A Global Perspectives White Paper                                                    `           Managing Change in the He...
Contents             IntroductionIntroduction                    2   “It must be considered that there is nothing more    ...
to put firm controls in place around the          Funds to register is now upon us.process of change management.Change whi...
demand for increased liquidity              these are in place is an important driver       and transparency              ...
A Hedge Fund Manager may want to              new situation will be an improvement and howget a new product to market or a...
must to be clear that everyone involvedin the project will be held accountable             Project Managementfor their pi...
goal oriented and adaptive to the project    when a year or two later you have to upgrade torequirements as this may be re...
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Managing change in the Hedge Fund industry - A Global Perspectives consulting White Paper - March 2012


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This White Paper looks at some of the drivers for change taking place in the Hedge Fund Industry, before examing ways to manage this change effectively.

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Managing change in the Hedge Fund industry - A Global Perspectives consulting White Paper - March 2012

  1. 1. A Global Perspectives White Paper ` Managing Change in the Hedge Fund Industry By Shane Brett, Managing Director st Date 31 March 2012
  2. 2. Contents IntroductionIntroduction 2 “It must be considered that there is nothing more difficult to carry out nor more doubtful of successCurrent status 2 nor more dangerous to handle than to initiate aMain drivers of change 3 new order of things”.Key steps for managing change 4 Niccolò Machiavelli (1446-1507), ItalianConclusion 7 statesman and philosopher, in "The Prince". Machiavelli got it right. Trying to successfully manage the implementation of widespread change is one of the most difficult tasks an organisation in our industry can undertake. Over the last 10 years the Hedge Fund has experienced change on an enormous scale. The first years of the new century were marked by huge growth across the industry. Hedge Fund Managers and their service providers struggled to absorb massive asset growth, a high volume of fund launches and an ever increasing number of investors. Then came the Post-Lehman/Madoff carnage where funds instead had to manage a more negative period of change, primarily driven by funds reorganising, gates being imposed, irate investors trying to redeem and difficult to price illiquid securities. All of this has made the last decade in the Hedge Fund industry one of great change. The evidence suggests this change has largely been managed in an organic fashion (i.e. uncontrolled and haphazard). Whereas change ten years ago was primarily driven by positive factors – AUM’s rising, subscriptions into Hedge Funds increasing and positive stock market returns – change in recent years has been the result by more negative trends – increased competition, an unstable economic environment, a wave of new global regulation and far more demanding investors. Current status Up to this point companies in the industry have been either growing very quickly or trying to deal with the consequences of the economic meltdown. This meant few have had the chance thDate 15 Feb 2012
  3. 3. to put firm controls in place around the Funds to register is now upon us.process of change management.Change which is constant and on-going Similarly from July next year theand needs to be project managed European AIFM directive will come intoeffectively. Particularly as the Hedge force across the EU. This legislation isFund industry had moved from still in the process of been finalised.adolescent into adulthood and is now What Hedge Fund Managers will havebecoming a mature industry in its own to do in respect of issues likeright. domiciliation or reporting is still unclear and will make the process of applyingThe result of the industry moving from these required changes internally veryadulthood to full maturity can be seen all difficult, given a relatively shortaround us. More regulation, more timescale.demanding client requirements andmore competition for existing Hedge Finally in the US the IRS has issuedFund. requirements around foreign tax compliance (FATCA) and this has meant a wave of registration andMain drivers of change documentation for many Hedge Fund entities worldwide. Again the details regarding compliance and operationalFor this White Paper, firstly we’ll look at requirements are still being clarified.the current main drivers of change inHedge Fund industry, before looking at Even if the changes projects proposedsome of the techniques we can use to in your organisation are not regulatorymanage this change more effectively. driven in nature, Hedge Funds need to ensure that internally operational or outsourcing projects are organised is  Regulatory Change – This is such a way that their output will easily currently the largest driver of satisfy both existing and future likely change in our industry. legislative requirements like Dodd Frank and the AIFMD. Specifically the Hedge Fund industry is in the early adoption stage of a huge wall of legal and  Investor appetite – The launch of new regulatory requirements, which funds, new fund structures (e.g. will likely change the way the Managed Accounts) and the provision of industry operates in the future. new operational requirements (e.g. enhanced, flexible and far more granular The Dodd Frank Act in particular investor reporting) is been largely driven contains onerous regulatory by the rise of Institutional Investors reporting requirements (by among many Hedge Fund’s shareholder previous industry standards) base. and even sometimes contradictory requirements (as High Net Worth Investors will continue pointed out by The Economist to be an important source of many newspaper recently). There is Hedge Fund’s subscriptions, however confusion across the industry the future will see large institutional and yet the deadline for Hedge investors coming to dominate the shareholder register and with that aGlobal Perspectives Consultingwww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  4. 4. demand for increased liquidity these are in place is an important driver and transparency of many upscale projects across the industry.  Industry Growth - 2012 is expected to be the most All of these crucial regulatory changes, as well promising year for the as the demand from Institutional Investors for Alternative Investment industry greater fee flexibility and enhanced reporting, in 5 years. Growth in net has added the pressure on Hedge Fund inflows is expected from Managers, their Administrators and Software Institutional Investors and Vendors to meet this challenge. particularly Pension Funds. Hedge Funds are now an The importance of all the drivers of change established part of the identified above illustrates how change in the investment landscape and many industry must be managed in an ordered and Institutional Managers are controlled manner. Global Perspectives has increasing their allocation. This managed change programmes for some of the means proposed changes to the largest Hedge Fund Managers, Administrators operation and structure of your and Software Vendors in the world. This organisation must be scalable exposure to many projects of different scale and and able to accommodate size has enabled us to identify the key steps to growth. managing change successfully in the industry.  Financial, Operational, Investment, Counterparty & Liquidity Risk. Post- Lehman Investors, Regulators, Hedge Key steps for managing change Funds and the wider world have all become far more risk aware. Risk management seems to be  Document the Business Need at the centre of everyone’s strategy and this is likely to As soon as the change need has been defined continue in the near future. All the Project Manager must sit down with the proposed changes to operations Project Sponsor and clearly document the and strategy need to ensure business need. Perhaps it is a new fund launch they at least maintain, if not or adopting regulatory change. This will give the tighter your risk controls and project a clear reason for being and positions processes. the change required more clearly in everyone’s mind. Subsequently project buy-in is increased  Due Diligence – Post-Madoff across the board, as everyone understands why Operational Due Diligence had they are doing what they are doing. It’s also increased massively in critically to emphasise to those affected by importance for most Investors, forthcoming change that what they are doing is Hedge Funds and particularly better than the alternative. for the Fund of Hedge Fund community. Investors do not want to be told about your  Project Planning processes - they want to see them. They expect durable and Most projects fail because they have not been transparent operational controls planned properly. It’s that simple. and the process for ensuringGlobal Perspectives Consultingwww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  5. 5. A Hedge Fund Manager may want to new situation will be an improvement and howget a new product to market or a Hedge these business requirements will help achieve it.Fund software vendor may be keen to It is important that change should be driven byrush the latest release of their shadow satisfying your customer’s needs. If you are afund accounting software to market, but Hedge Fund unhappy with a particular softwareif the project has not been planned vendor, the project must be focused onextensively the project will be a failure. identifying the missing functionality requiredWithout a proper period of analysis, in from a replacement vendor that will increaseorder to consider the best way to your customer satisfaction.organise, proceed and manage theproposed change project and Also, over time it is advisable to build up a seriesassociated risk the likelihood is the of change templates that work for different typesproject will not succeed. of change projects. These can include Investor On boarding, Fund launches and FundThis is a particular problem in our reorganisations. They can come in particularlyindustry if an investor is ready to write a useful on the sort of change project that onlycheque and the Hedge Fund Manager is occurs in an organisation every couple of yearskeen to get a new fund launch in place. (e.g. upgrading existing software, launching aThe urgently can mean planning is new Fund umbrella). The optimum stepsoverlooked and the project execution required can be easily forgotten by the time awill be sloppy and haphazard. Similarly similar project next comes around.if you are a Hedge Fund Administratorthere is no point in quickly onboarding a All of this sounds like basic common sense but itlarge new hedge fund client if it is not is amazing, especially in the alternativeplanned extensively. This will lead investment industry, how often ambitiousservice to your existing clients change is embarked upon without it ever beendemonstrably suffering and damaging planned properly. This point needs to beyour industry reputation. emphasised. The old adage “Fail to plan, Plan to fail” is as accurate as it ever was.Part of the planning process shouldinclude a definition of how the project’ssuccess will be measured. For example,  Project Executionsuccess could be defined assuccessfully outsourcing all operational Once the change projects requirements arereporting to a specialist provider by a defined the project moves to the executionspecific date, in a specific budget. This phase. This should be completed using clearneeds to be documented and widely and agreed goals, assigned work-packages forcirculated. Make it clear for both the each area of the project and use brief, frequentProject Manager and team involved check-ins by all members of the Project team towhat will constitute a clear success. Too keep everyone updated (Software developmentoften projects muddle along without methodologies like Agile use regular briefanyone having defining exactly what is updates and small ongoing deliverables to greatrequired and by when, be it on boarding effect) .a new manager or launching a newHedge fund. Unclear priorities, a lack of accountability and bad communication are all some of the mostThe planning phase must include an common reasons projects are not executedextensive period of requirements successfully. The team should focus ongathering from all relevant areas. Make accomplishments and keep the morale sappingit clear to everyone affected why the “blame-game” to a minimum. However it alsoGlobal Perspectives Consultingwww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  6. 6. must to be clear that everyone involvedin the project will be held accountable  Project Managementfor their piece. Failure to meet adeadline is not acceptable. On a large transformational project, with multiple streams across a Hedge Fund company, theFostering teamwork to ensure organisation needs to appoint a dedicatedsuccessful project execution is easier Project / Programme Manager.said than done. Often in our industry theguys working in Operations might have This is not meant as a reflection on the oftenpreviously little time to spend getting to very talent Senior Managers in the company.know the Portfolio Managers or Risk The simple truth is that managing a large multiteam. If the project covers multiple work stream project takes a specific set of skillsdepartments the Project Manager needs and experience, and this is often best done byto schedule some time to allow someone external to the organisation.everyone to get to know each other,preferably socially as well as As well as their obvious previous projectprofessionally. The Project Manager has management knowledge an external projectan important role to play here and manager come to the table immune fromcarefully articulating and repeating the existing internal politics and historicalcommon goal of the project, as well as animosities. Their temporary duration alsoeveryone’s assigned role, can help a ensures they do not get as easily bogged downteam develop into a coherent whole by internal disagreements.On large projects strategic alliances with Often at Global Perspectives we have beensuppliers, functional groups and relevant retained to manage a project after the client hasstakeholders can make the process of tried to progress it on their own. In that processdelivering change far smoother. If you they have encountered internal resistance -are executing change with a third party exhausted staff trying to juggle their daily work(e.g. Service provider like an with projects requirements and a sinking senseAdministrator, Consultancy or Software of morale as the project runs into trouble.Vendor) consider using a partnershipapproach. This means adopting an open An external Project Manager ensures a fresh setcommunication process where either of eyes is brought to the organisation, with anparty can freely raise issues or independent perspective, and most importantly,concerns. someone whose attention is focused solely on the success of the project and who will not beA partnership process moves beyond distracted by the daily operational activity.the traditional Client – Supplier It is the Project Manager’s job to ensure therelationship where instead each party is team is sold on the project from Day 1 and thatready to help the other In order to meet communication is clear, regular and concise. It isthe projects requirements. This win-win easy to confuse a new team with mixedprocess tends to reinforce the success messages and unclear resource assignment.of the project as both partners want the The process of allocating tasks should be asother to succeed. It also means there is transparent as possible.a far less chance of encounteringunexpected surprises throughout the Project Managers should be able to organise theproject’s execution, as each party chaos and install organisation administration onshould be keeping the other fully briefed the project, ensuring each element of theat all times. change process is managed, assigned and timetabled for delivery. Similarly they must everyGlobal Perspectives Consultingwww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  7. 7. goal oriented and adaptive to the project when a year or two later you have to upgrade torequirements as this may be required that new software or launch that new Fundduring project execution, when umbrella and the experiences of the previousrequirements can be amended or project are long forgotten and everyone’supdated. If a change deadline is memories is hazy. This is not a time forparticularly aggressive, they must flag recrimination but is actually an investment in thethis to the Project Sponsor and carefully organisations future success.balanced the business need againstburning the team out, and ultimatelysapping morale. ConclusionA really effective Project Manager leads In conclusion, it is clear our industry is in thefrom behind the scenes, allowing the process of adopting its next huge wave ofachievements of the team members to change. The pain of managing these changesbe recorded and recognised. They must can be greatly alleviated by successfullybe open and approachable and be fully planning and executing the process using anfamiliar with the main formal change experience Project Manager.management methodologies, as well ashaving a deep knowledge of the HedgeFund industry itself. We will return to the Project Management theme in a future Global Perspectives white paper.  Lessons learned.Finally, ensure your organisationdocuments the lessons learned whilethey are still fresh in everyone’s mind.Often when a project is completed,when everyone is under pressure andthe project participants are exhausted,people just want to get the projectfinalised and move onto to the hundredother things waiting their attention. Thisis a mistake.Once of the most valuable things youcan do to help your future hedge fundsprojects be a success is to spent sometime documenting the lessons that havebeen learned. Particularly while they arestill fresh in everyone’s mind. Whatworked, what didn’t? What do theproject team wish they had of had moreof – more time, a larger budget, a bettertest plan, more responsive serviceproviders?Spending a brief session brainstormingand documenting everyone’s thoughtscan be invaluable to the organisationGlobal Perspectives Consultingwww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173