More risk management and due diligence

The GAIM Ops Cayman conference 2010 debated changes affecting the funds industry writes business journalist Michael Klein.

The hedge fund industry has evolved significantly since the financial crisis, when the relationship between investors and funds was severely tested.
 
In particular large institutional investors have been forcing the industry to change by demanding more transparency and practising more extensive and comprehensive due diligence.
 
As a result the hedge fund industry had to evolve with regard to transparency, investor terms and pricing. The old 2/20 compensation model, consisting of 2 per cent management fees and 20 per cent performance compensation, is now on average much closer to 1.5 and 19 per cent. Fund managers are expected to deliver more information and risk metrics to investors and lock-up and suspension provisions that prevent investors from withdrawing their funds are much more scrutinised than in the past.
 
At the same time new regulations are looming in Europe and the US.
An event that took account of these changes, with a particular focus on fund operations, was the GAIM Ops Cayman conference held at The Ritz-Carlton from 28 February to 3 March.
Deloitte is very proud to work with our event partners, UBS and Walkers and the organisers, IIR, to once again support the GAIM Ops Cayman fund conference, said Norm McGregor, an audit partner with Deloitte and one of the conference chairs.
 
“This  conference, now in its fifth year, has secured a firm place in the event calendars of global asset allocators, investment managers and service providers operating in the hedge fund industry.”
 
He said that after averting a global economic collapse and witnessing a recovery in the broader markets in the second half of 2009, the challenges faced by the industry in 2010 have shifted from focusing on credit and liquidity issues to regaining investor confidence and ensuring that new fund structures reflect the lessons learned over the past 18 months.
 
“The operational due diligence and risk management focus of this conference dives into these and other issues in much detail,” he said.
 
Darren Stainrod, head of Alternative Fund Services, UBS Global Asset Management agreed.
 
“Hedge funds and fund of hedge funds rode out the credit crisis with a stronger performance than the general markets,” he said. “However, the industry’s reputation was damaged by cases of fraud and the inability to return redemption monies in a timely fashion. As a result security of assets, liquidity, risk management and transparency are now just as important to hedge fund investors as performance.”
 
“Fortunately the industry is highly flexible and has already produced solutions to these demands in the form of managed accounts and other ways to regain the trust of investors,” Stainrod stated.
 
“With speakers covering topics ranging from new investor terms and demands to the latest structuring changes, we’re looking forward to taking away some new ideas and best practices to assist our clients,” said McGregor.  
 
In addition to the quality content and the networking opportunities at the conference, this event also provided an excellent opportunity for the jurisdiction to showcase its talent, said McGregor, as many of the international delegates stay on afterwards to meet with local attorneys, administrators, auditors, directors and regulators. 
 
Ingrid Pierce, a funds partner at Walkers who co-chaired the conference together with McGregor and Stainrod, also said the conference covered critical changes to operational risk management and the compliance culture.
 
We have an incredible line up of speakers and participants this year, she said. “As we move into this phase of rehabilitation, the focus is on mitigating financial and operational risk while balancing liquidity and performance”, she explained.
 
In addition the conference looked at the expanded role of government in hedge funds and the shape of forthcoming regulation.
 
In her address Pierce spoke about the impact of legal language on hedge fund business operations.
 
“It is critical that parties’ expectations match reality,” she argued. “We have previously discussed the importance of understanding the power granted to the fund or the investment manager under the fund’s constitutional documents or the investment management agreement.”
 
This year we looked at these issues from more of an operational perspective and discussed some of the ways to avoid unintended consequences, she said.

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