Despite a difficult business climate that has cut into staffing levels and resources, hedge funds have managed to stay largely trouble-free in the few years since the financial crisis of 2008-2009.
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“There have been far fewer instances of breakdowns of control,” said Howard Altman, co-chief executive officer and principal in charge of financial services at Rothstein Kass.
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Speaking on May 10 at the Skybridge Alternatives (SALT) Conference in Las Vegas, Altman cited a number of factors behind hedge funds largely staying out of the headlines, including a more direct alignment with institutional capital; improved due diligence emphasizing transparency and best practices; and more reliable financial reporting.
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Responding to the question of how hedge funds can convince institutional investors that their infrastructure is robust, Andrew Dougherty of BNP Paribas said it boils down to two criteria: the control environment of the portfolio and the firm, and sustainability. That framework, too, has taken shape since the financial crisis.
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“Five years ago we spent very little time with due diligence from an investor’s point of view. We didn’t have to field questions from investors,” said Dougherty, managing director and head of alternative and institutional solutions at BNP. “Since 2008, that has changed.”
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The control environment pertains to whether operations and compliance functions are conducted in-house or outsourced, Dougherty explained. If kept in-house, it is vital that there is separate staff for this so that the investment managers are free to manage the investments; if outsourced, it must be demonstrated that tasks are outsourced properly.
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Statements from a hedge fund’s prime brokerage should be independently verified and controlled, as should data from a fund’s margin process. Hedge funds with less than $100 million under management that do not have to register with the U.S. Securities and Exchange Commission should maintain the same standards as larger funds that do have to register, Dougherty said.
