Corgentum highlights the importance of robust hedge fund operational policies and valuations procedures with Opalesque
A recent Opalesque article outlined the recet the comments of Jason Scharfman, Corgentum Consulting Managing Partner on the subject of trends in hedge fund operational risk.
In the article, which is entitled 20% of marketing presentation should be dedicated to investor education , Mr. Scharfman outlines in part that, “[managers] need to have a robust operational policy (from pricing sources, to valuations, to how the administrator receives that information, to cash management policies).”
The full article can be read on the Opalesque website (subscription required).
Corgentum’s Overview of Material Nonpublic Information Operational Due Diligence Considerations For Hedge Funds in the US
Corgentum Consulting has released a new paper entitled, Hedge Fund Operational Due Diligence Education Series – Understanding Material Nonpublic Information in the United States.
With the recent raids of the offices of three hedge fund managers by the Federal Bureau of Investigation and the on-going prosecution of Raj Rajaratnam’s Galleon Group, cracking down on allegedly illegal insider trading is clearly on the forefront of the U.S. government’s financial regulatory agenda. Here is a video from CNBC concerning the recent FBI raids:
Hedge Fund Operational Due Diligence Education Series – Understanding Material Nonpublic Information in the United States provides an introduction to the ways in which hedge fund’s may interact, either directly or indirectly, with material nonpublic information. Areas addressed in this paper include a hedge fund’s use of expert networks as well as other third-party firms which provide information to hedge funds. Also discussed in this paper are several questions investors should address during the operational due diligence process in order to diagnose both a fund’s potential exposures to the risks associated with material nonpublic information as well as what preventative measures, if any, a hedge fund may have taken to insulate themselves for the liability associated with receiving or trading on such information.
The paper can be found in the Research section of the corgentum.com website, or via direct link here.
$150 million or more in your hedge fund? – The SEC says you will have to register
At a recent open meeting, the U.S. Securities and Exchange Commission outlined proposals as to how it would enforce Title IV of recently enacted Dodd-Frank legislation.
Specifically, hedge funds with at least $150 million in assets will be required to register with the SEC. As a reminder hedge funds were previously required to register with the SEC but that requirement was lifted after Philip Goldstein sued the SEC (and won) in 2006 to lift the registration ban – here is the decision. Despite the Goldstein rule the hedge fund industry, via groups such as the Managed Funds Association, have expressed support for hedge fund registration:
Additionally, the SEC will require hedge fund and other private fund managers to provide a whole host of new information. These suggestions piggyback on already enacted amendments for enhanced disclosures on form ADV . Hedge funds will be required to disclose basic information, including assets under management and the types of investors in the fund, as well as its auditors, prime brokers, custodians, administrators and marketers. Additionally, advisers themselves will have to provide more information as well, including about their employees, potential conflicts of interest such as soft-dollar deals, and advisory activities. Such firms may have to register even if they manage less than $150 million or exclusively venture capital funds.
The new rule also changes the SEC’s pay-to-play regulations in the wake of a scandal at the New York State Common Retirement Fund….:
While these proposals face a 45 day comment period it is likely that they will meet with little opposition.
These news rules will certainly increase the cost of compliance for hedge funds. In addition to devoting more time and resources towards compliance (both for the initial registration process and on-going compliance) hedge fund’s will continue to make more use of third-party compliance consulting firms. As part of the operational due diligence process investors should take steps to understand a number of issues related to registration including:
- How does a hedge fund plan to comply with the new registration requirements?
- Do they plan to do the bear minimum to be in compliance?
- Are there any areas of their firm (i.e. – because of legal structure, types of investors or investment strategy) which may put them at more or less risk based on the new registration requirements?
- How will the hedge fund deal with the increased cost of resources required to be dedicated to compliance?
- Has a hedge fund developed a dialogue with their legal and compliance service providers (i.e. – attorneys, third-party compliance consultants) to prepare for the registration process?
It is unlikely that these rules will do anything to prevent the next Madoff, as SEC registration creates an artificial floor for operational due diligence (for more on this please refer to Corgentum: Hedge Fund Regulation Doesn’t Matter) but that being said the more eyes on a hedge fund the better. Often the threat of an SEC exam does more to ensure on-going compliance then the the actual exam itself…
