Archive for the ‘Regulation’ Category
Thursday, May 2nd, 2013
It has been recently covered in the media that Mary Jo White, who became SEC chairman on April 10, is pushing to adopt the JOBS ACT without major changes and potentially adding additional investor protections at a later date. While this new legislation would for the first time allow general solicitations and advertising to the U.S. general public by hedge funds, hedge funds will still only be able to accept investments from accredited investors.
This legislation has been strongly contested by consumer advocates that remain concerned that hedge funds are risky and that unsophisticated investors might be taken advantage of. However, a quick review of the ordinary investment vehicles available to the general public and their respective risks of capital loss compared to the same risk for hedge funds would quickly reveal that hedge funds do not present the amount of risk as perceived by the general public. To the contrary, many sophisticated investors are now actually allocated to hedge funds to reduce the overall risk in their portfolio.
Instead of focusing on hedge funds, these consumer advocate groups should be concerned that many individuals are buying:
30-year treasury bonds that could sustain significant market value losses if interest rates begin to rise because of the massive budget deficits the U.S. government is continuing to run;
long-term municipal bonds in state and local governments whose finances are in a shambles and who also continue to grow their massive unfunded public pension fund liabilities;
money market funds whose low yields are causing individuals to lose purchasing power on the money they have invested in the funds; and finally,
individual stocks. In 2008, the MSCI world index was down over 40% which was more than double the decline of the average hedge fund. Obviously, owning an individual stock is significantly more risky than a diversified portfolio. Many companies’ stock prices have fallen 90% to 100% in value over a short period of time, which can include such companies as Bank of America, Lehman or Merrill Lynch. There have also been many high profile frauds associated with publicly traded companies including Enron, Tyco and WorldCom. These examples are given not to scare people away from investing in the capital markets, but to put things in perspective relative to hedge funds.
This new legislation will provide a number of benefits including:
Clarity of what information hedge funds can share with the general public. This new legislation will provide greater clarity to the hedge fund industry regarding how information can be provided to the public and what type of information hedge fund managers are allowed to disseminate. To date there has been conflicting legislation regarding what information hedge funds can provide, along with wide differences in the interpretation of these regulations within the hedge fund industry. The conservative interpretation of Regulation D of the Securities Act of 1933 pertaining to the ban on general solicitation has included: 1) no communication on any subject to the media; 2) no participation in databases; and 3) no contact information on a firm’s web site. Yet many of these same firms are registered with the SEC and must also comply with the conflicting legislation of the Investment Advisors Act of 1940, which requires these firms to submit a Form ADV to the SEC and state securities authorities. Form ADV contains detailed information about their organization, which is available to the general public on the SEC website, and makes it impossible to be in compliance with both legislations simultaneously. Other hedge funds have been more liberal in interpreting these rules and believe it is appropriate to speak to the media regarding industry information excluding their firm and fund, participate in databases that are published in the media and provide some information on their web sites regarding their firms and investment process. This new legislation should bring clarity and a more level playing field to marketing strategies among hedge funds.
Greater transparency throughout the hedge fund industry. Currently it is cumbersome for investors to identify top-quality hedge funds, compare them to top competitors in the strategy, and perform appropriate due diligence. This is because of the difference in transparency between the mutual fund and hedge fund industries. In the mutual fund industry, a vast majority of firms provide information about their funds on their company web sites and to leading industry databases. This allows investors to quickly compare mutual funds based on style and rankings in a database, and then access more detailed information about individual funds on their web sites. In the hedge fund industry, many hedge funds elect not to participate in databases. In addition, U.S.-based hedge funds have password-protected web sites. As a result, analyzing hedge funds has been an arduous task that includes starting with hedge fund databases and then leveraging trade publications, industry conferences, prime brokers, third party marketers and friends to help identify top hedge funds. This is followed by contacting the hedge fund directly to obtain information about the manager, which makes it a very inefficient process.
Enhanced investment education for the public. The hedge fund industry represents a significant number of the leading investment minds in the financial industry. This new legislation will benefit the general public because hedge funds should be more inclined to share their investment views on television and in print media. As a result, retail and high-net-worth investors will gain valuable insights into a variety of hedge fund strategies and investment ideas.
More investment alternatives for accredited investors. With the increase in transparency within the hedge fund industry investors will become aware of a broad new universe of investment ideas, many of which have low correlation to traditional long-only benchmarks. This broader investment universe is especially true relative to small and mid-sized hedge funds that have not developed strong brands in the marketplace.
This new regulation will cause challenges for the overworked regulators who will be responsible for protecting investors from unscrupulous marketing activity by a small percent of alternative investment firms. However, overall this new legislation should significantly benefit accredited investors by giving them more information and investment options.
Don Steinbrugge is Chairman of Agecroft Partners, a global consulting and third-party marketing firm for hedge funds. Don was a founding principal of Andor Capital Management, which was formed when he and a number of his associates spun out of Pequot Capital Management. At Andor he was Head of Sales, Marketing, and Client Service and was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Don is also a member of the Investment Committees for The City of Richmond Retirement System, The Science Museum of Virginia Endowment Fund and The Richmond Sports Backers Scholarship Fund. He is also a member of the Board of Directors of the Hedge Fund Association, Lewis Ginter Botanical Gardens and the University of Richmond’s Robins School of Business. In addition, he is a former 2 term Board of Directors member of The Richmond Ballet (The State Ballet of Virginia).
Wednesday, April 24th, 2013
A recent HedgeWorld/Labaton Sucharow/Hedge Fund Association survey of hedge fund managers showed almost half thought their competitors did something illegal to generate returns and more than one-third had felt pressure within their own firms to break rules. Following up on that, a panel at the HedgeWorld East 2013 conference discussed the culture of compliance in hedge funds. Among the panelists was Jordan Thomas, a partner at the law firm Labaton Sucharow.
Thursday, March 21st, 2013
The fastest growing segment of the financial services industry was the one hardest hit by MF Global’s suspicious demise and overt fraud at Peregrine Financial Group (PFG).
The managed futures industry, which had grown from $14 billion under management in 1991 to over $329 billion to end 2012, was a shining star of the new economy. Offering the unique ability to zig when other investments zagged, the lack of correlation and performance during crisis were key points of attraction. This attraction came to a screeching halt with the MF Global and PFG criminal incidents. Not only were investors getting acquainted with the asset class shocked to learn their accounts were looted of assets, but more troubling criminal behavior appeared the cause - casting a shadow over all participants.
“There is a severe loss of trust, a loss of confidence. There is incredible anger and frustration. Things need to change,” said Diane Mix Birnberg, president of Horizon Cash Management. Her firm just released a study, The Aftermath of MF Global and Peregrine Financial Group Meltdowns: A Crisis of Trust, showing that a whopping 91% of respondents believed there was a breakdown in audit procedures.
The study themes that emerged included:
- The laws and rules that govern the industry need to have ‘teeth’ â€“ and those involved in fraud and theft need to be punished.
- Customer segregated funds must either be kept completely out of the FCM and/or be verified in real-time by regulators.
A strong and rare female voice inside a Type A male dominated industry, Ms Birnberg’s firm, Horizon Cash Management, has become the top cash management firm for participants in the managed futures industry. Starting in the 1970s as a secretary in a stock brokerage firm in Atlanta, where “women generally didn’t think about career aspirations,” she later joined Lehman Brothers in the bond business. After moving to New York City to work on Wall Street, she was recruited in 1980 by investors to operate a cash management firm in the futures industry and in 1991 founded Horizon Cash Management, which currently has $2 billion under management.
In MF Global “there was very little institutional leadership (from exchanges, regulators and major firms),” she said. “This resulted in rumor, innuendo and ultimately a lack of trust. The void in leadership is terrifying.”
Looking back on the MF Global and PFG disasters, Ms. Birnberg has the experience of witnessing 10 FCM implosions. “In every FCM implosion it has negatively touched the CTA / CPO segment of the industry.”
“Think about a plane crash,” she said. “When it happens? Key issues and facts are addressed by the airline, the FAA and even the US president. Information is available regarding what happened, why it happened and steps being taken to address the problem.”
With MF Global a plane crashed and there was silence.
This is the first part of a two part article.
Mark Melin is author of three books and taught a managed futures course for Northwestern University’s Executive Education program. To read additional blog posts visit www.UncorrelatedInvestments.com (requires free registration).
Wednesday, March 20th, 2013
The voluntary return of $546 million in MF Global customer assets, the subject of hard fought 2 Â˝ year battle, was not motivated solely by the kindness of JP Morgan.Â Rather, it could be considered fruit from a likely hard investigation now gearing up if not already under way.Â This investigation, declared “dead” many times over in leaks to the press from official sources, has heated up, asÂ first discussed here.
The return of illegally transferred MF Global customerÂ assetsÂ was always a key bone of contention.Â JP Morgan had summarily dismissed regulatory and public pressure to return customer assets, so the question is: why submit to authority now?
In 2012 the National Futures Association (NFA) went so far as to send the bank a public letter, which was generally brushed aside as were numerous verbal requests and mounting public pressure from groups such as the Commodity Customer Collation and its leaders James Koutoulas and John Roe.Â This significant pressure was dismissed, yet an attempt by bankruptcy trustee James Giddens was successful. Â The fact this occurred at this moment in time is not aÂ coincidence.
Speculation is JP Morganâ€™s normally dismissive attitude towards government regulators might have changed in the face of what is expected to be a no holds bar CFTC / DoJ criminal investigation.Â In other words, the specter of government actually asserting itself and allowing career investigators to do their jobs unimpeded is enough motivation for JP Morgan to return what are documented to be illegally transferred customer assets.
But perhaps more important to the future, a real investigation could also be motivation for JP Morgan to provide critical testimony regarding the criminal activity of MF Global executives, including that of Jon Corzine.
The need for deterrence that derives from a Jon Corzine conviction is more important because the future that matters most.Â Since 2008, when financial crimes that damaged the US financial system were was documented not to be investigated by DoJâ€™s former assistant attorney general in charge of criminal investigations Lanny Breuer, Wall Street crime has imploded in its brazen disregard.Â MF Global is one example, but the case of HSBC laundering money for terrorist organizations and drug cartels â€“ after being warned on several occasions not to do so â€“ is a sign of complete disrespect and a breakdown of law and order on Wall Street. Â Â When the full story is known, Mr. Corzineâ€™s disrespect for the US financial system and its cogs of justice will likely stand as the turning point in a long battle.
Is this real?Â Is the investigation a serious point where the rule of law might actually apply to once exempt Wall Street players?Â We donâ€™t know for certain at this point, but one key tell is going to be the type of charges filed against MF Global executives.Â If RICO charges are used, this will send the powerful message that a cop is in fact back on the beat.
Mark Melin is author of three books and taught a course on managed futures for Northwestern University’s Executive Education program. Â To read more of his blog posts, click here (requires free registration). Â Contents Copyright (C) 2013 Mark Melin.
Friday, March 15th, 2013
Last year, Congress passed the JOBS Act, a new bill that was designed to foster the growth of startups. Hedge funds were particularly excited about the bill because it was expected to allow the Securities and Exchange Commission to form new rules for the industry.
However, in the months since the bill was passed, little has come from the JOBS Act. Hedge funds are still waiting to hear from the SEC, and investors are still jumping through hoops.
“That’s something that’s very frustrating for us as a firm because we are someone that provides data to only the accredited audience currently,” Evan Rapoport, CEO of HedgeCo Networks, told StreetID. “In order to come on to HedgeCo, and to view hedge fund information, you first have to go through an online questionnaire that asks some pretty personal questions, such as your net worth, your liquid net worth, how many funds have you invested in, etc.”
The SEC requires HedgeCo to ask those questions in order to prove that anyone who has access to hedge fund data “qualifies as an accredited investor pursuant to SEC guidelines.”
“The user not only has to put this information online, but he then has to get a phone call from one of our representatives over here where we verbally verify that information prior to giving him or her access to the website,” said Rapoport. “That’s a fairly arduous process.
“With the JOBS Act passed, as the President and Senate said it should be passed, we can open this information to the world and not have to put people through this arduous process of giving up all their information just to see data.”
This is the same process hedge funds force potential investors to go through. “The way they can raise capital is only through what we discussedâ€”password-protected websites or database like ours, talking to people they already know and have a pre-existing relationship with and understand that they are accredited investors, and then finally tell them about the fund,” said Rapoport.
Part of the problem could be due to a change in management. In January, President Barack Obama nominated Mary Jo White to be the new head of the SEC. White replaced Elisse Walter, who temporarily led the organization after Mary Schapiro resigned last year.
“I think that was also some of the cause behind the pushback,” said Rapoport. “That change had probably been in the work for some time, and as a result, it has put a stop to the regulations coming out.”
Mutual funds have also pushed back.
“Mutual funds are concerned because hedge funds have become a huge industry over the last few years and have taken a lot of capital away from the mutual fund industry and have actually taken away a lot of talent away from the mutual fund industry,” said Rapoport. “Frankly, hedge funds perform better than mutual funds over time and they do so with much less volatility. So they should be concerned, rightfully so, that hedge funds are going to become more popular.”
When asked why hedge funds were believed to be so different in the first place (from a regulatory perspective), Rapoport pointed to the associated volatility.
“Hedge funds have been known to be very volatile, to use leverage,” he said. “The potential to lose a lot of money in a hedge fund, just as there is to make money, is certainly there.
“Looking at all of the studies, hedge funds have managed to outperform [alternatives] with lesser volatility but there will always be the few that cause more losses than gains and could potentially hurt investors. They [the government] were trying to limit investments to those who could afford the risk of investing in a fund.”
This content originally appeared on StreetID, a financial career networking, matchmaking and news site. To learn more about StreetID, visit StreetID.com. StreetID’s financial career news can be found on its blog, streetid.com/newsblog/.
Friday, March 1st, 2013
How does one define a previously un-definable topic such as High Frequency Trading (HFT)?
Sources close to the Commodity Futures Trading Commission (CFTC) indicate new thinking may be underway regarding the topic of High Frequency Trading (HFT). Speculation is this thinking could look at the relative market impact HFT may have in a given market move as a legal definition. Such a definition could consider the relative impact of a particular HFT player as a percentage of a market damaging move and could be used for potential CFTC action on the issue. This new thinking could be outlined sometime in March, sources said.
Current US regulation regarding HFT is considered by some market participants to be behind the curve relative to the European Union. In the EU, for instance, algorithm type is used as an identifier to determine market participant behavior during crisis conditions.
“There is significant uneasiness on the speed in markets,” noted Vassilis Vergotis, Executive Vice President, Head of Eurex, Americas.
For the full article, visit the source web site (requires free registration):Â http://www.uncorrelatedinvestments.com/blog/?p=59
Mark H. Melin is author of several books, including High Performance Managed Futures and taught on the topic at Northwestern University’s Executive Education program
Thursday, January 10th, 2013
WASHINGTON (Reuters)â€”The top U.S. derivatives regulator will listen to banks and exchanges in a public hearing this month to find out if its rules are unduly forcing clients out of swaps markets.
The Commodity Futures Trading Commission, which regulates both swaps and futures, is also considering a rule for block trades that could accommodate some of the concerns aired by the industry, a senior executive said.
“We’re going to have this discussion and get some of these topics up there,” Scott O’Malia, one of five CFTC commissioners told Reuters in a telephone interview. “It’s better that we have that discussion before we make a bad decision, than after.”
The meeting, which had not been announced before, is set for Jan. 24.
Regulators across the world are setting the first-ever rules for the $650 trillion swaps market, where trading is largely executed over the phone and data is hard to find, two factors that were blamed for aggravating the 2007-09 crisis. Banks such as Citi, Bank of America and JPMorgan dominate the market and fear that clients will instead start using futures â€” a similar type of derivative â€” because the new rules make them cheaper to use.
Futures exchanges, such as the CME Group Inc. and its much-smaller rival Eris Exchange have grabbed the opportunity, launching products that promise the same features as swaps, but at a far lower cost.
One concern of the banks is that the new rules unfairly favor futures markets by making it easier to do block trades, which allow dealers to delay the reporting of a transaction if it is above a certain threshold, so as not to show their hand.
A proposed new CFTC rule for swaps trading imposes stringent requirements on block trades for swaps, which does not exist for futures. The plan is to introduce a similar restriction for block trades in futures regulation.
“It is a concern that, depending on the block rules, the existing rules (may) create a disparity in regulation,” said Mr. O’Malia, one of the two members of a Republican minority on the CFTC’s five-strong board.
“The staff is developing a proposed rule on futures blocks,” said Mr. O’Malia, who is often critical of the CFTC.
Both futures and swaps can be used to protect or hedge against the effects of a change in anything from interest rates, foreign exchange rates, the risks of default of companies or governments, or commodity prices.
The CFTC’s public hearing was called on concerns about a shift out of swaps and into futures, a process known as “futurization,” Mr. O’Malia said.
At a similar hearing in November, Asian and European regulators vented their anger over the brusque manner in which the CFTC plans to impose its rules on foreign banks. U.S. politicians later chided the agency over the plan.
The CFTC is drawing up rules for public data reporting and to bring swaps trading on to exchange-like platforms, with clearing houses standing in between buyers and sellers to protect against the risk of default.
Derivatives brokers such as ICAP, Tullett Prebon and GFI are expected to run these new trading platforms, known as Swap Execution Facilities (SEFs), but are still in the dark about the rules.
The Jan. 24 meeting would discuss the different rules for block trades between the two markets, Mr. O’Malia said, but it was not clear whether the new rule on block trades prepared by the CFTC’s staff would come up for discussion.
It was also still not clear when the CFTC would vote on the long-awaited SEF rules.
By Douwe Miedema
Friday, January 4th, 2013
NEW YORK (Reuters)â€”U.S. financial regulators are pushing to turn hedge funds into informers on the white collar crime beat.
The Financial Crimes Enforcement Network (FinCEN) is working on a rule that would require U.S. hedge funds to file formal reports notifying U.S. authorities of any suspicious trading by employees or outside parties, the regulatory agency said.
The rule being crafted by FinCEN, part of the Treasury Department, would force the $2 trillion hedge fund industry to police itself in much the same way banks, brokerages and mutual funds are required to do by filing suspicious activity reports (SARs) with the unit.
Steve Hudak, a FinCEN spokesman, said a proposed rule for the hedge fund industry could be filed for public comment sometime in the first half of this year. But the rule, which would cover activities such as insider trading and money laundering, will force funds to spend more money on building out their compliance and legal departments.
Hedge fund lawyer Ron Geffner said he expects many in the industry will oppose the new rule as being both intrusive and costly.
“Anytime there’s any regulatory hook into a firm, it’s like a domino,” said Mr. Geffner, a partner at the law firm Sadis Goldberg in New York. “When taken together, all of the rules and regulations, both new and revised, serve to intimidate entrepreneurs.”
A spokesman for the largest hedge fund trade group, the Managed Funds Association, did not respond to a request for comment.
The measure also could heighten tensions in the hyper-aggressive hedge fund world as it could put firms and their employees in a position to snitch on their competitors.
FinCEN’s move is not entirely new. In 2003, the agency began looking at imposing a SARs requirement on hedge funds, but eventually withdrew a proposed rule in 2008 after deciding it was too hard to define a hedge fund and enforce the requirement. The agency now believes the new mandate in the Dodd-Frank financial reform law that requires U.S. hedge funds to register as investment advisers gives it the ability to require hedge funds file SARs.
James Freis, a former FinCEN director, said the new rule is long overdue and would require hedge funds to do more due diligence on their employees and customers. He said it also would require hedge funds to hire staff who are well-versed in anti-money laundering procedures, which is one of the main reasons banks are required to file SARs.
“Suspicious activity reporting would put an affirmative obligation upon investment advisers, including certain hedge funds, to notify the authorities of suspected illegal activity,” said Mr. Freis, now an attorney with the law firm Cleary Gottlieb in Washington.
Mr. Freis served as the director of FinCEN until September, when he was forced out over disagreements with Treasury officials over FinCEN’s priorities, according to a person familiar with the matter. During his tenure he was an advocate for a hedge fund reporting requirement.
The filing of SARs reports took on new urgency for the financial industry in the wake of the Sept. 11, 2001, attacks on New York and Washington as federal lawmakers moved to require banks to become more aggressive in tracking money flows by terror groups.
The SARs reporting requirement is one that banks and brokers do not take lightly.
Jay Hack, a partner at Gallet Dreyer & Berkey in New York, said many banks file a “defensive SAR” when they see something even remotely suspicious to keep the regulators satisfied.
In the brokerage world, the SARs requirement has provided securities regulators and federal prosecutors with leads about investment scams and insider trading rings, securities lawyers said.
From 2003 to 2011, securities firms filed more than 110,000 SARs, with most of those involving incidents of money laundering or unusually large transactions, according to FinCEN. Roughly, 3,500 of those SARs involved a suspected insider trading incident. Final numbers for 2012 are not yet available.
But the agency reports that the number of SARs filed involving insider trading was up 34 percent in 2011 from 2010. The increase came at a time when U.S. authorities were engaging in a massive crackdown on insider trading in the hedge fund industry that has led to more than 70 convictions.
Many hedge funds maintain relatively small compliance and legal departments, often preferring to hire outside contractors to perform that work.
SAC Capital, the $14 billion hedge fund with 900 employees that has drawn scrutiny in the insider trading investigation, is rarity in that it has more than 30 people working on compliance matters. People familiar with SAC Capital, which declined to comment, said the firm’s compliance team is one of the largest in the hedge fund industry.
By Emily Flitter
Friday, October 19th, 2012
With the rise of new regulations such as the Dodd-Frank Reform Act, the advent of outsourcing and the growth of cloud computing, there is little doubt that the hedge fund industry landscape has evolved significantly in recent years. These changes have forced many firms to re-examine the way they do business, from both an operational and a technology perspective. On a personnel level, what effects have these changes had for the individuals that are responsible for technology at hedge funds and investment firms?
Chief Technology Officers (CTO), or individuals in comparable roles such as Directors of IT, Chief Information Officers, etc., have traditionally been responsible for an organization’s day-to-day IT functions and regular technology upgrades. However, as the industry has experienced drastic change in recent years, so too has the role of the CTO and his or her responsibilities.
Today, a hedge fund CTO is forced to wear many hats and have an understanding of many different technologies. In addition to having a variety of technical skills in such areas as networking, storage, virtualization, telecommunications and resource management, this individual must now also possess business savvy and other non-technical skills to support the organization. These include an understanding of the evolving regulatory environment, knowledge of compliance standards, keen communication skills and an understanding of the newest and most robust security measures.
New Requirements of a Hedge Fund CTO
Understanding Regulatory Requirements
Now that the Dodd-Frank Reform Act has gone into effect, investment firms have a whole new host of requirements to meet. As a result, CTOs at these funds have to take on a number of added responsibilities. They must run reports much more frequently than in the past in order to satisfy new legal requirements, ensure emails and other messages are being stored and archived appropriately, and liaise with legislators on a regular basis to ensure their firms are complying with all pertinent directives.
Knowledge Compliance Standards & Best Practices
In addition to ensuring their firms are in compliance with new and changing legislation, hedge fund CTOs now also have a host of new internal compliance procedures to implement. In today’s post-Madoff era, companies are working hard to develop policies that combat insider trading, prevent data breaches and avert other common securities risks. Mobile device security is another area where CTOs must focus their attention, especially with the recent growth of the BYOD trend.
Strong Communication Skills
In the past, technologists did not require finely tuned communications skills, as they spent the majority of their time focused on working with inanimate objects, such as computers and other hardware. Today, these individuals need to have strong communication skills to support their technical operations. As investors place increased importance on transparency and the due diligence process becomes more intense, many CTOs must now interact directly with investors and other stakeholders on a regular basis. It has become the CTO’s responsibility to educate investors on how technology is being used within the firm to support and safeguard their assets. They must also be able to demonstrate that robust security tools and procedures are in place to ensure all data is protected. Working more frequently with investors and regulators means CTOs need to sharpen their interpersonal communication skills in order to represent their organizations in the best possible manner.
Understanding Security Best Practices
With data breaches becoming more frequent and gaining increased media attention, security has become one of the most important â€“ if not the most important â€“ aspect of an investment management firm’s IT operations. In addition to managing the back end infrastructure, a firm’s CTO may now also be involved in developing internal policies and procedures to enhance security operations throughout the firm. Investors are increasingly seeking the highest standards in security, so technologists should be prepared to face tough requirements on this front.
The Impact of Cloud Computing
While hedge fund CTOs are grappling with increased responsibilities relative to regulations, compliance and due diligence, another phenomenon is also contributing to the evolution of this role: cloud computing. The popularity of the cloud (and outsourcing in general) has prompted many investment firms to reevaluate their technical strategies and change the way they allocate their IT resources. For instance, some firms have opted to reduce or eliminate their internal IT staffs and outsource all technology operations to a third-party provider. Others have chosen to maintain in-house technology resources while also leveraging the cloud for certain systems and applications. This combined approach can improve a fund’s operational effectiveness and efficiency. Many larger firms, in particular, have found it highly beneficial to utilize the cloud while also maintaining an internal IT team dedicated to managing certain aspects of the system and focusing on other technical projects.
Regardless of whether firms choose to embrace the cloud for all or part of their IT operations, the prevalence of cloud computing in the alternative investment industry is driving CTOs to evolve both their technical and non-technical skills. Technical roles are shifting from hands-on work with hardware and installations to resource management, integration, capacity planning and technical architecture management.
A New Era for Hedge Fund Technologists
Every firm has a different dynamic, with unique operational and business requirements. While the traditional role of hedge fund CTOs is ultimately changing, some aspects remain the same. Many firms still maintain that they need an internal expert on-hand for troubleshooting and other technical projects. Some prefer to focus their attention on the newer aspects of technology and operations, such as compliance, due diligence and security, while outsourcing the more fundamental day-to-day IT functions to a third-party provider. The role of the hedge fund CTO has undoubtedly evolved in recent years, and like the technologies they support, it’s safe to say that their job functions will be markedly different in the future as well.
As vice president of client technology, Steve Schoener is responsible for driving technology growth through Eze Castle Integration’s global offices, as well as assisting in product and service evaluations with new and existing hedge fund clients. Steve’s team handles application design and management in the Eze Private Cloud.
Friday, August 24th, 2012
There has been a lot of chatter surrounding the JOBS (Jumpstart Our Business Startups) Act and its inevitable impact on the job market. But what impact, if any, will it have on the hedge fund industry?
“For more than 60 years, hedge funds have never been allowed to advertise,” said Mitch Ackles, President of the Hedge Fund Association and CEO of Hedge Fund PR. “They haven’t been allowed to do the same things that mutual funds are currently allowed to do. Many managers are advised by their legal counsel and compliance people never to talk to people like you, never to talk to a reporter. Some don’t even speak at events because they’re scared that what they say might be construed as a solicitation to an unqualified person.”
With the JOBS Act, that could soon change.
“Some of the larger managers have been comfortable with it — you see them on CNBC or Bloomberg TV or The Wall Street Journal,” Ackles told StreetID. “Those managers tend to stick to the big picture, and this has been a safe haven for managers of all sizes. They can go on TV and be quoted in the press if they talk about their big picture view of a sectorâ€”the economy, regulation. They can certainly give those opinions (and be quoted) and not have that be construed as, you know, trying to offer something inappropriate to someone that’s unqualified that might read it.”
The real problem, however, is that there has not been any clarity regarding the things that hedge fund managers can and cannot do. “So there’s a good chunk of people that you will never see get quoted and will never want to talk to [reporters] until the JOBS Act rules [are finalized] and the SEC comes out with specifics that will guide the industry and hopefully provide that clarity that has been missing for so many years,” said Ackles.
This is not the only challenge that hedge fund managers have encountered, but things are starting to get easier. “The secondary aspect of the Hedge Fund Associationâ€”which was only established as a result of Dodd-Frankâ€”is our lobbying,” Ackles explained. “I myself am a registered lobbyist and part of a core team of about four or five people at HFA that airdropped ourselves into DC during Dodd-Frank before everything was finalized. We were really speaking up for the industry participants that don’t usually have a voice in DCâ€”the smaller and emerging managers.”
Ackles said that the reason the Hedge Fund Association decided to take action and become lobbyists “is because the original Dodd-Frank proposal was that every manager that managed $30 million and up would need to register with the SEC.”
“We thought that might impede new funds from forming,” said Ackles. “It’s obviously increased costs for running the business, and you would need additional service providers, legal advice, compliance, if you were to have to register at that threshold with the federal government.”
In the end, the association’s efforts were not in vain.
“We were successful,” said Ackles. “It was our first effort and they raised the AUM level to $150 million. That really taught us that speaking up for that group, our main constituency, was worthwhile.”
That said, Dodd-Frank is not over. “They are only part-way through implementing it, so there are still concerns relating to Dodd-Frank here in the United States,” said Ackles, adding that hedge fund managers should also keep an eye on FATCA, the Foreign Account Tax Compliance Act.
“FATCA is interesting because it is actually making governments share data about investors and where their money is, and it will have an impact on the investor side of the equation.”
Beyond that, hedge fund managers need to pay attention to Form PF. “It’s a 49-page, five-section document that hedge fund managers have to fill out,” said Ackles. “It’s got 79 expandable questions, and they have to submit it to the SEC and the CFTC using a specific protocol.”
Ackles said that the Hedge Fund Association has the view that if President Obama is re-elected, “all of these things will continue to go as they are currently in place.”
“Romney has indicated that he is going to look back at some of these things and potentially roll them back in congress,” Ackles added. “The uncertainty on the regulatory front is also a challenge to not just the hedge funds but all of Wall Street.”
Regardless, the Hedge Fund Association does not support a particular candidate. “The Hedge Fund Association is non-partisan,” said Ackles. “What we are hoping for is smart, efficient regulation that’s not overly burdensome.”
Ackles said that by “overly burdensome,” he means that the government cannot expect hedge funds to “spend all of their money on lawyers and compliance people.”
“Contrary to what some mainstream media have said about hedge funds and private equity, they are job creators,” said Ackles. “There is a benefit to hedge funds, and obviously there’s a benefit to Wall Street. Main Street may not see it, and politicians may use it as a way to almost re-create class warfare. But capitalism is not a bad thing. It’s what this country was based on.”
Ackles said that the Hedge Fund Association supports regulation, as it is an important part of the industry. He also said that hedge funds need to realize that they must adhere to these regulations.
“We certainly want the bad apples to go away and face the music,” Ackles continued. “But it is our view that it just needs to be done in a way in which it’s not too complicated. Look at what I just told you about Form PF [and] Dodd-Frank — there’s hundreds of pages! To be able to interpret this, and then have the right guidance from your legal counsel as a hedge fund manager, and you have to rely on that. You can’t be the legal expert interpreting what’s okay and what’s not.”
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