March 29, 2012

There's No Silver Bullet

In order to complete Form PF, chief compliance officers at hedge funds have a number of choices, industry sources say. They can bring in consultants to do it, hire more staff, outsource to a firm such as Deloitte & Touche, or turn to services provided by companies such as Butterfield Fulcrum and GlobeOp.

Michaels says G2, which used to provide software and consulting services to the alternative investment community before changing its focus in 2011 to tax analysis and regulatory compliance software, would have charged a large hedge fund around $300,000 a year for this sort of work. He estimates brand-name advisory firms like KPMG or Deloitte & Touche would probably charge two or three times that.

Cheaper technology solutions that can help streamline the data collection process also are likely to pop up, though their price tag could be fairly steep, as well, according to Butterfield Fulcrum's Niles. "When you look at the alternative cost as far as the investment manager having to staff out a larger compliance or regulatory piece of their organization — the costs there are quite substantial," Niles cautions. "This is an expensive process, and whether it's done through human intervention or some sort of technology tool, it's not going to be cheap."

Since the process will be expensive, G2's Michaels says, vendors will dangle cheaper solutions that they claim will be able to automate the process, basically making the problem disappear for a small fee. But you get what you pay for, he warns, and firms that look to cut corners could be burned in the long run.

"There are plenty of fly-by-nights who'll say, 'Give me $2,000 and I'll make your Form PF go away,'" Michaels says. "There are vendors telling you there's a silver bullet because the hedge funds really want there to be a cheap solution. But there isn't one."

ABOUT THE AUTHOR
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced ...