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Emerging Managers Series 2014


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The series brings together expert guidance from industry insiders across prime brokerage, legal and compliance, technology and fund management

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Emerging Managers Series 2014

  1. 1. Emerging Managers Insight Ar cle Series Advice for today’s hedge fund managers from experts in prime brokerage, legal, compliance, technology and more
  2. 2. TABLE OF CONTENTS Unveiling our Emerging Managers Insight Ar cle Series ………….………….……………………………...….3 The Prime Brokerage Perspec ve for Emerging Hedge Fund Managers ………...………………..…....4 Should I Go With the Flow Into Liquid Alts? ………………………………………………..……....…………..…...6 Assessing Never‐Examined SEC‐Registered Investment Advisers: An SEC NEP Priority ….….….12 A Hedge Fund’s Guide to Technology Decisions: From Cloud to DR ….…………………………….…...15 Can an Alterna ve Strategy Investor Know the Valua on Given is Correct? .…………………….….19 At Hedge Fund Trading Desks, Furniture Ma ers …………………………………………………………………22 About Eze Castle Integra on ……………………………………………………………..….……………………….…….24 © 2014 Eze Castle Integra on2
  3. 3. UNVEILING OUR EMERGING MANAGERS INSIGHT ARTICLE SERIES 3 © 2014 Eze Castle Integra on The start‐up environment for hedge fund firms con nues to evolve as managers face changing investor and regulator expecta ons, increased due diligence, new investment opportuni es and advancing technology innova ons. To help firms navigate the new launch environment, Eze Castle Integra on is excited to share our Emerging Managers Insight Ar cle Series. The Series, created for emerging hedge fund managers, brings together expert guidance from industry insiders across prime brokerage, legal and compliance, technology and fund management. Contributors to the Series include senior leaders at Eze Castle Integra on, Jefferies & Company, Rothstein Kass, Tannenbaum Helpern Syracuse & Hirschtri LLP, Wells Fargo, FQS Capital Partners, and CFS Group.
  4. 4. 4 © 2014 Eze Castle Integra on THE PRIME BROKERAGE PERSPECTIVE FOR EMERGING HEDGE FUND MANAGERS BY: GLEN DAILEY, FORMERLY OF JEFFERIES & COMPANY Star ng a hedge fund is easier than ever with many vendors offering turnkey services to get a fund up and running quickly. The challenge is star ng a successful hedge fund that will grow and become a viable organiza on. With over 8,000 hedge funds opera ng around the world, the compe on to a ract hedge fund investors is greater than ever. For someone star ng a fund, you have to rely on your own capital and that of your friends and family to get the fund off the ground. From there, the key to success is outstanding performance. Someone star ng a fund should set a realis c schedule to launch and not rush to get the fund up and running too quickly. Take the me to partner with the right service providers that will support your business from the start and be there as you grow. Have a plan going into your new venture, which should include lining up friends and family as day one investors as well as reaching out to other investors to start a pipeline before you actually launch the fund. Once you are under way, you will end up ge ng ed to your screens, focused on performing, and me for marke ng becomes scarce. I would also recommend for a new fund to budget for a marketer in their first two years of opera on. You can contract with a third‐party marketer or hire an in‐house person. If you look at the largest funds in the industry, they all have substan al investor rela ons teams that keep current investors informed while prospec ng for future investors. The largest funds did not get to where they are by wai ng for someone to knock on their door looking for a good hedge fund. They built their funds by ac vely seeking new investors and building a brand that becomes known in the market place. With so many compe tors in every strategy, you have to be proac ve in your approach to make sure that when an allocator is looking for a par cular strategy, you have already laid the ground work by having a pre‐ exis ng rela onship, which makes it easier for an investor to perform due diligence and ul mately make the investment. Prime brokers offer services such as por olio and risk repor ng which makes your ini al technology investment fairly minimal. There are other outsourcing services for technology, compliance, trading and accoun ng that are very economical and provide an ins tu onal infrastructure. Capital introduc on is a much sought a er service from prime brokers which could be very helpful in providing a new fund exposure to poten al investors. Capital introduc on is exactly what a prime broker provides. A fund has to take advantage of introduc ons and begin to build rela onships and add to their list of investors and poten al investors. All professional hedge fund investors want to know about new funds and funds that are performing well. They may not be willing to have “The largest funds did not get to where they are by wai ng for someone to knock on their door looking for a good hedge fund”
  5. 5. 5 © 2014 Eze Castle Integra on mee ngs up front, but they all want to be on your mailing list and follow your fund’s performance and growth through your monthly le er. Star ng a fund is about star ng and managing a business. Most new managers come with great investment capabili es and li le business opera ng experience. The services of your prime broker and other service providers can make the transi on a whole lot easier. Many prime brokers offer consul ng services to help guide you through the maze of real estate, technology, benefits and staffing. These services can be a great value, and their experience can help you avoid costly mistakes that may distract you from your real mission, which is to make money for your investors. The hedge fund industry has grown and become more ins tu onalized over the past 25 years. The industry is expected to con nue to grow for years to come as absolute returns become the only alterna ve in a vola le market for corporate and state pension funds that are underfunded with huge obliga ons to meet in the years ahead. There will always be room in the market for talented individuals, and the most successful will be the ones that start with a solid founda on. A A Glen Dailey is the former Managing Director and Head of Prime Brokerage at Jefferies & Company. He previously founded Banc of America Prime Brokerage in 1995 and was most recently their Chief Opera ng Officer. Prior to Banc of America Securi es LLC, Glen was a Managing Director and Head of Prime Brokerage for twelve years at Furman Selz LLC.
  6. 6. 6 © 2014 Eze Castle Integra on As regulatory requirements become more complex and onerous in the alternative investment space, there is clearly an evolution taking place in the market. There is an ongoing trend toward adding registered or retail products among many hedge fund managers. They are seeking new structures to bring their strategies to market while putting themselves in the best position to tap retail investors and wealth advisors in the new competitive landscape. It’s no secret that a significant amount of capital is looking to move into the alterna ve investment space – just look at the numbers. According to Ci group, assets in liquid alterna ve funds have surged from $95 billion in 2008 to more than $300 billion last year. Ci es mates that number will hit $1 trillion by 2017. If you look at the trajectory, what seems to be clear is that liquid alterna ves are here to stay. What may not be so obvious to some alterna ve managers is whether they should stay on the private fund side or follow the asset flow into the retail space by adding addi onal product offerings. It’s not a move that should be taken lightly. Managers have to make smart, informed decisions about whether a registered product is right for them, and how they can best implement the strategy if they decide to make the move. There are many ques ons that need to be answered, and many op ons that need to be considered before making such a cri cal decision. To help managers make more informed decisions in the new liquid alterna ves reality, Rothstein Kass has compiled a set of important ques ons managers must ask themselves, and other cri cal considera ons that should be part of their decision‐ making process. For hedge fund managers, the potential to tap into the mass affluent market through retail distribution channels is extremely enticing, but not if it comes at the expense of their current business. The goal of launching a liquid alt fund should be to gain access to a new pool of investors that could not be reached with a private fund, not to move current investors from one product into another. Managers have to take a hard look at how a SHOULD I GO WITH THE FLOW INTO LIQUID ALTS? BY: FRANK ATTALLA, CPA, AND MARC J. WOLF, CPA, ROTHSTEIN KASS 1.Will a registered product cannibalize my exis ng private fund business?
  7. 7. 7 © 2014 Eze Castle Integra on registered product will impact their existing private fund business. For example:  Will it be additive or will be it be competitive?  Can you clearly articulate the differences between the product offerings and the value to different investor segments? If not, then it is unlikely you will be successful long‐term. If investors feel they can get the same diversification and upside in a retail product — without paying the performance fees of a hedge fund — why wouldn’t they simply move their assets from one product to another at the first opportunity? Beyond investor perception, managers must also consider operational resources and other elements that may take away from the success of a current business. It may seem like a product extension but, in reality, launching a liquid alt fund is like launching a new business that requires a:  Well‐thought‐out business plan,  Thorough competitive analysis, and  Realistic view of what impact that new business will have on your existing revenue. This may seem like a simple question, and for some managers it is. The reality is that most strategies can fit into a mutual fund or liquid alt model, as long as:  You have the proper structure for trading commodities,  You don’t have a significant amount of illiquid assets, or  You’re not highly levered. And, in some cases, even if managers do have significant illiquid assets, they can utilize a listed or unlisted closed‐end fund and still reach a new pool of investors. So, instead of thinking of this as simply a yes or no question, this decision may come down to a question of nuance. The following are all questions that managers should not only consider, but talk through with their team of experts:  Do you fully understand what you can or cannot do from a strategy standpoint inside a registered vehicle?  Do you understand how you can or should alter your strategy to be most effective in the registered arena?  Are you aware of the registered product structures that would be most conducive to your particular strategy? The reality is there is no typical alternative mutual fund, and there is no cookie‐cutter approach to being successful in the liquid alts space. Distribution is critical to the success of any investment product, but in the increasingly competitive world of liquid alternatives it’s even more so. Managers can have the best investment strategy out there, but if they do not have a sound distribution strategy with the right distribution partners and channels, it will not matter. What managers have to understand is that retail distribution is a whole different animal than private fund distribution. Hedge fund distribution is more relationship‐driven, while mutual fund distribution requires systematic institutional selling. Mutual fund distribution requires managers to consider everything from strategic product positioning and pricing to 2. Will my strategy fit inside a mutual fund? 3. Do I understand the distribution landscape?
  8. 8. 8 © 2014 Eze Castle Integra on understanding the peer group that a fund is competing against. Managers have to be confident that they can execute their strategy effectively either by themselves or with a trusted partner. Organizing a registrant and launching a mutual fund is a complex process with a lot of requirements. The first decision that managers need to make is whether they will set up their fund as a stand‐alone trust or through a series trust. The decision often comes down to weighing multiple factors such as cost, time to market and control over the process. With a series trust, the regulatory compliance and operational structure is already in place, which can reduce startup costs, administrative burdens, operational costs and, ultimately, time to market for managers. The trade‐off is that the manager is fitting into an existing structure and inheriting an existing board that might not be tailored for their specific strategy. If you do decide to go the series trust route, it’s important to understand that there are a growing number of options and there can be huge disparity when it comes to everything from expertise and assets to costs and technology. So, you have to do your series trust “due diligence.” For example:  Talk to managers who are in the trust already.  Look at the trust sponsor’s experience.  Gain a full understanding of the expertise and reputation of the board, the audit firm and the legal counsel.  Understand the distribution channels being utilized. While many managers may think the answer to this question is yes, this response may be anchored more in perception than reality. The operational, compliance and reporting responsibilities may seem more onerous and costly in a registered fund, but the reality is that they are just different. If a manager works with the right partners to put the right infrastructure, processes and controls in place, the operational efficiencies and cost savings will follow. 4. Should I use a stand‐alone trust or a series trust? If a series trust, how do I choose the right one? 5. Is a registered fund too expensive?
  9. 9. 9 © 2014 Eze Castle Integra on All registered funds are not created equal. There are many different varieties of mutual funds and closed‐ end funds, each with different:  Tax considerations,  Reporting requirement, and  Fee structures. Managers should have an understanding of all the options and determine what works best for their strategy and their business. While every product structure has different and often complex tax requirements, managers also need to be aware of the tax implications of a registered fund at a higher level. For example, they need to have the answers to the following questions:  Will my strategy qualify from a tax code perspective?  Will my investment mix pass the asset diversification test?  Do I have a firm grasp of ”good” income versus “bad” income?  Do I understand how the structure impacts the needs of different types of investors? These may seem like obvious questions to some, but if they are overlooked from the onset, problems will arise further down the road. In addition, there are significant advantages for tax‐exempt and pension plan investors, such as the elimination of unrelated business taxable income (UBTI) and an exemption from the ERISA1 rules, that could be touted if the advisor is aware of them. The answers to some of these questions may eliminate the possibility of a move to retail altogether. What’s most important, however, is that you are thinking about them. When alternative managers make the decision to launch a registered fund, they have to be sure they’re fully committed – both mentally and financially – for the long haul. While there is the potential to access a whole new pool of investors and assets in a registered fund, it’s not an overnight proposition. It takes time to build assets and a track record and it takes a financial commitment to fund operations while the assets are building. Like with most hedge funds, managers will have a management fee to cover expenses, although the fee could be limited by an expense cap. Therefore, a fund manager should prepare a break‐even analysis, which the fund’s administrator can usually assist with. In the absence of this commitment, it will likely be a waste of time and money for managers to jump into the liquid alts arena. Many investors make investment decisions based on a fund’s track record. Unfortunately for alternative managers making the shift into the registered space, their track records are rarely portable. Beyond that, it takes three years for a fund to get Morningstar® rated, which is a major validation point in the retail space. In some cases, there are product structures that can potentially allow managers to leverage their track record from the alternative space. Managers need to fully understand track record implications before making the move to the registered space and work with a legal or compliance expert to make sure they’re taking all the right steps along the way. 6. Do I understand all my product options? 7. Do I understand the tax implications of a registered fund? 8. Am I ready to make the commitment for the long haul? 9. Do I understand the track record implications?
  10. 10. 10 © 2014 Eze Castle Integra on Some alternative managers look at the mounting regulations in the private fund space and see the move into the registered space as an obvious one. They think that if they’re already dealing with increased regulation, they may as well make the move to retail and reap the rewards of gaining access to a new and larger capital base. But it’s not that simple. The regulatory requirements in the registered world—from the need for independent boards to required compliance with a whole new set of SEC,2 CFTC3 and FINRA4 regulations — is different from the private fund world. Managers who aren’t realistic about this fact will be in for a rude regulatory awakening. It’s critical for managers to work with seasoned experts to gain a full understanding of the regulatory landscape and the implications it will have on their business in both the short‐ and long‐term. However, advisors to registered funds get the benefit of avoiding the Form PF filing requirement. Transparency has become the norm for managers in all asset classes since the financial crisis. That said, when an alternative manager crosses over into the registered space, transparency becomes a regulatory requirement as opposed to simply an investor demand. You need to be aware of this shift and make sure you’re ready to execute on it. From a practical standpoint, this means:  Disclosing all investments over 1 percent or, at a minimum, the top 20 positions on a quarterly basis as opposed to only those that make up more than 5 percent of the total fund, and  Daily asset valuation and liquidity, if organized as an open‐ended (mutual) fund. These are all factors you need to consider before making the move and deciding whether your strategy and your business are ready for the leap into the registered space. Moving to a liquid alts strategy seems simple enough for most hedge fund managers. It’s just a matter of executing a proven strategy in a different product structure, right? Well, not exactly. What’s important to remember is that in a mutual fund structure, fund managers must report to a board that has a fiduciary responsibility to ensure that the shareholders’ best interests are being considered, such as reviewing investment decisions and fees charged to a fund. This requires a major change in mindset for most hedge fund managers who essentially ran their own fiefdom, answering only to investors with, in most cases, long‐term lock‐ups provisions. Many managers can and have made the shift, but those who go in with that understanding from the get‐go are much more likely to be successful long‐term. The liquid alternative space has grown at a breakneck pace in recent years, and there doesn’t seem to be any slowdown in sight. But while there is clearly a lot of opportunity, there is also a lot of competition, as “Before making any move, managers need to take a hard look in the mirror and consider all the business implications” 10. Do I understand the regulatory implications? 11. Is the additional transparency that a registered product requires acceptable? 12. Am I prepared for the change in mindset required to operate a mutual fund structure? The Last Word
  11. 11. 11 © 2014 Eze Castle Integra on well as the need to create the correct operational infrastructure, and it’s not the right fit for every manager. Before making any move, managers need to take a hard look in the mirror and consider all the business implications — and consult with their service providers — before getting caught up in all the liquid alts excitement. The questions above may not be the only ones that need to be asked, but they’re a good place to start for any manager who’s thinking about following the flow of liquid alternatives into the retail space. A A Frank A alla is a principal at Rothstein Kass, located in the firm’s Roseland, N.J., office. He has over 15 years of experience exclusively in the financial services industry. He specializes in audit and tax services for a variety of investment partnership structures, including domes c and offshore funds, master‐feeder structures, funds of funds, and registered investment companies. Frank is a cer fied public accountant in New Jersey and New York. Marc Wolf is an audit principal in Rothstein Kass’ Beverly Hills office. Marc’s areas of specialization are focused within the firm’s Financial Services Group, specifically hedge funds, regulated investment companies (RICs), commodity pools, real estate, private equity and other types of investment vehicles, broker‐dealers, private foundations and family offices. He is a certified public accountant in California, Colorado, New Jersey, New York and Texas.
  12. 12. 12 © 2014 Eze Castle Integra on ASSESSING NEVER-EXAMINED SEC-REGISTERED INVESTMENT ADVISERS: AN SEC NEP PRIORITY BY: SHELLEY ROSENSWEIG AND BETH SMIGEL, TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT On January 9, 2014, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) published its 2014 examination priorities for its National Exam Program (“NEP”). While the examination priorities include multiple areas that OCIE believes are higher‐risk areas of the business and operations of investment advisers, this article focuses on the NEP’s initiative (the “Initiative”) to conduct focused, risk‐based examinations of investment advisers who have been registered with the SEC for at least three (3) years (including non‐U.S. advisers) but have not yet been examined by the NEP and are not subject to the “Presence Exam” initiative discussed herein (“Covered Advisers”). The examinations conducted by the NEP in accordance with the Initiative focus on two approaches. The first approach consists of risk‐ assessment reviews which allow the NEP to obtain a better understanding of each Covered Adviser and include a high‐level review of the Covered Adviser’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on the Covered Adviser’s disclosure documents. The second approach utilizes focused reviews which emphasize certain high risk areas of the Covered Adviser’s business and operations, including the following:  Compliance Program: NEP staff will examine the Covered Adviser’s compliance program and the effectiveness of such program (including a review of its books and records, even such records existing prior to such Covered Adviser’s registration with the SEC) to determine if a Covered Adviser has adequately identified conflicts of interest and compliance‐related risks, adopted appropriate policies and procedures to mitigate and manage those conflicts and risks, and empowered a competent chief compliance officer to administer the compliance program;  Filings/Disclosure: NEP staff will review the Covered Adviser’s filings and disclosure documents to assess the content and scope of disclosures that have been made therein (in particular whether conflicts of interest and potential conflicts of interest have been adequately disclosed);  Marketing: NEP staff will review the Covered Adviser’s marketing materials and evaluate whether a Covered Adviser has made false or misleading statements about its business or performance record, made any untrue statement of a material fact, omitted material facts, made any statement that is otherwise misleading or engaged in any
  13. 13. 13 © 2014 Eze Castle Integra on manipulative, fraudulent, or deceptive activities in such marketing materials;  Portfolio Management: NEP staff will review and evaluate the Covered Adviser’s portfolio decision‐making practices, including the allocation of investment opportunities and whether the Covered Adviser’s practices are consistent with disclosures provided to clients; and  Safety of Client Assets: NEP staff will review a Covered Adviser’s compliance with the relevant provisions of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and other applicable laws that are designed to prevent loss or theft of client assets. The SEC specifically excludes registered investment advisers to private funds from the Initiative, as those advisers are subject to examination pursuant to the SEC’s “Presence Exam” initiative launched in October 2012. The Presence Exam program focuses on newly registered private fund investment advisers that registered with the SEC as of July 21, 2011, the date when the definitional rules under Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 became effective (which, among other things, removed the “less than 15 clients” exemption from SEC registration on which most private fund advisers previously relied). It is worth noting for those advisers to private funds subject to Presence Exams that the five (5) key focus areas (some of which overlap with those mentioned above) are the adviser’s marketing, portfolio management, conflicts of interest, safety of client assets and valuation procedures. Covered Advisers should anticipate being examined by the SEC pursuant to the Initiative. To prepare for such exams, compliance officers of Covered Advisers are encouraged to review their compliance policies and procedures to ensure that such procedures (i) adequately address the foregoing matters, (ii) are in compliance with the Advisers Act and SEC guidance and (iii) accurately reflect the operations of the Covered Adviser. Covered Advisers should also ensure that disclosures made to its clients are consistent across all of its disclosure materials including ADV filings, offering and related documents, client agreements and marketing materials. We note that OCIE indicated its intention to invite Covered Advisers to attend regional meetings later in 2014 where they can learn more about the examination process. As the SEC’s Division of Enforcement has the ability to bring charges against a Covered Adviser based on deficiencies discovered by OCIE in the course of examination, Covered Advisers should consider meeting with their legal advisors to better understand what to expect during the examination process and how best to prepare. If you have any questions regarding this update, please contact Shelley Rosensweig at 212‐508‐6774 or Beth Smigel at 212‐702‐3176.
  14. 14. 14 © 2014 Eze Castle Integra on A A Shelley Rosensweig is a partner in the Financial Services, Private Funds and Capital Markets department at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Shelley advises clients regarding matters which include design, structure and operation of US and non‐US investment funds and portfolios, distribution and marketing issues as well as commodities, futures and derivatives issues. Shelley also advises and assists clients with regard to seeding arrangements, managed account platforms and the organization of joint ventures. Further, Shelley advises investment advisory clients regarding investment products and services, SEC, FINRA, CFTC and blue sky regulatory and compliance matters, as well as trading issues and employment matters. Beth Smigel is partner in the firm's Financial Services, Private Funds and Capital Markets department at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Beth's practice includes forming and structuring domestic and offshore private investment funds (including hedge funds and private equity funds) and advising with respect to ongoing operational and U.S. regulatory matters for the funds. In addition, Beth advises U.S. and non‐U.S. investment advisers with respect to registration (and exemptions therefrom) under the U.S. Investment Advisers Act of 1940 and compliance matters arising thereunder, including assisting in preparation of compliance manuals and code of ethics. Beth also counsels investment advisers, fund operators and investment funds with regard to various U.S. regulatory matters, including those arising under the U.S. Securities Act of 1933, the U.S. Investment Company Act of 1940, the Commodity Exchange Act as well as SEC, FINRA, NFA and CFTC compliance and registration issues.
  15. 15. 15 © 2014 Eze Castle Integra on A HEDGE FUND’S GUIDE TO TECHNOLOGY DECISIONS: FROM CLOUD TO DR BY: MARY BETH HAMILTON, EZE CASTLE INTEGRATION The Cloud: Every Hedge Fund is Doing It Here at Eze Castle Integration, we see that 9 out of 10 hedge fund startups are selecting a cloud‐based solution versus a traditional on‐premise solution. If you aren’t already sold on the cloud, here are a few reasons we typically see clients select the cloud:  Easy and Complete IT Package: Cloud computing can support front‐, middle‐ and back‐office functions – everything from business applications and client relationship management systems to data management solutions and accounting systems  Cost Containment: CapEx to OpEx: While building out a Comm. room or data center requires capital expenditures, using an external cloud service that offers a pay‐as‐you‐go service falls into ongoing operating expenditures. The transition to a cloud service provides many cost‐savings beyond just eliminating the need to purchase and refresh equipment.  Improved Flexibility and Scalability of IT: Cloud computing is uniquely flexible and scalable, operating on a utility basis ‐ allowing firms to pay as they go and only for the resources they will use.  Simplified IT Management = Less Maintenance: With cloud services, firms no longer need to handle server updates, patches, hardware installs and other computing maintenance issues. This saves firms from having to hire dedicated IT resources or allows them to focus IT staff on higher value projects. Mee ng the SEC’s Cybersecurity Expecta ons Regardless of whether your firm opts for an on‐ premise solution or the cloud, security is fundamental when considering a fund’s technology setup and network infrastructure. It is so important that the SEC this month issued a risk alert providing additional clarity into how it will examine registered investment firms regarding their cybersecurity practices. All financial firms are at risk because hackers see value in gaining a firm’s business secrets and intellectual property ‐ such as business plans, trading programs, market forecasts and investment strategies. Therefore, a multi‐layer security approach is essential to protecting the critical information that passes through the organization’s system every day. This strategy, known as Defense in Depth, recommends that investment firms maintain up‐to‐date anti‐virus and anti‐malware software as well as network firewalls, deep inspection proxy and intrusion detection/ prevention (IDS/IPS) to reduce the amount of traffic on the network, thereby decreasing opportunities for an intrusion. In addition to these technical layers, firms should also implement the following policies and procedures to ensure their critical systems and data do not fall into the wrong hands. Acceptable Use Policy. Define what acceptable behavior is for your employees as it relates to their technology usage. It is best to be specific within this policy regarding what activities and programs employees are or are not permitted to access. Firms can employ web filtering
  16. 16. 16 © 2014 Eze Castle Integra on practices to block access to identified websites. They can also use third‐party software to log activity around which employees are accessing what and what other actions they are taking (e.g. printing, copying, forwarding, etc.). Principle of Least Privilege. This involves restricting access to only those employees who need it. Keep access control lists on all applications and data and inbound/ outbound Internet access to keep track of who can gain access to what. Also, log the use of audited one‐time passwords and minimum privilege shared accounts. Secure User Authentication Protocols. Secure user authentication protocols include assigning unique domain user IDs to each employee, implementing strong domain password policies, monitoring data security passwords and ensuring that they are kept in a secure location and limiting access to only active users and active user accounts. Information Management Security Policy. Develop a plan that details how the firm will handle a security incident. The plan should outline who is in charge of managing a security incident, the required reporting and investigation procedures, communications policies for contacting clients and the post‐incident remediation procedures. Visitor/Contractor Premise Access Policy. It is essential that firms keep track of all people who have visited the site through the use of physical security checkpoints and surveillance. Mobile Device Policy. Develop guidelines for the use of personal mobile devices in the workplace, and train staff on mobile device security practices. Employ security measures such as requiring passwords, having the ability to remotely wipe devices and employing encryption tools. Preparing for the Inevitable Disaster Disaster recovery and business continuity plans are crucial for sustaining operations during outages or disasters. A disaster recovery plan addresses how the business will resume normal operations in the event of a catastrophe. A business continuity plan is somewhat broader in nature and deals with sustaining normal business operations during periods of disruption. Both disaster recovery and business continuity planning are essentially means of systematically assessing the potential impacts of various unexpected incidences and determining the organization’s preparedness to deal with such events. During the planning process, firms should aim to ensure little to no business and project interruption during either a planned or unexpected event. In this planning phase, be sure to take the following steps: 1. Assess the business risk and impact of potential emergencies. 2. Prepare for possible emergencies. 3. Document a disaster recovery plan. 4. Outline the business recovery phase. 5. Train staff for the business recovery phase. 6. Test the plan with a realistic dry run. 7. Keep the plan timely. Avoiding Common Technology Mistakes Finally, following are five common technology mistakes that new funds make and what you can do to “All financial firms are at risk because hackers see value in gaining a firm’s business secrets and intellectual property”
  17. 17. 17 © 2014 Eze Castle Integra on avoid them. Looking for the perfect solution. During the planning phase of your new fund, the idea that there may be one or more solutions that can meet 100% of your technology requirements can be an appealing thought. Some vendors are attempting to develop a turnkey platform to deliver on this promise. However, unless your business is narrowly focused, the chances that a single vendor will meet every aspect of your needs are very slim. Realistically, you will likely need to negotiate, purchase and deploy systems from multiple vendors and service providers. Selecting a single vendor and relying on it to be around in the years ahead may cause your firm to assume more concentrated business risk than you are willing to accept. Insufficient planning for the future. Without envisioning how your practice will look over the longer term—in three or five years—you may be setting yourself up for some short‐sighted solutions. Despite your intense focus on completing the immediate tasks of launching your fund, understanding what your firm will look like in the future is important as well. If your fund grows significantly, will you have the necessary technological systems to support that larger business? Failing to understand how much you rely on technology today. Think about the work you currently do today and write down some notes on which systems you use to complete that work (email, reports, phones, quote feeds, etc.). Now, consider the work that will need to be done in your new hedge fund and what systems you and your team will require to complete it. More than likely, you will need most – if not all – of the same systems, with some additional ones as well. Use this list as a shopping guide when building out your technology platform. Overestimating your capacity to manage technology. Managing technology is a profession unto itself. Unless you spend most of your free time building servers and managing networks, you will need help managing technology at your new firm. For project‐ related work (“one‐and‐done” jobs), you can use consultants and contractors. For ongoing interaction and maintenance of the technology, you can contract with a third party. Also, be sure to consider hiring support or administrative personnel that is skilled with technology.
  18. 18. 18 © 2014 Eze Castle Integra on Shortchanging the training options and resources. Once you have all of your new systems lined up, you need to learn how to use them. Most vendors provide some sort of onsite or web‐based training options. If it is reasonably priced, you will most likely want to take advantage of it. Often, the vendor’s professional services arm will know all the quirks of the software package so well that many important details are glossed over during the sales process. They can help you develop the correct workflow to maximize your investment, as well as get you past some of the inevitable challenges. Also, ask the vendor whether there are any established user groups for their so ware and systems. O en, these communi es can be invaluable resources for ge ng up and running more quickly and with less frustra on. Avoid rushing the installa on in order to make a set deadline and address any subsequent issues that may arise. A A As vice president of marke ng for Eze Castle Integra on, Mary Beth Hamilton is responsible for mar‐ ke ng strategy and integrated marke ng programs to drive awareness and demand for the company’s IT services and solu ons. With a decade of marke ng experience, Mary Beth is skilled in guiding mar‐ ke ng efforts for services organiza ons. She holds a BS from Loyola University New Orleans and MBA from Boston College.
  19. 19. © 2014 Eze Castle Integra on19 CAN AN ALTERNATIVE STRATEGY INVESTOR KNOW THE VALUATION GIVEN IS CORRECT? BY: DANIEL JOHNSON, OF WELLS FARGO GLOBAL FUND SERVICES, AND ERIC LAZEAR, OF FQS CAPITAL PARTNERS Traditionally, for most investors, the main concern when investing in a hedge or private equity fund was whether the manager could generate a sufficient level of return for an acceptable level of investment risk. But operational matters have increased in importance and operational due diligence has now evolved to the point that many investors will reconsider an investment on operational grounds alone, regardless of the return profile. Operational risk can take many forms, but valuation is a good place for investors’ initial focus: are the holdings of the fund accurately valued, and is there a process in place to ensure that they are accurately valued at each dealing period? Valuation risk is particularly critical for more complex strategies, such as structured credit, where the risk of pricing irregularities is significantly higher. However, it is also important to review and understand pricing policies and procedures for strategies that trade listed securities. For example, it is useful to know whether the manager marks their equity longs at the bid, mid or close and, if it is the mid, if the manager determines the impact on the portfolio if priced at the bid. It is also important to understand if adjustments are made for large positions, less liquid holdings, or for securities that trade less frequently. How the holdings of a fund are valued is important for many reasons: it drives the net asset value (NAV); it sets the price for subscriptions and redemptions; and it determines the level of performance fees. While this point may be obvious for most investors, many investors are often unsure of what detailed valuation related questions to ask the manager and, equally as important, the administrator who is responsible for producing the NAV. Valuation Risk Unlike reviews of performance, it is essential that any review of valuation risk include all parties involved in valuing the assets of the fund. This will often include speaking to the administrator about their role in the process and what the involvement of the investment manager has in determining the final prices. However, when reviewing the valuation process it is often too easy to adopt a checkbox approach. It is essential for investors to understand that the questions one should ask must change depending on the strategy of the fund and the assets it trades. The questions asked of a distressed debt manager are different from those that should be directed to a long/short equity manager who only trades listed securities. But there are also some common questions that should be asked of all funds and questions for fund administrators covering key areas (see boxes). These questions are just some examples to help investors more
  20. 20. 20 © 2014 Eze Castle Integra on fully understand the valuation process for funds they are considering investing in. Common Ques ons to All Funds  Who approves the valuation policy, how often is it reviewed and re‐approved?  How are policy exceptions reported and to whom?  What is the role of the governing body in the valuation process? How much knowledge do they have of the asset class being traded by the fund?  What valuation service providers are used and exactly what type and level of service is being provided?  What due diligence was performed on the provider?  How involved is the investment manager in the process? Can they pick the price‐providers and, more importantly, can they change the providers each month?  Are third parties involved in the pricing process at any stage?  Does the investment manager have a valuation committee to review valuation processes, approve all policy exceptions and if necessary approve all investment manager prices? Key Questions for Fund Administrators  Is there a clearly defined and documented process that covers how all major asset classes will be valued for the fund? This is normally more detailed than the NAV section of the prospectus and provides specifics on what the administrator will actually do to value the investments.  Does that process cover not only the primary and secondary data sources, but which prices should be used (mid/bid/ask, and so on), what time the prices are taken, how the prices can be independently obtained and what to do when the process cannot be followed?  Is the administrator SSAE16 Type II or ISAE 3402 certified? This shows they have documented processes that have been reviewed by a third party.  Is the administrator independently valuing the portfolio, or acting as a price validation/ verification agent?  Do investors or the fund’s directors receive any kind of NAV transparency report showing a breakdown of pricing sources and methods, as well as a breakdown of assets by ASC 820 levels? Most administrators can provide this and should be able to walk investors through all of the numbers. “Valuation risk is particularly critical for more complex strategies, such as structured credit, where the risk of pricing irregularities is significantly higher.” A A Daniel Johnson is vice president, valuation services at Wells Fargo Global Fund Services and Eric Lazear is head of operational due diligence at FQS Capital Partners (US).
  21. 21. © 2014 Eze Castle Integra on22 AT HEDGE FUND TRADING DESKS, FURNITURE MATTERS BY: JEFF BRECHMAN, CFS GROUP There are many layers to creating a successful launch of a hedge fund, and often one that is overlooked is implementing the right furniture, while keeping in mind budget, timeline and dimensional restraints for your new office space. For someone starting a fund, and relying on your own capital, creating an office space within a budget is essential. In order to do so, you must partner with a furniture dealership that understands the marketplace and has the creativity to provide a solution that is light on the wallet but has the feel of stability and success. As you would expect, just like many other businesses, the commercial furniture industry is a very competitive, relationship‐driven sale, and unfortunately the client is usually on the raw end of the stick. Let’s give an example: Hedge fund A has six traders, and in their mind “we need a trading desk.” But the fund's users only have one PC and two monitors each, which equates to a minimal technology requirement. The fact is that a full‐blown trading desk can range from $2,000 to $5,000 (for height adjustable product) per user. Here is what the fund manager needs to know. There are other options that will adequately handle your technology, save you up to 60‐70% and give you the look and feel of a trading desk solution. Savings of $10,000 just by having the proper relationship and information. Hedge fund B has six traders, and they are looking for a new trading desk. The fund’s users have two or three PCs and three to six monitors each. Based on the amount of technology required, a trading desk does seem like the
  22. 22. © 2014 Eze Castle Integra on23 right fit and would run on average between $20,000 and $24,000. Having a relationship with a furniture vendor that stocks used trading desks may just save hedge fund B 100%. This is another example of making sure a vendor’s vision is aligned with the fund. The world of technology platforms is ever‐ changing. Therefore, knowing the technology is the key to understanding the furniture requirements to any successful hedge fund build out. As a result, hedge funds should look for a furniture partner that has the ability to identify each client’s specific needs and provide them with the right product for their furniture application. As a specialist in the industry, CFS Group knows hedge funds need a “go to” to embrace change as it unfolds. A typical build‐out provides practical solutions that elevate the aesthetics and performance of each hedge fund's facilities. The secondary key is having the right dealership to align each hedge fund with the manufacturers based on their budget. Besides looking at the technology and aesthetic requirements, understanding the budget is just as critical. Our job as a dealership is to remove that stress of purchasing furniture by creating furniture plan layouts and managing projects from start to finish. A A Jeff Brechman is the Director of Sales at the CFS Group. Prior to CFS Jeff was a Principal and Sales Director of one of the leading trading desk manufactures in the country. With over 15 years of industry experience, Jeff is helping to build the business as well as taking the financial furniture arm of CFS to new heights.
  23. 23. ABOUT EZE CASTLE INTEGRATION Eze Castle Integra on is the leading provider of IT solu ons and private cloud services to more than 650 alterna ve investment firms worldwide, including more than 100 firms with $1 billion or more in assets under management. We provide one global financial cloud pla orm that is complimented by excep onal service and opera onal excellence. Our Eze Private Cloud is built to deliver the high performance, applica ons and excep onal user experience demanded by the hedge fund and investment industry. To learn more about Eze Castle Integra on, contact us at 800‐752‐1382 or visit 24 © 2014 Eze Castle Integra on Complete Managed IT — So ware as a Service Eze Managed Suite is a fully managed IT solu on that provides flexibility and simplified IT opera ons. The hosted IT solu on combines a robust, highly secure private infrastructure via the Eze Private Cloud with key business applica ons and professional IT management. Applica on Hos ng — Infrastructure as a Service Eze Managed Infrastructure provides clients easy access to an enterprise‐grade private environment with the latest hardware and so ware without capital expenditures, expensive upgrades or ongoing maintenance and monitoring. It is ideal for hos ng applica ons used by hedge funds and investment firms. Disaster Recovery as a Service Eze Managed Data Availability delivers a full range of business resiliency services including Disaster Recovery, Online Backup and Message Archiving. Via the Eze Private Cloud, your cri cal data and applica ons will be available and protected 24x7x365.