What are Hedge Funds & Regulation

1. Hedge Funds
Ornella Hernandez, Peter Walsh
and Zara Zapico

2. What is a Hedge Fund?
A hedge fund manages a private pool of funds for investors with
excess capital.
● Legally limited partnerships
● Not as regulated as other financial firms.
● Limited liquidity of assets - ‘lockup period’
● Management fee and performance fee

3. What do they do?
Objective is to gain investors and use the cash to invest
● Trade in different types of securities to spread risk
● The higher NAV of a fund the more money it can hold back
● Strategies:
- long-short
- derivatives – include futures and options
- leveraging

4. Roles Within a Hedge Fund
Managers
● Oversee the client portfolio with goal to maximize returns.
● Proprietary trader
● Front office
Administrators
● Hired to carry out the investment process
● Calculating the NAV, preparing reports or monitoring compliance with the SEC.
● Middle office
Analysts
● Identify potential risks and make recommendations to the manager on how to
manage the fund.
● Middle office

5. Regulation - why it was needed:
● Highly leveraged funds
● Systemic risks
● Lack of transparency
● US and EU responded with new policy

6. U.S. Response
● Subject to same trade reporting and recordkeeping
requirements as other investors in publicly traded securities.
Dodd-Frank Wall Street Reform and Consumer Protection
Act (2010)
● hedge fund advisers with $100 million or more in assets
have to register with SEC
● Threshold for registration of AUM raised from $25m to
$100m
● fill systemic risk info with SEC and CFTC
● Volcker Rule (2014)

7. E.U Response
Directive on Alternative Investment Fund Managers
(AIFMD- 2010)
● register with national regulators
● increase disclosure requirements
● increases capital requirements
● restrictions on leverage
● Conduct of Business
● Final date for compliance is 22J

8. Volcker Rule and its consequences:
● Banned proprietary trading + sponsorship/ownership of Hedge
Funds from investment banks
● Prevents banks from using own funds to make speculative
investments that increase their profits.
● Hedge funds attracted bank traders and more investors who
sought to earn larger revenues
● Applies where any party to a trade is resident in the US--
foreign subsidiaries of US companies or US subsidiaries of
non-US banks.

9. What DeltaOne Solutions provides to
clients:
● Sells database to the sell side so they can accurately represent the
data of the underlying indices to the buy side.
● Standardizes data
It is easier for Hedge funds/banks to outsource this task to companies
such as DeltaOne Solutions who acts as a single source of data
provision, while Hedge funds can focus on trading

11. Improved trading efficiency
● Accessibility and Visibility
● Internal rebalance calculator to provide built in hedging.
● Client customisation of interface
● Consolidation of multiple internal processes reduces
total cost
Risk Management
● Accuracy and Validation checks
● Timely and Objective