21 February 2008

Hedge Funds: Focus on Sound Practices...

So what is on the mind of Hedge Fund Managers in these days of "volatility" and uncertainty? Afterall the CFOs and COOs at hedge funds and fund of funds must have some questions about best practices for auditing their funds' operations, and mitigating the most common forms of operation risk.

Top industry practitioners and industry advisors will discuss these topics at THE HEDGE FUND OPERATIONAL RISK MANAGEMENT SUMMIT Strategies for Stress Testing and Hedging Operational Risks:
  • New auditing standards – an operational due diligence checklist
  • Methods for attaining greater transparency while protecting strategies
  • Financing your operations – key considerations for managing operational risk
  • Implementation of disaster recovery strategies
  • The role of operational due diligence in your risk management strategy
  • Current issues in regulation and compliance
  • Updates on tax risk management and international tax compliance
  • Understanding methodologies for hedge fund ratings
  • ERISA – new info for hedge fund operations
  • Best practices for managing counterparty risk
The speakers and panelist's are prominent leaders in banking, alternative investments and the usual suspects of lawyers and accountants. Yet there is one item in the list that stands out. The topic of ERISA and new info for hedge fund operations. Among other things, ERISA provides that those individuals who manage plans (and other fiduciaries) must meet certain standards of conduct. The law also contains detailed provisions for reporting to the government and disclosure to participants. There also are provisions aimed at assuring that plan funds are protected and that participants who qualify receive their benefits.

Hedge Funds CxO's are thinking more about implementation of disaster recovery strategies. We know that they have been planning for it since the day the doors opened somewhere in Greenwich, yet now the vital topic of "Implementation" is at the forefront of the discussion.

In the context of Operational Risk Management with hedge funds, the goal is no different even while the feds may not have all the new regulations in place or the laws on the books. After all, the industry as a whole is just now getting their new leader in place to lobby "The Hill". The Managed Funds Association (MFA) has announced their new President, Mr. Baker .

Oversight and transparency will be a continuous topic for regulators. Yet as managers of several trillion dollars in assets, there are some important and vital practices that will gain momentum within the ranks of the Alternative Investments Industry.

We are pleased to see that Section I of the MFA Sound Practices Guidance includes Information Technology Controls:

The Recommendations also include information technology (“IT”) guidance in order to control changes to any software applications, data, and IT infrastructure and to maintain proper security therein. Finally, the Recommendations in Section 1 provide guidance on relationships with third-party service providers that perform key business functions, such as calculating net asset value (“NAV”) or monitoring risk.

And beyond the normal rules around "Ethics" and best practices associated with the code of conduct in the financial services industry, Hedge Funds must realize that they are not hedging their Operational Risk by outsourcing to 3rd Parties. They are still responsible for the oversight of these 3rd Parties and the extent to which they are in compliance with all federal and state laws.


A. Relationships between the Hedge Fund Manager and Third Parties

This section should address the fact that the U.S. Department of Treasury has recognized the ability of a Hedge Fund or Hedge Fund Manager to contractually delegate the implementation and operation of certain aspects of its AML compliance program to third parties (e.g., fund administrators, IAs, CPOs, CTAs, broker-dealers, and futures commission merchants), although the Hedge Fund and Hedge Fund Manager remain fully responsible for the program.

With so much riding on the hedge funds industry and it's importance to the performance of the markets, it's everyones wish that the CxO's implement robust compliance and ethics programs to support their Operational Risk Management Frameworks.

No comments:

Post a Comment