As we look forward to 2014, we can expect that the hedge fund and investment management industry will continue to evolve and experience change as in years past. As more and more new funds launch, the competition for investors will increase and firms will be hard-pressed to live up to the successes of the top performing funds in the industry.
Earlier this week, we gathered several panels of experts in Boston to share their insights into the hedge fund landscape for startups in 2014 and the tips and advice for firms looking to compete in the changing marketplace. Following is a brief recap of the event.
Building a Hedge Fund is Like Building Any Successful Business
When starting a new firm, it’s critical to think about all aspects or forming a new business. Yes, your investment strategy is important, but if the foundation of your business is not critically thought out, it will wreak havoc for your firm. Following are a few areas you shouldn’t overlook as you go through the launch process.
Categorized under: Business Continuity Planning Cloud Computing Hedge Fund Due Diligence Hedge Fund Marketing Hedge Fund Operations Hedge Fund Regulation Infrastructure Launching A Hedge Fund Outsourcing Privacy Compliance Security Trends We're Seeing
Last week, the Eze Castle Integration London team along with industry experts from the Financial Conduct Authority (FCA), Investment Management Association (IMA), HSBC, and Simmons & Simmons got together to address the FCA’s “Dear CEO” letter on outsourcing, which was issued to CEO’s of asset management firms back in December 2012.
In the “Dear CEO” letter, the FCA identified that the asset management industry outsources a number of activities to service providers and the FCA’s major concern was if a service provider was to face financial distress or serve operational disruption, the UK asset managers would not be able to perform regulated activities.
Our panel of experts gathered together to discuss the letter in more detail and what practical steps asset managers should adopt, including reviewing contingency plans to ensure managers are minimising risk and have a continuity strategy in place. Let’s take a closer look at what was discussed.
Starting a hedge fund is an intensive task and there are many aspects of the business that a portfolio manager must consider. Expectations are higher than ever, and investors want to see that new hedge fund startups are taking the right precautions and steps to ensure that both the investment strategy and business operations are sound.
There are a wealth of considerations to review before starting a new hedge fund, and truth be told, most of these points are just as important to keep in mind if you are an established fund. Take a look and you’ll notice these best practices apply to more than just new launches.
First and foremost, Happy Halloween!
In honor of Halloween, I’m going to share a trick and a treat about the world of social media and investment firms.
First the trick.
Did you hear the story about how shares of bankrupt Tweeter soared when Twitter announced its IPO? If not, here goes. According to WallStreetInsanity, on October 4, 2013, “shares in bankrupt TWTR Inc. (OTC: TWTRQ) were up over 1500 percent as the company’s stock soared from $0.0 to $0.15 on extremely heavy volume. Seems some people thought the consumer electronics retailer was Twitter.”
This story demonstrates that traders are monitoring social media outlets for investment ideas even if they are not personally participating. It also shows that many of those folks buying TWTRQ didn’t quite understand how an IPO works or what Twitter will be valued at (certainly not pennies), but we’ll ignore that fact for the sake of this article.
In a move likely to redefine the financial industry, the SEC voted this week to rescind an 80-year-old ruling prohibiting hedge funds from public advertising. The ruling comes as the result of the Jumpstart Our Business Startups Act (JOBS Act), which is intended to make it easier for small businesses to raise capital.
The Securities Act of 1933 was originally implemented following the stock market crash in 1929 as a means to regulate and control securities sold, requiring that funds register with the SEC unless they met an exemption.
Under the new rule, hedge funds, private equity funds and other investment firms will have the opportunity to publicly solicit capital via a variety of commercial advertising outlets, including websites, print ads, and social media. Hedge funds have historically been quiet on such mediums, largely due to fear of noncompliance with regulations.
We spend a lot of time here on Hedge IT making suggestions about what hedge funds and investment firms should do when it comes to their technology. But today, we’re not going to tell you what you should do. In fact, these are things we definitely DON’T want you to do!
Plan your infrastructure only for the short-term.
A crucial mistake often made by funds is not planning for the future. Even at launch, you should be thinking about what your firm will look like and what technology you will require down the road. Planning out two to three years in advance is recommended in order to reap the most benefits when it comes to your infrastructure. Plus, if you don’t plan ahead, you may wind up incurring more costs if technology decisions need to be made unexpectedly.
Ignore the importance of a business continuity plan.
It has become commonplace for hedge funds to employ disaster recovery strategies to protect mission-critical data and applications (due to a number of reasons including investor expectations, new regulations and the effect of unexpected natural disasters, e.g. Hurricane Sandy). But firms often overlook the equally important business continuity plan, which provides guidelines for what employees need to do in the event of a disaster. Yes, focusing on your infrastructure is essential to keeping your business afloat, but that business also cannot survive without its employees. Don’t forget to test that BCP plan once you’ve developed it – a good plan will only work if people know how to follow it.
Big changes are coming in the form of European Union data protection mandates. In January 2012, the European Commission announced a proposal to reform the current European Union's data protection framework, currently known as the 1995 EU Data Protection Directive, to better protect the personal data of EU citizens and update the current legislation to fit in with the 21st century requirements and rapid evolution of technology (including the prevalence of social networking and smartphones).
The EU proposal will give individuals more control over their data while also serving to promote the importance of data protection in a globalised world. The European Commission expects the rules will go into effect two years after they have been adopted by the member countries - officially around 2014 or 2015.
While some of the current proposals will undoubtedly be amended over the course of this lengthy process, let’s look at some of the practical steps companies should be considering now.
Yesterday, we hosted a webinar, “Going Social: What Investment Firms Need to Know about Social Media Compliance” along with Global Relay, an Eze Castle Integration partner and provider of enterprise message archiving and monitoring services. Global Relay's vice president of sales, Bryan Young, and our own vice president of marketing, Mary Beth Hamilton, discussed a range of topics including the changing SEC guidance on social media, compliance requirements for hedge funds and key components of instituting a social media policy at an investment management firm. Read on for a recap of the event, or watch the full replay now.
In the wake of the 2008 financial credit crisis, investment firms have recognized the need for more robust liquidity risk management tools and procedures. However, due to shifting regulations and detailed fund and investment structures, fund of funds, private equity firms, hedge funds, and institutional investors continue to grapple with liquidity management and reporting within their investment portfolios. The following is a high level overview of both the liquidity risk challenges facing firms today, and the ways in which some fund managers are overcoming these challenges.
What is liquidity risk, and how does it affect funds?
Liquidity is the extent to which an asset or security can be bought or sold in the market, while not impacting the asset’s price. The concept of liquidity is comprised of illiquid assets, which are the result of liquidity risk and cannot be instantly sold due to value uncertainty and lack of a market. Liquidity risk refers to the concept that an asset or security cannot be traded at the rate necessary to achieve returns and bypass losses. In the last several years, worldwide economic challenges including rising liquidity costs, a more uncertain market and lower levels of market assurance have contributed to the liquidity management challenges facing funds. Liquidity risk’s ability to negatively impact and compound other types of risk, such as credit risk, also has far reaching consequences for the financial markets. These consequences make it even more imperative for firms to get a handle on their liquidity risk management practices.
Historically, financial services firms have not been the most active group in the social media sphere. In a 2011 survey of hedge fund managers conducted by MHP Communications, only 1% of firms were active participants on Twitter, and none of the managers surveyed were active on Facebook. More recently, however, the tides have begun to change. Following Goldman Sachs’ entrance into the Twitterverse in May 2012, investment management firms and their employees have started to increase their social media participation. With this growing trend comes the added layer of social media compliance with industry legislation.
The Legal Perspective
According to the SEC’s Rule 17a-4(b), registered investment advisers and broker-dealers should archive all business communications on social media for a minimum of three years. As the frequency of discovery audits continues to rise, firms should ensure these communications are easily searchable and can be recovered quickly in the event of an SEC inquiry.
- Expert Tips for Launching a Hedge Fund in a New Environment
- Answering the FCA's Dear CEO Letter on Outsourcing with Some Practical Steps
- Reflecting on What We're Thankful For This Thanksgiving
- Finding Your One-Stop Shop: The Benefits of Choosing an All-Inclusive IT Provider
- Three Ways Your Cloud Provider Can De-Stress Your Life
- business continuity planning
- cloud computing
- data loss prevention
- disaster recovery
- eze castle milestones
- hedge fund due diligence
- hedge fund marketing
- hedge fund operations
- hedge fund regulation
- help desk
- high frequency trading
- launching a hedge fund
- privacy compliance
- project management
- real estate
- startup & relocation
- trends we're seeing
- videos and infographics