After Registration: Finding Help
July 4, 2011
The Securities and Exchange Commission's recent decision to delay the deadline for hedge fund and private equity fund advisors to register from this month until March 2012 gives them a tad more breathing room to prepare for the new requirements.
And find the necessary help.
Enter a legion of third-party IT, compliance specialists, prime brokerage and fund administrators to the rescue. They are only too willing to prove they have the best infrastructure, operations and data available in a competitive market.
"Fund advisors will quickly turn to software vendors and middle- and back-office service providers for answers," said Noreen Crowe, vice president and product manager for Mshare, the shareholder accounting platform operated by Linedata. "Regulators may not have final rules in place, but that isn't stopping fund managers from coming up with their own requirements to prepare."
The SEC wants to keep track of just how much systemic risk a hedge fund or private equity fund could cause if it were to go bust. So the regulator wants information in about 14 different categories ranging from the value of assets under management to as complicated as value at risk, leverage and counterparty exposure. It can easily come to over 400 data elements.
"One change we've seen is an increase in the number of our transfer agent clients using Linedata Mshare to track U.S. investors in offshore funds-not just to count numbers for SEC registration but also for an increasingly wide set of regulatory requirements," Crowe said. "These clients, plus the 30 fund administrators and hedge funds using Linedata Mfact, Linedata's portfolio accounting platform, are anticipating using the products to slice and dice data on the fly any way the SEC might want-by customer, time period, asset class, individual security and geography."
Among the key new regulatory responsibilities: disaster recovery and archiving. Too often, hedge funds have relied on either their fund administrator or prime broker to provide them with the necessary data in the event of a power or other outage but they still cannot access their trading, risk management and back-office applications. Nor can they afford to lose client records and communications in e-mails, smart phones, Bloomberg messages and other forms of online media.
In May, Abacus, a San Francisco-based hedge fund technology firm, rolled out its private cloud offering, AbacusFlex, to allow hedge fund managers to host all of their technology and back-up sites in secure and redundant data centers. This includes core systems such as order management, risk management and accounting systems, as well as e-mail, mobile devices, and voice solutions. "Hedge funds that don't want the expensive and onerous process of managing IT internally, now have a choice to host their technology offsite," said Chris Grandi, co-founder of Abacus.
The decision whether to rely on licensed or hosted technologies for disaster recovery in large part depends on the size of the fund, according to Arup Das, chief executive and technology officer for Alphaserve Technology, a New York-based technology provider to hedge funds. Smaller funds will typically prefer hosted platforms.
In the case of archiving e-communications, the system used will be less important as deciding which messages to save. "We don't advocate that fund managers store every message but only the most pertinent information so they can do random searches to prepare for a regulatory audit or lawsuit from investors," Das said. "Those searches, in turn, will help the fund manager know whether or not it is storing the right information and whether it is at risk of any wrongdoing."
Next up: the nitty-gritty compliance manual to write out how to prevent conflicts of interest or fraud, and middle- and back-office procedures such as valuation of hard-to-price securities, to name a few.
Firms, such as Armor Compliance in Boston, can provide plenty of guidance on how to draft such documents-and enforce them through mock drills that will prepare advisors for the dreaded SEC exams. "It isn't enough to just write the manual," said Douglas McLean, president of Armor Compliance. "They also have to prove they are following it and respond to any regulatory questions."
Of all the services that third-party prime brokers and administrators offer, none will be in as much demand as filing out Form PF. Smaller hedge fund advisors need to report only basic information on leverage, credit providers, strategy and performance, and counterparty credit risk. At a minimum, larger hedge fund advisors will need to report on an aggregate basis information related to exposures by asset class, geographic concentration and turnover.
In addition, for each hedge fund having a net asset value of at least $500 million, advisors must provide details on that fund's investments, leverage, risk profile and liquidity. For smaller funds, results of stress testing must be provided annually, while larger fund managers must do so quarterly.