By Ahila Karan, 11 December 2012, www.prohedge.co.uk
Operations managers gathered at the IBC Hedge Fund Operations & Executive Responsibility Conference this week and discussed their changing role as a result of the institutionalisation of the hedge fund industry as a result of increased regulation and a changing investor base.
“You have a day job to do. You almost forget about it with all these other tasks to do. Where do the resources come from? We must remember, you can’t divorce regulation from managing investment”. The additional reporting requirements (increased frequency and content) and transparency standards, have served up hedge fund COOs with a long checklist approaching the July 2013 AIFMD implementation. Dealing with day-to-day proceedings is a greater ordeal to some managers than others.
Larger fund managers (especially bank-owned entities), able to draw on other parts of the business and existing infrastructure, can distribute the additional workload more easily. COOs in small funds, with smaller teams and fewer resources, have reported on the other hand that their roles have morphed over the last two years. Having to take on the many different roles, they are “spending a lot of time with a compliance and legal hat on”. The strain exists since managers are balancing culminating priorities, each independently carrying a heavy burden. Whilst setting up infrastructure to entice potential investors, managers must also control the spiralling regulation costs; budgeting is key since high expense ratios can discourage potential investors. This juggling act is a genuine pressure on smaller funds, concentrated on a few or even one individual(s).
Although regulatory compliance is expensive, uncertainty over the finalised AIFMD content has forced managers to foot these costs and prepare for potential changes; the onus is on flexibility. Large funds found their employment structures slow down decision making, encumbering upon flexibility. “There are tens of people to convince on what we should do and all with a differing views”; despite these grievances, larger funds possess the breadth of knowledge and the resources to obtain the support, so this inflexibility is a minor issue in the current climate.
Lack of Clarity
Awaiting the second AIFMD consultation paper from the EU over the next fortnight, and the lack of clarity in the first publication, has driven uncertainty. Looking to launch new businesses, managers expressed confusion over the definition of “fund-marketing” within the AIFMD remit. For many, the decision to change jurisdiction has been stalled by these limited guidelines, thus hampering forward-planning. A frustrated COO said “what are we supposed to do, not do business until July next year?”. On the approach to the new year, alarm bells are ringing for small hedge funds since unfavourable changes down the line weigh in more heavily. Getting it right from the outset is all the more important.
Whilst apprehensive about regulation, managers are simultaneously busy pulling in investors. Sound infrastructure is most attractive to investors, and the ability to report on daily NAVs and provide coherent and prompt risk analysis are key marketing tools. This trend is evident as publications have shifted from mathematical content to reporting with a less technical focus, pitching to a non-specialist investor audience.
Investors have also stepped up due-diligence on managers too, auditing fund manager processes and operations themselves. The time investors demand to interview COOs and staff, and the additional administrative duties carried out by the fund ahead of inspection, both add to operational undertakings in the fund.
The impact of insuring transparency may be costly but certain managers welcome this platform to rebuild reputations, especially managers who previously faced fraud charges and allegations. One particular fund manager said “we welcome these pressures. It’s a showcase of our operations and helps bring back investors because of a few fraud issues”. These managers are able to re-establish their brands without losing competitiveness (since these costs apply across the board to all funds).
In the face of additional responsibilities, funds outsource more functions to service providers. Managers expressed mixed reviews over outsourcing; opinion varied on a case by case basis. For some, the management of services providers posed additional costs. Whilst service providers were initially useful, with the growing “uncertainty about exact requirements”, a manager explains, “we find ourselves having to support our service providers, who are unable to support our business, therefore losing advantage and effort. This year we will be educating our service providers. I can’t imagine how big companies are dealing with this…they can stop you from trading if you face a misunderstanding”. Integration is vital, but bridging the gap between the manager and service provider is both time consuming and costly.
Other funds managers, on the other side of the coin, “found service providers to be useful and helpful, especially considering uncertainty. We do and continue to rely heavily on service providers”. Choosing the correct service provider comes down to careful due-diligence. For instance, a service provider may not employ staff of the quality expected from a fund manager; whilst this may not bear on all operations, it is an aspect of consideration.
Investors are clinging to reputational values and infrastructure requirements, forcing managers to employ a ‘grin and bear it’ attitude.
The increased uncertainty, rather unintentionally has a positive knock-on effect for investors and regulators; managers pre-empt more stringent regulation and large repercussions, so are already ironing out all the creases of the business. Managers no longer see it as a choice to be compliant, it is now mandatory.
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