  Following is a recap of the key topics discussed around operational due diligence, regulations and technology trends.

Insights from Deborah Prutzman, Regulatory Fundamentals Group

2012 was a year marked with significant regulatory changes in the world of investment management. So far, we’re expecting to see more of the same in 2013. This time, the direction and manner of change will likely be more predictable.  Some important themes we expect will permeate throughout the year include:

HF Industry outlook webinar

  • A need for trust

  • A focus on governance

  • Pensions searching for yield

  • Central counterparty risks

  • An arms race between regulators

  • A need to focus on supervisory processes around marketing

External Factors Driving Change in 2013
As always, investors are hungry for yield, but they are smarter now thanks to lessons learned in the post-Madoff era. This year, the “typical” investor that invests in alternatives is changing. We expect the importance of institutional investors to increase, while pension funds and endowments start to seek greater allocations.

So, what does this mean? First and foremost, we’ll see an increased focus on operational due diligence amongst hedge funds. Additionally, this will raise the stakes for asset managers. If word gets out to the media that a high net worth individual lost money in a questionable investment scenario, the media and the public will not see this favorably. But, if a teachers union or group of nurses loses pension funds, there will likely be far greater backlash.

Major Changes to Look For
2013 is likely going to be the year of regulatory enforcement in the alternatives industry. We’re seeing that the regulatory bodies that govern this space are especially invigorated right now. The SEC has a new Asset Management Unit in place, and is changing its approach to focus more on conflicts, human motivation and deep knowledge of the industry. We expect much of the same at the CFTC as well. Other US regulators, such as the FERC (Federal Energy Regulatory Committee) and state governance groups will start to play a more influential role this year as well.

Another change to look for is the tendency for regulators to focus on the personal liability of firms’ senior management. The media is applying pressure to the industry to hold these executives accountable for the inner workings of their funds, and popular belief is they should be taking a more supervisory role going forward.

In 2012, we began to see increased litigation coming from the investor base and we believe this will continue to grow, especially as the “whistleblower” phenomenon gains momentum. Last year, the SEC received 3,000 tips from whistleblowers (about 8 per day) – a number that is expected to increase in 2013.

What Adjustments Should You Make?
Develop an enterprise-wide understanding of needs as they pertain to the firm’s strategy, governance, operations and technology. Requirements should be innately built into the firm, using clear governance and strong policies. As a best practice, we recommend the following framework for governance:

  1. Perform a comprehensive risk assessment.

  2. Implement a process for initiating business changes and new activities.

  3. Implement a process for monitoring for external environmental changes (such as taxes, laws, best practices, etc.)

  4. Ensure your staff has a clear understanding of expectations.

This will result in a more mature, agile fund that is in a better position to navigate the tough competitive environment and upcoming regulatory changes.

Insights from Mary Beth Hamilton, VP of Marketing, Eze Castle Integration

DR & BCP In the Spotlight
Recent events have tested the preparedness of firms across the United States and internationally.  From the London Olympics and summer power failures to Hurricane Sandy and the recent flu season concerns, the need for well thought out DR and BCP is pretty clear.

It is important to note that each of the scenarios above impact a business in different ways and, highlight the importance of conducting thorough risk analysis and scenario planning when developing a disaster recovery and business continuity plan.  It is important to think through the different types of scenarios that can impact your firm.

Movement to the Cloud
Adoption of cloud services by hedge funds and alternative investment firms continues to increase at a rapid rate.  Eze Castle estimates that 40% of our clients are using some sort of cloud service.  A 2012 independent cloud market survey found that nearly 8 in 10 hedge funds & investment management firms are using the cloud for at least some of their IT infrastructure or application needs.

  • The key reasons firms are moving to the cloud are:

  • To reduce IT infrastructure investment/costs (transfer from CapEx to OpEx)

  • To increase the speed of technology deployment

  • To simplify IT management and support

  • To improve IT flexibility and scalability of on-demand resources

  • To take advantage of built-in disaster recovery and business continuity features and functionality

Navigating the BYOD Trend
Today, the acronym BYOD is becoming common place amongst professionals responsible for overseeing a firm’s IT functions.  After resisting it for years, firms are starting to recognize that by allowing employees to bring their own devices they can experience potential cost savings, productivity increases and make some employees a little bit happier.

A survey by Good Technology found that 90% of financial organizations support the use of personal mobile devices at work. It also found that the most popular model for BYOD at financial institutions is for employees to purchase and pay for their own device with the company offering support in the form of access to corporate systems.  The next-most popular is a model where the enterprise reimburses users for "eligible expenses" up to a point

The prevalence of employees bringing their own devices also has implications on corporate security and policies.  Hedge funds need to be thoughtful about their policies and ensure employees are knowledgeable about responsible practices.

More Resources
Here are some additional sources of (free!) information to help you stay up-to-date on the latest in hedge fund regulations:

To hear the complete presentation, be sure to view the webinar, Hedge Fund Industry Outlook: Trending Topics for 2013 (below)!



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