"The Ultimate Hedge Fund Chief Operating Officer" by Frank Carr

1. MANAGED FUNDS ASSOCIATION May/June 2009
The “Ultimate” Hedge Fund
Chief Operating Officer
FRANK CARR,FRANK CARR, PARTNER, AMROP BATTALIA WINSTON
MANAGING PARTNER, CENTENNIAL ADVISORY GROUP
A COO’s Day to Day Responsibilities
WANTED: The Ultimate Hedge Fund Chief Like the captain of a nuclear submarine, the Ultimate Hedge
Operating Officer Fund COO (UHFCOO) must be able to make informed deci-
sions about forward-thinking strategic issues as well as split sec-
Then: Trustworthy back office expert to handle all details ond decisions to avoid counterparty torpedoes. The actual list
and interface with investors; prior knowledge of the term of daily responsibilities is enormous and the complexity is such
“Prime Broker” is a decided plus. that a qualified COO must truly understand the minute details
and be adept at delegating authority to a diverse support staff.
Now: Polished business executive that can skyrocket enter- The “Pre-Flight Checklist,” on the following page, could be
prise value, slash back office costs, track counterparty risks viewed as a COO’s daily reminder sheet or as a detailed check-
on a tick-by-tick basis and manage all gate issues/complaints. list for interviewing prospective job candidates. Several items
Must have proven track record in all areas of operations are clearly handled directly by the chief financial officer, general
and administration and must be able to predict the SEC’s counsel or other specialists, but most COOs are still on the
next regulatory pronouncement. Ideal candidates will trim hook to make everything run smoothly. From an overall per-
another 25% from management company overhead and spective, three of the most important categories, according to
cut portfolio finance costs by at least 110 basis points; Josh Kestler, chief administrator officer, DB Advisors Hedge
ability to bring in a quick $1 billion in new investors is a Fund Group, are managing:
decided plus.
• Operational risk;
• Legal and regulatory risk; and
• The entire client relationship process.
The Old Days
In 1993, this author was a “Then” guy. An ex-commercial banker A fund’s daily liquidity position may have been the biggest con-
thrust into the CFO job at a small hedge fund. Back then, Boston cern in late 2008, but in general, the COO’s job starts with
Chicken [Market] was the hot IPO and David Askin was the blow- implementing “best practices for everything below the invest-
up of the day. A prime broker was still referred to in the singular ment line and seeking external expertise for issues and chal-
context and hedge fund investors had a rather simple menu of lenges beyond his or her skill set and experience,” observed
name brand managers: Steinhardt, Soros, Tiger, Tudor and sever- John Seyda, a prime brokerage and hedge fund industry veter-
al others including up-and-comer, Perry Capital, which was at or an, and now managing partner of JMS Advisors. A good COO
near its five year anniversary. There may have been one or two should also be a key participant in managing the valuation
hedge fund chief operating officers (COO), but in those days methodology and process for all of a fund’s positions. For man-
“back office infrastructure” was often just an accountant or two. agers with numerous illiquid positions held in various side pock-
The events of 2008 have clearly changed that equation forever. ets, the COO should be especially diligent in overseeing the

2. “Ultimate” Hedge Fund COO
work of fund accountants and administrators and be fluent in
every step of the NAV process. The chief financial officer (CFO)
and his or her staff will of course handle all of the details, how- A COO’s Pre-Flight Checklist
ever, an UHFCOO should be able to troubleshoot and make
• Budgeting & Cost Control
executive decisions on any valuation problems. Meanwhile,
• Business Continuity & Disaster Recovery
COOs and their staff on the hedge fund of funds (FoF) side
• Counterparty Risk Assessment & Problem Solving
of the trade, have an even tougher task of vetting the valuation
• Enterprise Value Enhancement
approach for as many as one hundred or more underlying
• Fund Accounting and NAV Issuance
hedge funds.
• HR, Benefits and Recruiting Issues
• Investor Relations Management
While the COO “is always accountable,” observed Joel Press,
• IT and Communications Planning & Troubleshooting
managing director at Morgan Stanley’s Prime Brokerage
• Legal & Compliance Oversight
Division, experts often suggest independent reporting lines for
• Management Company Fee Calculations
the legal and compliance functions with only a dotted line to
• New Product Due Diligence
the COO. David Nissenbaum, partner at law firm Schulte Roth
• Office Space Planning & Lease Negotiations
and Zabel, agrees that this structure can avoid conflicts but that
• Onshore/Offshore Structures and Tax Matters
the COO must still stay on top of all regulatory and legal issues.
• Portfolio Finance: Rates, Terms & Liquidity
“The Ultimate Hedge Fund COO is someone who works very
• Position Valuation Methodology & Process
hard to make sure that they don’t have blind spots; someone
• Securities Settlement & Clearance
who is constantly focused on the entirety of the business,”
• Service Provider Relationship Management
added Nissenbaum.
• Succession Planning
• Treasury & Cash Management Oversight
Special Note to Hedge Fund Founders, CIO’s and
Portfolio Managers
You are undeniably the one who generates alpha; but you need rized, but the MFA’s newly enhanced 2009 edition of “Sound
to make it clear to everyone that the UHFCOO is the “Alpha Practices for Hedge Fund Managers” (available online at
Dog” of operations and administration. Wolves may instinctually www.managedfunds.org) should be required reading for the
cooperate under a single leader but your COO’s job can be job. Experts agree that Sound Practices is a great starting point,
made much easier if your troops receive a direct message from but the best COOs have gone well beyond its suggested
the top about his or her clear mandate to govern. framework.
What Background is Best for Your Fund?
“Pedigree, including both education and experience, leadership
A hedge fund COO clearly has to be a really good “jack of all skills and the ability to grow and sustain a business are some of
trades,” but at hedge funds around the world, their career path the key elements that investors might use in benchmarking a
has included all flavors. The talent pools most commonly hedge fund COO,” said Kevin Lynch, formerly managing direc-
tapped are attorneys, auditors/CPA’s, former hedge fund CFO’s, tor, head of hedge fund research at Rogerscasey. No matter
capital markets management executives and securities opera- what the background, a good COO needs to be a strong advo-
tions veterans. Steve Swain, chief operating officer of Lyster cate for proper operational infrastructure and appropriate back-
Watson says, “the key is understanding how all the various office resources.
units integrate together, rather than being an expert in any
one particular area.” Specific investment strategy experience
Counterparty & Liquidity Risk – This Time it Hurt
may be less crucial to most funds, but fixed income managers
would be wise to stick with someone who is well-schooled in During 2008, even the ultimate COOs were bombarded with
the operational subtleties of the debt capital markets. never before seen challenges in tracking their various expo-
sures. “The COO is perhaps the first person in line to initiate
Countless Wall Street veterans may feel they are up to the task, and maintain a firm’s counterparty risk assessment,” stated John
but many hedge fund COO applicants just don’t appreciate the Budzyna, a veteran hedge fund auditor and now a partner at
complexity of the role. The real UHFCOOs surely have it memo- Precision Advisers, an independent operational due diligence

3. “Ultimate” Hedge Fund COO
consulting firm. Last year’s market volatility particularly chal- Steering the Ship with Greater Control
lenged the management of hedge funds of funds who were
As investors return to the hedge fund market, larger organiza-
caught in the crossfire of an unprecedented liquidity squeeze.
tions with an experienced COO steering the ship will likely gain
FoF COOs generally focus on aggregating fund performance
the upper hand in asset inflows. Emerging managers, mean-
figures rather than on individual securities positions, but with
while, can certainly be competitive by using state of the art out-
“gates” shutting in their faces like never before, these profes-
sourcing solutions and later increasing in-house staff commensu-
sionals had to be every bit as sophisticated as their single man-
rate with asset growth. Regardless of size, all managers will be
ager counterparts.
subject to stringent operational due diligence as they compete
for a share of the $2.6 trillion in assets (by 2013) forecast by the
The next big challenge for COOs and the entire financial indus-
Casey Quirk report. The hedge fund business model is tailor-
try is to develop an integrated solution to accurately track all
made for leverage of both the margin and outsourcing kind and
outside exposures from both a qualitative and quantitative
the Ultimate Hedge Fund Chief Operating Officer is the natural
standpoint. Hedge fund managers continue to be the pioneers
answer to keep all that power under control.
of the investment world and their UHFCOOs will surely be lead-
ers in implementing technological solutions which best clarify
the entire risk landscape. Author’s Note: I would like to thank the many contributors who made
my article possible: John DiRocco, Hedge Speed; Joel Press, Morgan
Stanley; Eric Vincent, Ospraie Management; David Nissenbaum, Schulte
The Back Office – In the Forefront of Investor Roth & Zabel; John Budzyna, Precision Advisors; Steve Swain, Lyster
Demands Watson; Alan Swersky, Olympia Capital Management; Tom Hirschfeld,
Halcyon; Gary Yannazzo, EIM; Josh Kestler, DB Advisors Hedge Fund
Investor demand for hedge funds will once again surge, as sug-
Group; Kevin Lynch; John Seyda, JMS Advisors; Erica Weinrich,
gested in “The Hedge Fund of Tomorrow,” the well-written April
Ambrose Employer Group; Mark Bergen, AG Asset Management;
2009 report by Casey Quirk and The Bank of New York Mellon.
Michael Dorsey, Aurelius System; and all the other ULTIMATE Hedge
This time, however, prospective clients will kick all four tires Fund COO’s who inspired me. — Frank Carr
and even look under those infamous rocker panels as Gene
Hackman demanded to see in the film The French Connection. Frank Carr is managing the Global Financial Services practice at Amrop
Frank Carr is Partner in partner of Stamford, CT–based Centennial
“Come on Irv!” Battalia Winston,and a specialist in recruiting senior executives for the in
Advisory Group a retained executive search firm. Frank is a specialist
recruiting senior executives foris a former fund industry and he is ahedge
hedge fund industry. Mr. Carr the hedge commercial banker and former
“The imposition of gates and the outright suspension of hedge fund chief financial officer. He is a graduate of Williams College
where he received a Bachelor of a graduate of Williams economy.
fund chief financial officer and is Arts degree in political College where
redemptions in 2008 have made institutional investors quite he received a Bachelor of Arts degree in political economy. Contact:
cautious and there is more focus than ever on a competent and fcarr@centennialag.com; 203-487-6171.
experienced back office infrastructure,” offered Kevin Lynch.
Plenty of other investors share his viewpoint. “A primary ele-
ment in our decision to invest with a manager is the depth and
FRANK CARR
competency of the operational infrastructure," observed Alan Partner, Investment Management
Swersky, global head of operational due diligence at fund of Amrop Battalia Winston
funds Olympia Capital Management. For the near future, anoth- 555 Madison Avenue • New York, NY 10022
er related challenge for a COO may be passing the “going con- T + 1 (212) 308 8080 • M +1 (203) 249 7244
F +1 (212) 308 1309 • E fcarr@amropbw.com
cern” test in the eyes of potential investors.
Reprinted with permission from MFA Reporter May/June 2009 issue.