In a recent roundtable, panelists offered advice on why it is important for hedge funds to increase transparency, perform "checks and balances" on valuations, add dedicated risk management functions and have a business continuity plan for trading operations. Ultimately, these practices will help reduce hedge fund risk and improve investor protections.In the first post of this guest blog series, a roundtable analyzed the Asset Managers Committee's recommendations that could reduce systemic risk and foster investor protection.
Continuing the series of discussions on the President's Working Group's Best Practices for Hedge Fund Participants guidelines that were issued in April 2008, Bob Guilbert, managing director, Eze Castle Integration, outlines industry responses and best practices advice from Eze Castle's recent panel discussion on the Asset Managers' and Investors' Committee Reports. Part two of the discussion includes recommendations from a panel of experts that include Equinox Partners, Ernst & Young, and Bingham McCutchen.
1. Disclosure - Panelists offered advice that although there is a certain level of subjectivity in disclosing information; you will want to move along with the market trend, which is towards increased transparency. To the extent that your fund size and structure allows, provide information to your investors that is consistent and as regularly conveyed as possible. This not only protects you from risk but also strengthens your relationship with investors, increasing their trust in you to manage the fund.
2. Valuation - The panel unanimously agreed upon a segregation of responsibilities -- even the smallest of funds should identify some sort of process of checks and balances. Identifying a third-party administrator and a good technology setup will protect your information and assure your investors of honest practices.
3. Risk Management - When asked, "At what point is it appropriate to have a designated risk management function?" Panelists said it depends. Hedge funds need to take into account strategy, size, and from there you determine how you will address the need. The panel stressed how essential it is to clearly define the operations of who evaluates your risk exposure, and that the decisions should be made by committee.
4. Trading and Business Operations - As part of this key area, the panelists addressed the need for a Business Continuity Plan, which begins at the very top of an organization. From COO to administrator, ensure that all employees would provide you the same answer to the question, "What happens in the event of X or Y?" Part of this BCP is your Disaster Recovery Plan, which includes the hardware and software necessary to keep your business-critical functions moving.
5. Compliance, Conflicts and Business Practices - Our panelists laid out a framework for a strong compliance program, which included a separation of duty amongst your team, a defined due diligence process, technology designed to maintain information's integrity, and a written Code of Ethics, among other aspects. The Code of Ethics document is important because of investor relations; it allows investors to see you are conducting good business and reducing risk and protects your own employees from making questionable decisions. You can also ensure compliance and ethics within your team through background checks and surveillance by means of archived email and instant messaging conversations, and recorded phone conversations.
In conclusion, the most important items to take from discussion of the President's Working Group's Best Practices for Hedge Fund Participants report, are as follows:
Identifying and adhering to the best practices that are applicable to your fund cannot only attract potential investors, but also could comfort your existing clients that you have a system in place to protect their investment. The panelists' advice is to understand the breadth and scope of the best practices to create a storyboard of your firm's plan. Define your capabilities internally and convey this clearly to your investors. Above all, remember that none of these are regulations, but rather, a way to increase your safety and streamline your operations.
Guest blog contribution from Bob Guilbert, managing director, Eze Castle Integration Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio