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Hedge Fund Services

Market Guide £ 10 - UK, ROW


$20 - Americas

2009 15 - EMEA

Change ahead
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Editors Letter

Looking forward
Disaster has stalked the financial markets this year, but on the whole the
hedge fund sector has survived and evolved

Over the past 10 years, funds have become the we are sticking our heads in the sand and ignor-
centre of the investment world. Some even say ing the systemic problems in the hedge fund in-
that Hermes, the god of commerce, was named dustry, but we see change as a positive factor. On
after a well known independent fund manger. page 38, Mark Mannion of PNC Global Global
However the gods have not smiled upon the Investment Servicing talks about surviving dur-
hedge fund industry in 2008. According to early ing this period, and Alan Flanagan, BNY Mel-
estimates from hedge fund industry consult- lon continues this positive theme of change by
ing firm Hennessee Group, the average fund discussing the positive aspects of ‘convergence’,
lost 18.0% last year. After Bernie Madoff put particular between the hedge fund and private
the biggest bang in the 2009 fireworks, many of equity arena. Peter John of Fidessa LatentZero
his investors may be quick to point out that not perhaps sums up our ideology for 2009 most
only is Hermes is the god of commerce, but also succinctly by stating that: “There is every reason
the god of thieves and liars. to be optimistic about the future”.

However outrage and name-calling achieves Looking forward it is important to remember


nothing, and we hope to use this guide to prove that Hermes is also the god of invention, and
that there is enough silver lining out of this cur- we are undoubtedly looking forward to how an
rent situation to prove that 2009 will be a year to innovative industry will solve the problems of
remember, rather than forget. The first step is to 2009.
analyse 2008. On page 27, Dermot Bulter high- Giles S. Turner
lights the mistreatment of hedge funds by the
press thought last year, most notably the early
attempt by the media to pin the credit crisis on
the hedge fund door. Looking forward pragmat-
ically, on page 24 we examine how hedge funds’
operations matter most in a bear market, and
what can be done to avoid failure.

You can find our silver lining spirit as early as


the following page, where John Donohoe, CEO,
Carne Global talks about the growth and change
of the industry at a time where everyone is fo-
cusing on redemptions. This is not to say that

1
Foreword

Growth & Change


John Donohoe, CEO, Carne Global Financial Services
Fund service providers are living in interesting services to be delivered locally. The need for a
times, a period of both consolidation and global footprint means administrators often
transformation. Larger fund managers are have to work round the clock, seven days a week
turning to them to distribute their product if necessary, and they are finding it has become
globally, and these firms expect their custodians a requirement for a larger proportion of the
and administrators to move with them across industry.
the multiple locations in which they operate. In the current market turmoil, we at Carne
Asset managers have also broadened their have seen increased emphasis on the safety of
product set to an unprecedented extent via assets. The future is a complex one, but we see
acquisition and a process of diversification, many in the fund administration, custody and
and are expecting their service prime brokerage space rising to
providers to keep pace with the challenge.
them. The development of Investment management
Investor Services Journal | Hedge Fund Services Market Guide 2009

new structures, like UCITS III firms will need to address other
funds, is leading to a cross- issues as well in order to ensure
migration between the retail and their competitive advantage,
institutional funds space, as well including governance,
as between traditional and hedge compliance, and outsourcing
fund strategies, which can throw challenges. We expect that the
up new challenges for service accurate and timely pricing of
providers. assets will also continue to be
At Carne we have been seeing high on the agenda for those
an unprecedented build-out in funds we advise, and for their
the capabilities of the leading investing clients. We have seen
fund service providers in the last year as they more of our clients becoming interested in the
move to meet these demands. There are now recommendations of the Hedge Fund Working
only a limited number of service providers that Group, and expect more of them to sign up in
can call themselves a one stop shop, and which the future.
can compete at the required levels of price and Administrators will now, more than ever, be
scale in this market. But at the top end of the asked to play a key role in ensuring portfolios are
industry, consolidation has seen the creation accurately valued, and that NAVs are delivered
of a handful of large, globally-oriented players on a timely and regular basis. This is becoming
with the budget to provide the sophisticated increasingly difficult in an environment where
services big money managers are asking for. At investors are more ready to resort to redemptions
the same time, the smaller provider which can and legal action.
cater to start-ups, smaller managers or niche There continues to be speculation about
products, still has a role to play. whether the current financial circumstances
The growth of the asset management will prompt further consolidation within the
industry also translates into an increasing level industry. Certainly, we may see more hedge
of international awareness for service providers, funds and prime brokers being acquired by
manifesting itself in the use of cheaper markets larger banks, or mergers between existing
for labour-intensive back office activities, and asset managers. But for the service providers
the recognition that money managers outside themselves a different world will emerge in the
developed markets also now require their next three to six months.
2
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Foreword
Interesting times
Ian Headon, product manager, alternative asset
administration, Northern Trust
Hedge funds have never been more topical. If mem- valuation of assets, risk management, business op-
ory serves, we have made this statement almost ev- erations, compliance and conflicts of interest. The
ery year in the last decade or thereabouts. latter includes a Fiduciary’s Guide and an
However, over the last 12 months, we have seen Investor’s Guide.
drives to self regulation in Europe and the US, in- The HFSB produced a single report covering,
creased scrutiny of the sector from regulators, ac- essentially, the same themes and topics. We are
cusations of hedge funds “talking down” of quoted beginning to see hedge fund clients modify pro-
companies, a heightened level cedures and governance struc-
of activism and a widening of tures to be consistent with the
the grey area between the clas- themes in these papers and
sically agreed notions of what significantly, we are beginning
is and what is not considered to see the investor community
to be a hedge fund. demand that compliance.
Investor Services Journal | Hedge Fund Services Market Guide 2009

All of this has occurred in A key element of these pa-


a financial environment de- pers is security pricing. Both
scribed by Alan Greenspan as bodies, together with the
“..probably a once in a century AIMA Guide to Sound Prac-
event”. The global credit cri- tice for Hedge Fund Valua-
sis has changed hedge funds tion, have greatly clarified the
behaviour as many managers respective roles and responsi-
have actively sought to reduce bilities of the various parties
exposure to the traditional involved in a hedge fund – it
prime brokers and others have struggled with the is now incumbent on those parties to implement
tightening of credit availability. specific processes and communications to give ef-
Clearly, it remains to be seen how the hedge fund fect to these shared principles.
industry will cope with the difficult market condi-
tions together with the infrastructural changes to This development is to be welcomed.
the market in areas like regulation. However, we We see a drive to quality in these uncertain eco-
expect to see a drive to quality in all aspects of the nomic conditions. We see investors demanding
industry and continued cultural changes around greater transparency, greater reporting of coun-
terparty exposures, increased demands for clarity
Risk management, governance and transparency. in the valuation process, more frequent reporting
Firstly, there is no agreed definition of a “hedge and a noticeable stepping-up in governance and
fund”; they take many forms and legal personali- control models.
ties, have multiple investment strategies and inves- Interestingly, we still encounter hedge funds
tor bases and are exposed to varying degrees of tax in the US which self administer – in Europe this
and regulatory supervision. is almost unheard of – though we are seeing an
Notwithstanding this, the hedge fund industry increase in the trend to outsource, often driven by
has taken a lead, in the U.S. via the Presidents Work- investor demand.
ing Group (“PWG”) and, in Europe, via the Hedge While many hedge funds have struggled with
Fund Standards performance and asset gathering and retention,
Board (“HFSB”). we expect the hedge fund industry to continue
The PWG issued two reports in April 2008: Best to grow. It has shown its resilience before and we
Practices for Asset Managers and Best Practices expect that it will continue to do so. Some hedge
for Investors. The former calls on hedge funds to funds will fail – others will prosper.
adopt comprehensive best practices in all aspects One thing is certain – it will be a space well
of their business, including, critically, disclosure, worth watching.

4
Contents
1 - Editor’s Letter Butler discusses media convergence of private Stats
2 - 4 Forewords treatment of hedge equity and hedge funds 54 - Hedge fund
funds performance
Features 30 - 32 Peter Ask the Experts
8 - 10 Fortis’ Charlie Stapleton of Dillon 43 - Stephane Leroy : Company profiles
Woolnough explores Eustace adresses legal QuantHouse 55 - Aquin
counterparty risk protection for hedge 44 - Eric Marcombes: 56 - Fidessa
12 - 14 Peter John of funds Cogitam Latentzero
Fidessa Latentzero 34 - 35 Shariah hedge 45 - Katya Azzopardi: 57 - BIBA
talks about using OTC funds explained by GVTH 58 - Hassans
Investor Services Journal | Hedge Fund Services Market Guide 2009

instruments Norton Rose’s Dean 46 - Nicholas Griffin: 59 - Custom House


15 - 19 An overview Naumowicz and Uzma KPMG 60 - UBS
from BIBA about doing Kahn Chris Cattermole: 61 - PNC Global
business in Bermuda 36 - 37 Hassans’ Advent Software Investments
20 - 22 Regulation in James Lasry expounds 62 - 63 - Fintuition
emerging markets from on the Gibraltar Head to Head 64 - Fortis
Aquin Experienced Investor 48 - 49 Hedge fund
24 - 26 Omgeo’s Fund Regime administration
Matthew Nelson 38 - 40 Mark Mannion 50 - 51 Hedge fund
explains why hedge of PNC Global technology
funds’ operations matter Investments talks of
in a bear market the new era Player Profile
27 - 29 Custom 41 - 42 Alan Flanagan 52 - Guy Martell
House CEO Dermot of BNY Mellon looks at

Supplement editor: Design: David Copsey (Mohammed@2ipartners.com) F: +44 (0) 20 7636 6044
Joe Corcos (david@2ipartnes.com) Tarik Rekiouak W: www.ISJtv.com
(Joseph@2ipartners.com) (Tarik@2ipartners.com)
Group editor: Associate publisher: Operations manager: © 2008 Investor Intelligence.
Giles Turner Justin Lawson Sue Whittle All rights reserved.
(Giles@2ipartners.com) (Justin@2ipartners.com) (Sue@2ipartners.com) No part of this publication may
Deputy editor: be reproduced, in whole or in
Ben Roberts Publishing manager: CEO: Mark Latham part, without prior written
(Ben@2ipartners.com), Monique Labuschagne (Mark@2ipartners.com) permission from the publishers.
Reporters: (Monique@2ipartners.com) Thanks to Juliette, Sophie
Catherine Kemp Account managers: Investor Intelligence Calypso and Electra.
(Catherine@2ipartners.com) Craig McCartney 16-17 Little Portland Street ISSN 1744-151X.
(Craig@2ipartners.com) London W1W 8BP Printed in the UK
Mohammed Malik T: +44 (0) 20 7299 7700 by Pensord Press.

6
Prime Fund Solutions

Getting you there.

At Prime Fund Solutions, the part of Fortis Merchant Banking dedicated to servicing

the alternative and traditional investment community, we are committed to building

strong and lasting relationships within the global investment industry. Focusing on the

future needs and opportunities in any type of investment funds, ranging from traditional

through hedge funds to funds of hedge funds, we deliver cutting-edge services and

invest in state-of-the-art information technology. Providing a first class package of fund

administration, custody, clearing, securities lending and borrowing, cash management,

bridge and leverage finance, we are ready to face your challenges with you.

For more information please contact:

London (+44) 203 296 8682 - Dublin (+353) 1607 1860 - Luxembourg (+352) 42 42 81 07

New York (+1) 212 340 55 43 - Hong Kong (+852) 2823 0598

www.merchantbanking.fortis.com
Fortis

Counterparty risk in the hedge fund industry


Fortis’ regional director for sales and relationship management, Charlie
Woolnough, explores counterparty risk
Looking across the current alternative asset witnessed many examples whereby very large
management landscape it is apparent that fund alternative asset managers have become con-
managers now have additional risks to consider cerned about the capitalisation and corporate
other than those which lie in their portfolio. In structure of their administrator as they increase
the current financial environment counterpar- their own assets under management and ‘out
ty risk has become the new hot topic. Obvious- grow’ a counterparty they once considered to
ly the recent plight of some longstanding prime be perfectly adequate. Leaving aside the quality
brokers has dramatically increased scrutiny of the service they are receiving, a large part of
on this specific area of the industry. However, this is no doubt borne out of a fear of having
other service providers to explain to their inves-
in the supply chain tors why they chose a
Investor Services Journal | Hedge Fund Services Market Guide 2009

are now also coming smaller, less secure and


under closer scrutiny perhaps less obvious
from managers and option should disaster
investors alike. strike.
It has almost be- Increasingly
come implicit that any aware of this concern,
fund manager wishing many fund adminis-
to attract institutional trators have merged
quality investors needs to create critical mass
to have recognisable or now find them-
and respected service selves part of a larger
providers named on financial organisation.
their offering docu- This has had the af-
ments if they are seri- fect of decreasing the
ous about raising assets in any meaningful way. level of counterparty risk that fund manag-
This is especially true of fund administrators ers now have with their fund administrator.
where the relationships are often one of mutual As with fund administrators, those manag-
dependency and cannot be changed or revoked ers who are serious about raising assets will typi-
very quickly. Indeed, it is quite common for cally employ the services of one of the ‘Big Four’
contractual agreements between fund admin- accounting firms to act as their audit partner.
istrators and their clients to contain a three This enables the investor due diligence process,
month notice clause. as it relates to counterparties, to become some-
As such, it is apparent that the relationship be- thing of a box ticking exercise as the majority
tween administrator and manager is somewhat of investors are able to gain comfort from such
more embedded than that which exists, for ex- brand name counterparties. Perhaps less oner-
ample, between a manager and his prime broker ous than changing administrator, there may
for example. It is, therefore, becoming increas- nevertheless be a hurdle to changing auditors in
ingly important for larger managers to be com- that an incoming firm would typically require
fortable that their fund administrator has the an audit to be completed by the incumbent be-
capacity and resources to keep apace with their fore they accepted the mandate. As such, this
own growth and future plans. Indeed, we have may delay matters if the manager does not wish,
8
Fortis

or is unwilling, to pay for an interim audit and assets when a fund is not currently employing
chooses instead to wait until the fund’s year end. leverage or taking substantial short positions
Obviously if the change is being dictated due to may now be seen as unjustifiable.
the fact a service provider is in a distressed situ- That said, by limiting a prime broker’s ability
ation, then the rules of the game may be reason- to rehypothecate assets, you are in essence limit-
ably expected to differ somewhat. ing their ability to generate revenue. Therefore,
Whilst the failure of administrators and au- it is safe to assume that margins would increase
ditors in an operating sense is relatively rare, elsewhere to compensate.
given recent market events the same can not This whole discussion has also served to
now be said for prime brokers. As such, it is no heighten the scrutiny on the ultimate custodian
coincidence that this area of the industry is now of a fund’s assets. In a clear trend of a flight to
attracting most attention from the Chief Oper- stability, many managers have been moving se-
ating Officers of hedge funds. curities and cash balances to those large bank-
The dynamics of the primer broker relation- ing groups which they deem to be more robust
ship are very different from those which a hedge in the current climate than broker dealers who
fund manager will have with his administrator are required to finance themselves in the cash
and auditor partner in that the latter do not markets to varying degrees. As such, one can en-
typically provide any form of financing or safe visage a growing trend whereby fund managers
keeping of assets. As such, the day to day finan- have counterparties for execution purposes and
cial health of a manager’s prime broker is of the counter parties for the safe keeping assets where
utmost importance at all times. the latter does not provide any form of financ-
The role of the prime broker has changed ing and, therefore, any form of credit risk.
over recent years insomuch as very few funds
now have only one prime broker. Whilst this Minimising Counterparty Risk
trend was perhaps initially driven by a desire So, what steps can a hedge fund manager take to
on behalf of managers to create greater com- minimise his counterparty risk?
petition between their counterparties and thus With regard to fund administration, a man-
improve services and reduce costs, there is no ager should choose a provider who has experi-
doubt that recently the trend has been expedit- ence of the strategy they are running, who has
ed by the need to diversify counterparty risk. the necessary brand and pedigree to satisfy
With this need to diversify prime broker their target investor base and who has the capi-
concentration has also come closer scrutiny on tal structure and resources to ensure that they
the role and practices of prime brokers in gen- can continue to meet their requirements as they
eral. Hedge fund managers are now paying in- grow. Some managers also choose to add an ad-
creasing attention to the ultimate custodian of ditional fund admisntrator as they grow. How-
their assets, which is not necessarily the prime ever, the merits of this option are not always
broker, and the degree to which their assets are quite so clear cut as it can lead to the require-
segregated and/or rehypothecated. Standard ment for more operational staff within the fund
prime brokerage agreements would generally manager’s business to monitor the relationships.
allow the broker to appropriate their clients’ as- Additionally by using two providers a manager
sets for their own benefit instead of requiring may not enjoy the same level of service that
clients to post cash collateral in order to access perhaps they did previously by being part of an
such services as securities lending, leverage and exclusive partnership. As such, it is really for the
FX. Whilst this would appear to be a sensible manager to decide if they happy with the service
compromise, it is the extent to which assets level and stability of their current counterparty
are being rehypotecated which is now of major before they decide to add a second provider. If
concern. Carte blanche rights to rehypothecate the answer is yes then it may not be necessary.
9
Fortis

With regard to primer brokers, the situation need to undertake intelligent due diligence on
is somewhat different and the merits of having all counterparties to their business in which they
two prime brokers are now abundantly clear. place any form of reliance that can not easily be
However, simply adding more and more prime retracted or transferred elsewhere at short no-
brokers in an effort to diversify risk even further tice. Indeed, it is no longer enough for the due
where the fund size or strategy does not justify diligence exercise to be a static process. The due
it may actually do more harm than good. This is diligence process needs to be continuous and
to say that if the relationships are not mutually can no longer be confined solely to quantitative
beneficial a manager may find that they are no metrics regarding a service provider’s financial
longer a highly valued client and, in turn, access health, if indeed such financial information is
to their broker’s balance sheet and hard-to-find readily available. As has been demonstrated
shorts for example can suddenly dry up. The recently, seemingly stable financial institutions
natural outcome would be that performance of can disappear over night. Therefore, greater em-

By using two providers a


Investor Services Journal | Hedge Fund Services Market Guide 2009

manager may not enjoy


the same level of service
that perhaps they did
previously
the fund suffers as a result. phasis ought to be placed on that
In addition to this, where a fund manager qualitative market intelligence which is also
finds themselves under a period of stress it may available as this could often be the first warning
be more beneficial for them to have deeper sign of potential trouble.
relationships with fewer prime brokers who From an investor perspective, investors
truly understand their trading strategy and are should be more willing to question a manager
more prepared to stand behind them until the on their choice of counterparty and to ask what
situation improves rather than cutting trading procedures are in place to ensure sufficient
lines at the first sign of trouble. monitoring of these critical relationships takes
place on an ongoing basis.
Conclusion
Simply adding more and more service providers
is not necessarily the best method of reducing
counterparty risk. Ultimately fund managers
10
Fidessa LatentZero

Using OTC instruments - are you exposed?


Peter John, derivatives product manager, Fidessa LatentZero

Using OTC instruments - are you exposed?


Among the seemingly endless supply of
depressing results in the last twelve months,
and the atmosphere of general gloom, a few
glimmers of light still shine. Where the crisis
in the global banking system has cut total
shareholder value by at least USD100 billion,
hedge funds are largely emerging from the
rubble in robust shape. For example, Brevan
Howard have grown their assets 73% from June
2007, to USD26.3 billion, and the top 10 hedge
fund managers have grown their assets under
Investor Services Journal | Hedge Fund Services Market Guide 2009

management by almost a fifth in that 12 month


timeframe, according to analysis by
Financial News.

Transparency and technology


The numbers reflect the growing status attributed
to hedge funds within the investment food chain.
But that recently acquired status has ushered in
major changes to the landscape. Investors and
strategies are altering - and both the hedge funds
themselves and the environment in which they
operate are under levels of scrutiny from both
investors and regulators.
A new mood can be discerned within the
hedge fund market – one that is preparing
for greater transparency and control. There
is an understanding that institutionalisation
in one form or another is taking place,
and accompanying all this is a substantial
shift in attitudes to technology.
Of course, hedge funds have always had
an interesting and diverse relationship with
IT. For example, in its earliest incarnations,
DMA was particularly associated with a group
of funds conducting statistical arbitrage before
wide adoption by more institutional funds.
At the other end of the scale there are
plenty of hedge funds that have almost no
IT infrastructure at all. On occasion it can
be hard to spot the traders in the mountain
of paperwork that surrounds them.
12
Fidessa LatentZero

Enter the vendor been a large scale swap taking place within
But there is a growing trend between these two the financial services world. As institutional
extremes to look at vendor solutions, such as investors have adopted more diverse asset
those supplied by Fidessa LatentZero. Hedge classes and the occasional high risk/ high
funds are no longer flying underneath the radar reward strategies more commonly associated
when undertaking activist strategies, which with hedge funds, so too are hedge funds
means they need to have the right technology increasingly using the trading technology
in place in order to meet both regulator and from their more traditional counterparts.
investor requirements, and to succeed in today’s This exchange of respective intelligence has
increasingly complex trading world. considerably enhanced the capabilities of
One of the key factors for hedge funds is technology on offer. As institutional investors
that the provision of the more sophisticated take on board more sophisticated strategies
systems is no longer the sole preserve of sell- and instruments borrowed from hedge funds,
side suppliers. And, for an industry sector for then the software that can support them
whom secrecy is essential and a fundamental has become more sophisticated, flexible and
operating principle, the idea of exposing scalable – and more interesting to hedge funds
trading activities through a tied execution in return. Derivatives have gone mainstream,
system from one broker has, understandably, and technology is now available from Fidessa
been an anathema. LatentZero to trade OTC instruments
effectively.
The holy grail of powerful, real-time
P&L and pricing analysis, validation, and Hurdles and hedging
reporting has remained elusive However, the holy grail of powerful, real-time P&L
and pricing analysis, validation and reporting has
remained elusive, and with it the realisation of an
No wonder that, where broker solutions have end-to-end investment management workflow.
been used, there are usually up to four or five The primary hurdle has been the difficulties
in place. This in its own way has been a barrier associated with measuring exposure to underlying
to STP and the full automation that many instruments. However, having developed the
hedge funds have been looking for. But buy- ability to calculate both primary and underlying
side sourced front office systems like Capstone exposure of derivatives within a fully cross-asset
that offer broker neutrality combined with system, Fidessa LatentZero’s technology opens
sell-side levels of technology and sophistication up a new range of opportunities in terms of
have started to overcome this particular hurdle. modelling and portfolio management. With
The other issues that vendors have integrated data and analytics incorporated
overcome are those associated with cost into the system, a more interactive approach
and implementation. Robust ‘out-of-the- to hedging has become possible.
box’ solutions that require little, if any, Until now the standard method of changing
customisation and have a standardised exposure to a given market for anyone on
set up have reduced the time and the buy-side was to buy or sell bonds or
costs involved in deployment, keeping securities to change the duration. Portfolio
overheads low and time-to-use short. management tools generated models, and
But the really interesting developments anything that was misaligned against targets
have taken place in functionality, especially was highlighted. Portfolio managers were able
with the asset classes and strategies that to balance the portfolio against any variants,
can now be handled by these sophisticated, usually by buying or selling more securities.
broker-neutral systems. In fact, there has
13
Fidessa Latentzero

Interactive hedging Interactive speculation


But the ability to calculate an accurate and And with interactive hedging comes interactive
comprehensive exposure number changes all speculation: the ability to look at the impact of
that. The portfolio manager can now change using derivatives on a cross asset class portfolio
duration through an interest rate swap, with and act accordingly. It is possible to model
the certainty that he is getting the exposure to any number of strategies, including butterflies,
markets that he wants from the choices that are caps and collars, barriers and 130/30s, build
available. It is no longer necessary to hold the positions that cover all possible scenarios,
underlying asset, and incur the management and then respond to immediate moves
and cost issues that come with it, since a swap in the market by executing the preferred,
can be created and the system populated with pre-prepared strategy. What this means is
all the resultant data with three simple clicks. that hedge fund managers with multi-asset
As an example, say a fund manager wants to portfolios will have the tools to test theories,
Investor Services Journal | Hedge Fund Services Market Guide 2009

There is every reason to be


optimistic about the future
change the duration on exposure numbers. to look at portfolios from a modelling point
He holds bonds plus interest rate swaps for of view and implement strategies only when
managing duration, credit default swaps for satisfied that they will work and deliver the
managing the credit risk of the portfolio, and expected results.
inflation swaps to hedge inflation. One option There is every reason to be optimistic
open to him is to arrange an interest rate swap. about the future. Hedge funds that have
However, with interactive hedging developed the technological infrastructure
capabilities, he can highlight a number of to support their operations will ride out, and
bonds that need duration management, and could even profit from the current volatility
then use the system to propose the most in the markets by shorting.. There is also little
appropriate swap. The duration numbers question that hedge funds will benefit from the
can then be massaged and, with one swap, execution and order management capabilities
can be changed for a portfolio of 20 bonds initially developed for institutional asset
in a move that would previously have managers. Interactive hedging and speculation
required buying and selling several bonds will radically alter the way funds are able
with different lengths of maturity. The same to respond to market moves, and are one
technique can be applied equally successfully example of how innovations on the buy-side
to inflation and credit management, or are now matching if not outpacing sell-side
even to LDIs (liability-driven investing) systems. The trend for more vendor-supplied
that need very long term duration. solutions is set to continue for some time yet.

14
BIBA

Bermuda
Thriving
Bermuda enjoys a booming investment business and
a world-class (re)insurance market that is quickly
closing on the leading position for insurance domiciles
says Cheryl Packwood of the Bermuda International
Business Association
A long-standing history of cooperation be- the laws of the US state of Delaware. A com-
tween government, regulators and industry in pany spokesman said that a number of the large
Bermuda has generated progressive legislation companies already domiciled in Bermuda were
and regulation on the Island. As a result, Ber- recognised and respected by Invesco, which pre-
muda enjoys a thriving investment business sented an additional reason in the Island’s fa-
and a world-class (re)insurance market that is vour.
quickly closing on the leading position for in- He went on: “The third factor was we want-
surance domiciles says Cheryl Packwood of the ed to make sure the transaction in moving our
Bermuda International Business Association. domicile was tax neutral for our shareholders.
Most of the Fortune 100 companies have a Moving to the US would not have been a tax
Bermuda captive insurance presence. Recently neutral situation. When it came down to it, it
released figures show the capitalisation of Ber- was a very short list of places that we considered
muda’s reinsurance industry rose more than 20 and Bermuda was at the top.”
percent to reach USD129 billion by the end of Packwood cites the ongoing cooperative
the third quarter of 2007. That staggering figure support and consultation that thrives between
is greater than the 2006 gross domestic product government, the business community and regu-
of many countries, including Pakistan and New lators which ensures that appropriate yet flexi-
Zealand and oil-producing Nigeria, according ble legislation and regulation remains a priority.
to International Monetary Fund (IMF) figures. The passing of the Investment Funds Act 2006
And, in the investment industry, Bermuda in December last year by Bermuda’s House of
also enjoys a world class reputation. At the end Assembly was applauded by the business com-
of 2007, after making the decision to leave Lon- munity in Bermuda.
don, leaders of Invesco quickly arrived at the The Bermuda International Business Asso-
conclusion that Bermuda was the best place to ciation gave its full endorsement to the legisla-
redomicile. With more than USD500 billion of tion, which outlines more clearly the regulation
assets under management, the company picked of public funds and refines the framework for
the Island because of its legal and regulatory non-public, institutional funds. Packwood
environment and the similarities of those to states: “As I commented at the time the legisla-
15
BIBA

tion was enacted, this Act is yet another example


Highlights of the Investment Funds Act of the positive results of collaborative consulta-
tion between Bermuda’s private and public sec-
tQVCMJD SFUBJM
GVOETBOEJOTUJUVUJPOBM tor partnership. It is the policy in Bermuda for
 PSOPOQVCMJDGVOET
the Ministry of Finance and the Bermuda Mon-
tSFmOFEQPXFSTUPFYDMVEFGVOETGSPN
etary Authority (BMA) to collaborate on writ-
particular requirements, giving certainty as
 UPUIFNJOJNVNSFRVJSFNFOUTFYQFDUFEPG ing financial legislation.
 GVOEPQFSBUPST “On this occasion, as is traditional in Bermu-
tNPSFDMFBSMZEFmOFEFYDMVTJPOTGSPN da, they also asked for the input of the financial
 GVOESFHVMBUJPO TPGVOETPGBAQSJWBUFOBUVSF industry in reviewing the Act and recommend-
 BSFOPUDBQUVSFE ing pertinent changes or additions to it prior to
tUIFJODMVTJPOJOUIFMFHJTMBUJPOPG  presentation before the House of Assembly. It
partnerships, is this ongoing collaborative spirit between gov-
 BTXFMMBTNVUVBMGVOEDPNQBOJFTBOEVOJU ernment, industry and the regulatory authori-
 USVTUT VOEFSQSFWJPVTMFHJTMBUJPO 
ties that is one of the primary reasons for Ber-
Investor Services Journal | Hedge Fund Services Market Guide 2009

 QBSUOFSTIJQTXFSFOPUDPWFSFE

muda’s success in introducing legislation that is
t SFHVMBUJPOBOEMJDFOTJOHPGGVOE 
 BENJOJTUSBUPST effective
tUIFJOUSPEVDUJPOPGBOFXDMBTTPGGVOET  and works.”
 LOPXOBTABENJOJTUFSFEGVOET8JUIUIF Finance Minister Paula Cox, who piloted
 JOUSPEVDUJPOPGMJDFOTFEBENJOJTUSBUPST  the Act through Parliament, said that it was
 JUJTOPXQPTTJCMFUPSFHJTUFSGVOETVOEFSUIJT necessary for Bermuda to streamline the
 DMBTTXJUIUIFMFWFMPGSFHVMBUJPOBEBQUFE incorporation process for investment funds
on the grounds that the administrator is based and eliminate unnecessary administrative
 JO#FSNVEBBOETVCKFDUUPDPEFTPGDPOEVDU procedures to augment the jurisdiction’s
 BOEGVOESVMFTUIBUXJMMFOTVSFUIFQSPQFS
competitive edge by bringing more clarity and
 MFWFMPGHPWFSOBODFPGUIFGVOE
certainty to the authorisation process. She
tDMFBSFSEFmOJUJPOPGUIFSVMFTGPSUIF
 BQQPJOUNFOUPGTFSWJDFQSPWJEFSTBOEEFMFHB explains: “There will be less time required to set
 UJPOPGQPXFST up a fund as the rules are more clearly stated.
tBOFXTFDUJPOFOBCMJOHVOJUUSVTUFFTUP The Act is another example of Bermuda’s
hold property in segregated accounts continued efforts to ensure that we maintain
 BOEEFmOJOHIPXUIFTFBDDPVOUTXJMMCF the right balance as a reputable international
 NBOBHFE5IJTBGGPSETUSVTUFFTUIFTBNFCFO financial centre.”
 FmUTBTDPNQBOJFTPQFSBUJOHXJUITFHSFHBUFE Although the passing of the Act means that
 BDDPVOUT Bermuda’s fund administrators will be licensed
tSVMFTGPSQSPTQFDUVTFTPGGVOETUIBUBSFDMFBSMZ
for the first time, Minister Cox has been quick
 TFUEPXOBOEEJTUJOHVJTIFEGSPNUIFHFOFSBM
to point out that it is not the case that there has
 SVMFTVOEFSUIF$PNQBOJFT"DUPG
t FOIBODFEQPXFSTGPSUIF#."UPJOTQFDUGVOET been no regulation of service providers.
 BOEUPSFRVJSFNPSFJOGPSNBUJPO
tNPSFDMFBSMZEFmOFESFRVJSFNFOUTBOE  Hedge funds are largely unregulated,
 QPXFSTGPSTIBSJOHPGJOGPSNBUJPOXJUI so listing provides a layer of comfort to
 PUIFSSFHVMBUPST investors that there is an independent,
tUIFJOUSPEVDUJPOPGBSJHIUPGBQQFBMUPB
 USJCVOBM TJNJMBSUPPUIFSmOBODJBM 
regulatory body monitoring the funds to
institutions. ensure proper corporate governance and
compliance

16
     


 

base in
bermuda

             speed and precision
Cedar House, 20 Victoria Street, Hamilton HM12 Bermuda tel.441.292.0632 fax.441.292.1797 www.BIBA.org
BIBA

Prior to the Act, fund administrators were regu- and trust business, the BSX and the BMA in
lated entities under the Proceeds of Crime Act order to stimulate creative thinking and devise
1977 and were subject to a higher level of due new products that would appeal to global
diligence when handling subscriptions and re- investors.
demptions similar to those imposed on banks, The first product developed, ‘Launch ‘n List’,
trust companies and investment providers. leverages the fact that Bermuda has a fully elec-
While many funds register in other jurisdictions, tronic stock exchange with Designated Invest-
Bermuda is one of the leading choices for com- ment Exchange status, as well as a regulatory
panies to administer their funds, regardless of authority with a practical but effective approach
where they choose to domicile. Bermuda actu- to regulation that supports development of be-
ally administers a substantial proportion of the spoke products for the investor. As of Decem-
funds which register in Cayman, for instance. ber 2007, the BSX was designated by the Board
Investor Services Journal | Hedge Fund Services Market Guide 2009

The larger exchanges had


approach to the extent that it
impinged on fund managers’
out their investment strategy

Combined with Bermuda’s superior infrastruc- of the United Kingdom’s HM Revenue and Cus-
ture, reputation and intellectual capital, the is- toms as a “Recognised Stock Exchange”.
land is poised to effectively garner its share of The committee is chaired by Conyers Dill &
the booming global fund business. Pearman partner, Julie McLean who explained:
Another attractive feature for those choos- “Funds usually list for two main reasons. The
ing to register and list in Bermuda is a unique first is that listing insures that the shares of the
vehicle whereby funds can be simultaneously funds are considered liquid assets, which many
approved by the BMA and listed on the Bermu- institutional investors prefer since they are fre-
da Stock Exchange (BSX) in as short a time as quently prohibited, for various reasons, from
two weeks. investing in illiquid assets. Secondly, hedge
In late 2005, a New Product Development funds are largely unregulated so listing provides
Committee was established as a joint initiative a layer of comfort to investors that there is an
between the private sector, engaged in funds independent, regulatory body monitoring the
18
BIBA

funds to ensure proper As mentioned above, the co-operation be-


corporate governance and compliance with tween the Bermuda authorities and the BSX in
stated investment strategies and restrictions.” the ‘Launch ‘n List’ process means that funds
The feedback the committee received was can apply to incorporate and be classified under
that the larger exchanges had increased their fund regulations at the same time that initial
regulatory approach to the extent that it was application is made to the BSX for listing.
inappropriate and impinged on fund managers’ Greg Wojciechowski, president and CEO of
ability to effectively carry out their investment the Bermuda Stock Exchange and a member
strategy. Julie McLean said that exchanges need- of the New Product Development Committee
ed to have a balanced approach whereby inves- comments: “We continually see issuers coming
tor protection is achieved while still allowing from jurisdictions all over the world seeking to
funds to carry out effectively their investment incorporate in Bermuda and list on the BSX.

increased their regulatory


was inappropriate and
ability to effectively carry

strategy. “This is what we feel the BSX offers,” The Launch ‘n List product was a logical exten-
she added. sion to offer our clients a one-stop solution.”
The ‘Designated Investment Exchange’ recog- Mr. Wojciechowski also pointed out that the
nition given to the Bermuda Stock Exchange new product will not only apply to the funds in-
reflects that it is a properly managed exchange dustry but will also be important for products
with sophisticated trading platforms and not such as private equity and
just a mere listing board. In addition to the debt transactions.
effective regulation of the BSX, the exchange The ‘Launch ‘n List’ product is an example of
has the ability to be nimble and flexible in the innovative yet quality business that Bermu-
its approach to listing funds. “An example is da can provide to the discerning global investor
funds with side pocket investments,” said Julie and is the brainchild of a successful collabora-
McLean. “The BSX has never had an issue with tion between the public and private sector.
listing such shares.”
19
Aquin

Regulation in emerging markets


As emerging markets gain in popularity with
investors, regulation remains one of the largest relevant factors
Investor Services Journal | Hedge Fund Services Market Guide 2009

Although emerging markets are traditionally nancial sector development such as; macro-
seen to be less regulated than developed mar- economic and fiscal stability, the legal and judi-
kets, economic development will inevitably cial system, proper regulation and supervision,
mean that regulatory environments change and access to credible information and competitive
develop as well. Fund managers operating in and contestable markets. Within this he also
these markets must make sure their systems are demonstrated a direct correlation between stock
flexible enough to adapt to regulators’ demands market capitalisation and shareholder rights,
or they run the risk of incurring additional costs and noted that a balanced approach to regula-
and the wrath of regulators. tion – one that is not overly restrictive but still
A recent presentation by Stijn Claessens, supports market discipline – is most beneficial.
Professor of International Finance at the Uni- For regions looking to expand their financial
versity of Amsterdam to Cass Business School services industry, this will require careful han-
highlighted a number of factors that drive fi- dling.
20
Aquin

Drivers for investment emerging markets could be overlooked when


Emerging markets are increasingly appealing to the developed markets see a return to liquidity
fund managers and investors wishing to escape and so others are keeping their options open. It
negative trends seen in more established mar- is notable that many funds, including sovereign
kets. The lack of significant debt – corporate and wealth funds (SWFs) that are responsible for a
consumer – and simplicity of products gives a large chunk of liquid capital in the emerging
welcome clarity for investors, allowing for more markets, are investing outside of
straightforward understanding of a company’s their geographies.
position and potential. The strong reserves of nat-
ural resources - in BRICs countries particularly – Drivers for regulatory change
along with a growth in consumer spending and What is not in doubt is that the need for regula-
investment in infrastructure are giving local cor- tion is paramount for investors. Where there are
porations some fairly straight forward economic no governmental rules, there is the potential for
returns. Domestic consumption in emerging private contracts to be drawn up so that inves-
markets is in most cases still lower than that seen tors have improved protection. But the evidence
in developed regions allowing room for growth. is that regulators are attempting to resolve con-
Inflation in some countries is causing con- cerns in emerging markets through improved
cern, while others are seeing dramatic increases transparency – for example in China where the
in wages as external investment drives up com- retail market for investors has grown exponen-
petition, for example in the Indian IT services tially in recent years, the government has made
industry. A recession in the US could also cause reforms to eliminate non-tradable shares to as-
problems for countries relying upon them for sist with corporate governance.
commodities exports. For the moment there is At the Annual Conference of International
money to be made, and a balanced approach, Organisation of Securities Commissions (IOS-

Emerging markets are being perceived as lower


risk investments by some, in comparison to
developed markets

stretching across regions could hedge against CO) in Paris this year, Martin Wheatley, CEO
economic shifts. of Hong Kong’s Securities & Futures Commis-
This has led to emerging markets - through sion (SFC) issued a call for greater consistency
growth potential and transparency - being in regulation globally, particularly as there is a
perceived as lower risk investments by some, growing trend of consolidation in the exchanges
in comparison to developed markets. However market which differences in “structures, curren-
a less rigorous regulatory framework in these cies, languages, political frameworks and culture
areas can present its own risks where potential across the region” could inhibit.
investments are not always required to be as
transparent as investors would expect. Preparation is key
Some see moving into such a market as a short The flexibility to operate in new markets, or
term affair. The funds launching only into across markets, will require funds to invest in
21
Aquin

understanding the markets they are moving fund’s needs, the fund will not necessarily have
into. That means acquiring local knowledge and the expertise to support the technology in-house
the processes to use it, acquiring technologies – and the cost for this may be prohibitive for smaller
that are flexible enough to adapt to movement ventures.
between regions or updates to the legal frame- One solution for funds that find themselves
works surrounding them. in this position is to utilise the economies of scale
For institutional investors of all sorts, re- provided by a custodian bank or infrastructure
forms in these markets will require them to provider. Aquin has provided solutions to a num-
adopt systems that can move with the reforms, ber of banks – for example Citi and BNP Paribas
generate reports for regulators where required – that are then offered via their custody services.
and ensure that a firm is aware of any limits or By utilising a custodian’s service provision a fund
restrictions that might lead them to stray into manager is able to take a full range of services
non-compliant territory. through a single point of contact reducing the
Aquin’s MIG21 system is a hugely flexible complexity of relationship management across
investment compliance solution that utilises a the enterprise.
high degree of automation to reduce the bur- Another alternative is to utilise the technol-
Investor Services Journal | Hedge Fund Services Market Guide 2009

den of work upon fund managers and their ogy offered through a service provider. Aquin and
compliance officers. Its adaptable rules engine PCE Investors, the London-based infrastructure
is designed to function in a changing regulatory platform for hedge funds announced a partner-
environment with comprehensive oversight ship this year, through which PCE will use the
for all new and existing asset classes. As such award-winning compliance solution from market
it will serve across geographies and regulatory leader Aquin as the system of choice for its infra-
regimes. It facilitates pre- and post-trade check- structure. With assets exceeding USD1.4 billion
ing of legal, contractual and internal investment across 15 hedge fund strategies, PCE is the first
guidelines in one single system thus reducing non-long only participant to acquire such a lead-
the cost and time associated with investment ing-edge, flexible compliance solution and this
process controls. Order management systems ground-breaking rules engine will significantly
can be easily integrated to extend compliance enhance the operational excellence that PCE is
into pre-trade. To help compliance officers able to offer hedge funds.
cover compliance regimes of new jurisdic- PCE Investors and Aquin can now provide
tions quicker Aquin offers its unique LawCard PCE’s clients with the full range of support from
service. LawCards are predefined rule libraries its institutional scale operating environment
that cover investment restrictions of the most whilst ensuring they are able to meet current and
important investment jurisdictions: UCITS III future needs of both regulators and retail clients
and national implementations in Europe, SEC via Aquin’s technology.
1940 Act, Hong Kong Mutual Provident Fund By using such technology through an infra-
Scheme and others. structure provider, fund managers are able to
cope with regulatory burden and the need for
Scale and support disclosure without significantly impacting their
One of the challenges to funds investing in infra- business. MIG21 provides that and, combined
structure and systems for movement into new ter- with PCE’s holistic service offering, gives fund
ritories lies with the costs and support involved. managers the benefits of scale across
Even where systems can be flexible to match a their operations.

22
Omgeo

Why hedge funds’ operations matter


in a bear market
Matthew Nelson, director, market intelligence, Omgeo LLC

Before I ruffle any feathers, let me state that in industry. No one knows for sure, but roughly
my opinion operations always matters. Bull or 3,000 hedge fund firms (not funds, mind you)
bear market, operations is the grease that keeps exist globally and the biggest managers oversee
the machine running. But in a bear market, billions of dollars in assets. Many of these firms
when the front office is struggling to eke out sin- have become household names in the industry
gle basis points to please investors, operations and they garner the same clout as the largest tra-
not only keeps the machine running, but it can ditional asset managers. Their trading volumes
actually help the machine to perform better. and aggressive styles make them important par-
News that hedge funds have struggled thus ticipants in markets around the globe and in as-
far in 2008 should come as no surprise to any- set classes from the most basic to the most com-
Investor Services Journal | Hedge Fund Services Market Guide 2009

one with access to a television, newspaper or plex. And the lines that separate hedge fund
computer. The media is replete with coverage managers from traditional asset managers are
of the housing collapse, subprime meltdown, blurry at best. Many traditional asset managers
credit crunch and other catchy taglines that have at least partly transitioned (either openly or
have been associated with the problems that secretly) into hedge fund managers themselves.
have plagued the global economy for the past A look near the top of Alpha Magazine’s hedge
year. So to many, the news that hedge funds fund league table reveals names like JP Morgan
are struggling comes as no surprise; everyone’s and Barclays Global Investors, once known as
struggling in this market, right? traditional asset managers, now known equally
Well, that’s not entirely right. Hedge funds known as alternative asset managers. In fact, in
are designed to make money in good times many cases you’d be hard-pressed to tell the dif-
and in bad. When compared to global equi- ferences when you look beneath the covers of
ties, hedge funds are doing quite well in 2008. traditional and alternative fund managers; op-
The -3.8% return through July 31 of the HFRX erationally they are very similar.
Global Hedge Fund Index compares favorably Competition for investor assets in the hedge
with the S&P 500 and MSCI EAFE which are fund industry is fierce. According to Hennes-
down a painful -13.7% and -15.6% see Group, nearly 70% of hedge fund assets now
respectively. come from demanding institutional investors.
But as stated above, the problem is that hedge In difficult market conditions, every basis point
funds are absolute return investments, meaning counts and managers need to be keenly aware of
that they should generate positive performance where money is made and lost and where it is
in a bull or bear market, in the latter using short being spent. Although it’s often overlooked, op-
positions and derivatives. Therefore, a more erational inefficiency may account for hundreds
appropriate performance comparison is ver- of thousands of dollars in unnecessary spending
sus cash as a benchmark (although one would on technology, data and personnel. Likewise the
hope that hedge funds would add some value, risk stemming from operations may expose the
so perhaps cash plus 1%). When measured in firm to thousands, if not millions of dollars in
this light, hedge funds, on average, are severely potential losses due to error-prone manual pro-
underperforming in 2008 and in fact have un- cesses, unknown risk exposure to entities and
derperformed for 2 of the last 3 years. counterparties and failed trades. Institutional
Now consider the dynamics of the hedge fund investors are demanding, not only in terms of
24
Omgeo

Matthew Nelson
25
Omgeo

performance but also in terms of operational the entire trade lifecycle. Phoning, emailing
soundness. They are more likely to invest their or faxing trade confirmations, re-keying trades
money with firms that can prove that they have into multiple systems, and using spreadsheets as
a strong operational infrastructure. “work arounds” to fill in technology gaps, are
For mid-sized and smaller hedge funds that common practices that should all be eliminated.
may outsource some or all of their operations to Spreadsheets are fine for modeling and analyz-
a prime broker, fund administrator or a combi- ing investments, but not for managing collateral
nation of the two, operational efficiency is still or reconciling positions; that’s a ticking time-
something that must be measured. Outsourc- bomb. Although they may be the easy, low cost
ing doesn’t mean wiping your hands clean of all solution, spreadsheets are a poor fit for these
the details surrounding operations. On the con- mission-critical functions. Versions change,
trary, fund managers need to establish strong macros break, developers change jobs; this is
service level agreements with their providers risk that the firm can do without.
and then regularly monitor them to ensure that
Investor Services Journal | Hedge Fund Services Market Guide 2009

Archeus Capital is a good


example of what can happen
when communication between
the fund manager and service
provider breaks down
the providers are meeting their obligations. Hedge funds, like their traditional asset man-
Archeus Capital is a good example of what can agement brethren, should always focus on op-
happen when communication between the fund erations just as they do on trading. The hedge
manager and service provider fund industry is a maturing industry and it’s
breaks down. time that all hedge funds, not just the largest
In this dynamic, challenging and competitive firms, start acting like it. That means looking at
industry, hedge funds need to be more consid- the entire firm and ensuring that the best, most
erate of operations than ever before, particularly efficient business is being run. Though little
when alpha is as scarce as it is today. That means money can truly be made in the middle and
both rationalizing unnecessary technology and back offices, money can be saved there; both in
smartly investing in technology that will im- real savings and averted potential losses. But
prove operational efficiency. Manual processes in a bear market like this one, operations really
should be eliminated wherever possible, across does matter.

26
Custom House

Mayhem in the Markets - and the Media


Custom House’s Dermot Butler explores the media’s treatment of hedge
funds in the midst of the financial maelstrom

I hope that those of you who read my comments knock-on effect on almost everything else. Try
in the 2008 Hedge Fund Services Market Guide as they might, the media has not been successful
will not assume that I have tunnel vision in attempting to blame the credit crunch entirely
concerning the media and its effect on the on hedge funds, because there is absolutely no
perception of hedge funds, both by the general evidence that anyone is to blame for the credit
public and by the regulators. However, it is an crunch other than the banks and the huge losses
on-going topic that needs to be aired and the that banks have sustained has demonstrated this
last Guide was a year ago. quite clearly. Nevertheless, there has been a call
So what has happened in the intervening for regulation of hedge funds when, in the
twelve months, apart from the continued context of problems in the credit markets, those
deterioration of the credit markets and the regulations should more properly be addressed
27
Custom House

to banks. It does appear, to this outside so. Either they didn’t know what their positions
observer that it is not the lack of regulation were, or they had not assessed the risk in those
in the banking industry, which is arguably the positions or they had no idea how to value the
most regulated of all industries, that has been positions, or, most likely, all three. But certainly
the problem, but the failure of the existing it wasn’t hedge funds that caused those problems
regulations, including Basel 2 and, perhaps, and I was delighted when Charlie McCreevy,
the failure of the oversight of the regulators who is the EU Commissioner responsible for
themselves, although many senior members of this area, gave a speech in which he was highly
the regulatory community have waived warning critical of that French bank that had suffered
flags, which have apparently been ignored by substantial trading losses as a result of lack of
the banking fraternity, whose focus has been controls and no-one could doubt the validity
more driven by avarice than prudence. As we of his criticism. What interested me however
all know, banks have historically lent to people, was that he finished the speech by drawing
who did not need it, when they did not want attention to the irony of the “demonisation”, in
Investor Services Journal | Hedge Fund Services Market Guide 2009

If it wasn’t for hedge funds then the


markets could easily have dried up for lack
of liquidity
it and withdrawn liquidity from people, who the press, of sovereign wealth funds and hedge
do need it, at the time that they most want it. funds. He went on to say that certain banks that
Nothing new here, but what is new is that for had suffered horrendous losses were rescued by
most of the past year, banks have been reluctant injections of capital from sovereign
to lend to other banks. But the problems with wealth funds.
UBS, Northern Rock, Merrill Lynch Fannie/ Furthermore, if it wasn’t for hedge funds
Freddie debacle and the collapse of Lehman then the markets themselves could easily
does not encourage banks to lend to anyone – have dried up for lack of liquidity. It is a
but is that cause or effect? rare comfort to hear a politician talking
The regulators certainly have a problem on sense and giving a point of view that won’t
their hands with regard to the valuation of many necessarily win him any votes. All of that
of the derivative products that have brought the is a continuation of the banking crisis that
banks down and, to be fair, the regulators, as we first saw in 2007. In addition, 2008 has
well as AIMA and IOSCO have all been waving featured the huge rises in oil and wheat and
this red flag for some time now. AIMA’s first indeed in all foodstuffs and the universal
pricing research paper, which highlighted this complaint that it was all due to the speculators
risk area, was released seven years ago. and hedge funds. I would suggest that this
It is difficult not to be skeptical about the is merely more hysterical balderdash.
controls and procedures that banks have (or, I was talking to a senior commodity trader
perhaps, do not have) in place, when two major a short while ago about the allegations that the
banks announced, earlier this year, losses of managed commodities community had ramped
between USD3 billion and USD4 billion each, up the prices of oil and wheat and ramped
only to double those figures within a month or them down again, just like the “Grand Old
28
Custom House

Duke of York”. According to both the tabloid and grains as new year crops comes on line.
and broadsheet press, this was the fault of the What I hadn’t appreciated, until it was
speculator, for which read “hedge fund”. I pointed out to me, is that while base metal
would suggest that in the case of wheat it is well prices – copper, zinc, aluminum – have all risen
documented that a huge acreage of wheat was on the back of Indian and Chinese demand and
diverted to the production of ethanol largely speculators were deemed guilty of exacerbating
in response to the encouragement of the US those price movements, nobody has explained
Government. As such I suppose it is the farmers why iron ore and certain of the minor metals
who could be accused of speculation, but then also increased by approximately the same
farmers speculate the day they plant their wheat, percentage as copper and this, despite the fact
albeit they are speculating on weather and that there are no free futures markets in these
supply and demand balances rather than with metals, which would encourage the infamous
the intention of manipulating prices, which speculator to squeeze prices. So have these
is the accusation laid against hedge funds. It prices risen purely in reaction to demand?
Similarly, I understand that the price of rice has
Who can explain to me why some hedge largely followed the price of wheat and again
funds are responsible for price rising in there is no easily accessible rice futures market
copper and wheat when they obviously have that could be manipulated by the hedge funds.
nothing to do with similar behavior in the Who can explain to me why some hedge funds
are responsible for prices rising in copper and
prices of iron ore and rice?
wheat when they obviously have nothing to do
with similar behavior in the prices of iron ore
matters not that the demand for food stuffs has and rice?
grown, partially because of the increased wealth Those who read last year’s Guide may
in some of the emerging markets such as India remember my comments about a media
and China as well as the reduction in wheat panel at a conference in South East Asia. At
available for food stuffs because of ethanol and the same conference this year, a similar panel
weather patterns and of course problems in with representatives of the Financial Times,
Zimbabwe haven’t helped, but even the most Bloomberg, CNBC and the Wall Street Journal
imaginative journalist can’t blame hedge funds appeared and, to my surprise, I was encouraged
for the vicious eccentricities of a madman like by the attitude of the panelists, who suggested
Robert Mugabe. that if the hedge fund community was more
Ultimately the price of raw materials such open with the press then the press could be
as commodities is entirely dependent upon more accurate in their reporting. I can see the
supply and demand. At the risk of stating the value of this, however there are many hedge
obvious, the greater the demand the greater the fund managers who have spoken to the media,
price. If the price goes too high then demand only to be horrendously misquoted and to have
will look for substitution, or greater supplies. It their comments distorted beyond recognition.
is not that easy to turn on the tap with oil except The problem with trust is that it has to be on
for the OPEC nations, although they have both sides and this is something that AIMA has
historically been more inclined to turn the tap been trying to develop in their focus on the press
off when prices go down, as they recently did and media relationships for some years now. It
when oil started bouncing around the USD100 is definitely getting better but it has a long way
mark. With crops, supply can be turned on to go.
quite quickly, subject only to weather and no
doubt we will see a reduction in prices for wheat
29
Dillon Eustace

Legal and regulatory protection for hedge


funds in difficult times
Dillon Eustace’s Peter Stapleton explores how the troubles facing
investment banks will affect hedge funds
financial markets and lobbyists were resisting
calls for increased regulation in favour of the self-
regulatory models since issued by the President’s
Working Group on Financial Markets in the US
and the Hedge Funds Working Group in the UK.
Looking back to 2007, an interesting
observation is not that so few foresaw the
magnitude of the current crisis but rather that
the greatest cause of financial instability to date
Investor Services Journal | Hedge Fund Services Market Guide 2009

(some notable hedge fund collapses excepted)


has come from the investment banking industry.
At the time of writing Lehman Brothers
Holdings Inc. has filed a petition under Chapter
11 of the US Bankruptcy Code and Lehman
Brothers International (Europe) has been placed
into administration in the UK. Merrill Lynch has
agreed to forego over 90 years of independence
and looks set to be acquired by Bank of
America. The incredible events of 15 September,
2008 follow the fire-sale of Bear Stearns to
JPMorgan Chase earlier in the year and recent
US government intervention to put Frannie
Mae and Freddie Mac into conservatorship.
Most commentators and analysts believe that
“As yet, there has not been a threat to there will be further shocks to the global financial
financial stability. But if there is, it is the markets before we regain a period of stability.
job of the regulators to make sure that However, in the short to medium term, the
no element of the banking industry is collapse and restructuring of the investment
over-exposed to (hedge funds)” – Charlie banking sector raises important questions
McCreevey, European Commissioner for for hedge funds, their management and
Internal Market speaking in an interview investment advisors who have heavily relied
with the Financial Times in February, 2007. upon investment banks to provide prime
Perhaps few in the hedge fund community brokerage services, including financing,
will accuse Commissioner McCreevey of a short sales and derivative trades, necessary
lack of foresight as fewer, if any, thought it to implement their investment policy.
possible that shortly after that interview the first For Irish hedge funds there are regulatory
ripples would appear in a credit tsunami which safeguards inherent in the appointment
has decimated the world’s leading financial of prime brokers which can be availed
institutions. At that point hedge funds were of, particularly in the areas of custody
widely perceived as a substantial danger to global protection, independent monitoring of
30
Dillon Eustace

positions and netting of exposures. There


are also important lessons to be learned For Irish hedge funds there are
from recent derivative close-out procedures regulatory safeguards inherent in the
and active monitoring of existing terms. appointment of prime brokers
On the regulatory side, Ireland offers a
hedge product which can be set up within a
short time period under a flexible regime. Under Irish rules the arrangement must
At the first instance there are quality incorporate a legally enforceable right of set-off
requirements and only prime brokers who are for the hedge fund and netting arrangements
regulated by a recognised regulatory authority, must be recognised under the law which
with shareholders’ funds in excess of EUR200 will govern the insolvency of the prime
million and a minimum credit rating of A1/ broker. Unlike the ISDA Master Agreement,
P1 can be appointed (the shareholders’ funds prime brokerage documentation and the
and credit rating criteria can also be fulfilled by provisions therein are not standardized. Each
the parent company). While a useful industry broker tends to have a house style and the
standard these criteria alone are not sufficient default position is for the credit and legal
protection as recent developments have shown. close-out risks to be weighted against hedge
Other limitations which can be fund clients. In jurisdictions where similar
strengthened or monitored by funds include protections are not hard-coded into the
restrictions on the amount of assets which a rules it is possible for the contract to have
prime broker can rehypothecate from a hedge insolvency and set-off provisions which are
fund. The ability to rehypothecate allows unilateral in favour of the prime broker. As
prime brokers to offer their counterparties a result, the netting and set-off protections
competitive financing rates as they can use many market participants take for granted
these assets for their own purposes, e.g. short under industry standard documentation,
selling securities. However, assets used in including the ISDA Master Agreement, may
this manner create a credit risk for the fund not apply.
and it only has an unsecured contractual The prime broker must also be appointed
right to the return of equivalent assets which as a sub-custodian of the local Irish trustee.
can be impaired or even rendered worthless This can be a long and difficult negotiation
in the event of an insolvency of the broker. process, however, it is one of the characteristics
Irish hedge funds must limit this amount which separates Irish hedge funds from
to 140% of their indebtedness to the prime models in traditional offshore jurisdictions
broker (PIFs). While Irish hedge funds and even some European countries. The assets
established as QIFs have no regulatory limit passed to the prime broker which are not
on rehypothecation, it is common for their rehypothecated must held by the prime broker
lawyers to contractually agree a limit with in a sub-custody account which is within the
the prime broker or for the prime broker’s local custodian’s network. While there is an
own regulatory authority or internal controls argument for further flexibility and some
to limit this amount. Irish prime brokerage changes may be introduced in the coming
agreements must also incorporate a procedure months, the current situation facilitates the
to mark positions to market daily, in order oversight and monitoring role discussed below.
to meet the foregoing requirements on an The Irish regulator requires a responsible
ongoing basis. This is similar protection person on behalf of the hedge fund (currently
to that afforded under market standard the Irish trustee) to monitor positions
derivative agreements and enables funds to outside the custody network on a daily
monitor their exposure to prime brokers. basis and reconcile them against the fund’s
31
Dillon Eustace

records. Any discrepancies arising from the credit rating threshold for themselves.
reconciliation, which cannot be satisfactorily Hedge funds need to ensure that
resolved with the prime broker are to be documentation and legal risk issues are
reported to the management of the fund addressed. Often funds will enter into trades
requesting them to take remedial action. with counterparties pursuant to a confirmation
Periodically the Irish trustee is required with a good faith agreement to put in place
to request a confirmation from the prime a master agreement at a later stage. However,
broker that it does not hold assets other than these negotiations can become bogged down
in accordance with the above noted rules. as the parties try to agree important carve-outs
and changes to standard provisions, including
valuation models, changes to cross-default,
thresholds, NAV triggers and limited recourse
Hedge funds need wording to protect related funds, service
providers or investment advisors from cross-
contamination claims under the contracts.
to ensure that Any unsigned documents outstanding with
Investor Services Journal | Hedge Fund Services Market Guide 2009

active counterparts need to be resolved.


documentation Funds also need to be aware of their rights
under existing documentation, to be able to
actively monitor their exposure and know how
and legal risk to move quickly to protect themselves should
an event of default arise. Should it become
necessary to terminate a relationship, they
issues are need to know whether optional termination
is permitted on a voluntary basis or must they
addressed wait for a trigger event. Small technicalities
can interfere with efficient early termination
of derivative contracts and service of close-
out notice against a counterparty. Parties
Hedge funds and their management need to be aware of the valuation provisions
would be well advised to check that the that have been selected and whether they
above requirements are being adhered can value a claim with a good faith estimate
to in practice and to consider whether (e.g. Loss) or need to seek independent
some of the options available, e.g. limiting quotations from the market which can
rehypothecation, should be re-visited. be difficult and time consuming in
Outside of prime brokerage documentation volatile conditions.
and the regulatory framework the traditional Even with the above noted protections in
positions offered by investment banks may place and rights to net or set-off exposure,
need to be looked at. For example, hedge funds few hedge funds will have any secured
have been used to dealing with investment claims against collapsed investment bank
banks who, with some justification historically counterparts and risk being left to prove pari
speaking, have seen the hedge fund client passu for a limited amount of unsecured
as the credit risk. They have insisted on funds with other creditors. Active monitoring
unilateral credit support documentation, and familiarity with key contractual
high initial deposits (Independent Amounts) provisions can assist in getting out of bad
and imposed strict NAV based termination positions before such defaults arises.
triggers while retaining flexibility in
32
Norton Rose

A new kind of fund:


Shariah compliant funds examined
Norton Rose LLP has advised on the launch of the Al Safi trust, a fund intended to com-
ply with the principles of Shariah. Whilst the methodologies to be utilised by the trust
are not in themselves out of the ordinary, enabling such methodologies to be used in
a way that is intended to comply with the principles of Shariah has been pioneering.
With this and other fund structures being discussed, we are no doubt witnessing the
rise of a new area of structured finance. By Dean Naumowicz and Uzma Khan.

Islamic finance: the story so far ing the mitigation of risk. Shariah scholars have
The Islamic finance industry has seen phenomenal been working within such a framework in order
growth over the last decade and continues to grow to develop Shariah complied products. Are we wit-
on an international scale. It is anticipated that the nessing the rise of the Shariah compliant “hedge”
Investor Services Journal | Hedge Fund Services Market Guide 2009

assets of Islamic banks will grow at a rate of 24% fund?


per annum to around USD1.85 trillion by 2013
(excluding the Islamic branches of conventional Shariah compliant funds
banks and excluding growth in investment in the Equity linked funds provide a platform for inves-
Takaful industry). As demand for financing based tors to gain exposure to equities which often ex-
on the rules, principles and parameters ploit techniques selling such equities “long”
of Islamic Law (Shariah) continues or “short”. In general, conventional short
to grow, the industry has experienced selling involves a fund borrowing an equity
further development of the more tradi- and selling this in the market with the un-
tional Islamic finance methods. derstanding that the loan must be repaid by
buying the equity later (hopefully at a lower
Demand for returns linked to Shariah price). This is prohibited under Shariah as
complaint equities it would involve selling an equity which
Islamic finance traditionally provides halal (or the seller does not own. With respect to Shariah
permissible) alternatives to debt financing involv- complaint investments, there have been some in-
ing the payment of interest. Increasingly, however, teresting developments recently utilising a tradi-
new structures are being devised and applied to a tional and well established Shariah contract - the
wider range of financing techniques, in- Arbun. The Arbun can be used to provide
cluding equity products. Such structures exposure to Shariah complaint equities by
have enabled Islamic and non-Islamic creating a similar economic effect to short
investors to access a broader range of ex- selling. The Arbun is a sale involving a de-
posure profiles with respect to Shariah posit in respect of the purchase price of an
compliant equities. equity with complete performance of the
contract due at a future date. Under this
Islamic funds model, ownership is established before the
The traditional Islamic fund structure subsequent sale and, as a result, this tech-
is based on the concept of profit and risk sharing nique has received scholarly approval for complying
between investors and a fund manager. However, with Shariah.
Shariah recognises the need for investor protection
and so new asset classes and hedging instruments Al-Safi: a case study
are increasingly being utilised in order to strike the Norton Rose LLP has been advising a number of
required balance between greater exposure and clients in leading the way in the development of
diversification of investments whilst maintain- structured Shariah compliant products. We advised

34
Norton Rose

on the recent launch of the Al-Safi umbrella trust trustee on behalf of the relevant sub-trust whereby
platform. The Al-Safi platform seeks to provide an the investor will subscribe for units in the relevant
innovative, Shariah compliant structure which aims sub-trust.
to assist investors in maximising their potential
returns. Shariah guidance
In order for the trust to remain Shariah compliant,
Trust structure the investments of each sub-trust must remain in
Al-Safi is a Cayman-based multi-class trust. The accordance with the principles of Shariah. There-
trust is structured as an “umbrella” trust having fore, investments in certain industries (such as
multiple sub-trusts. Pursuant to a trust deed, the gambling and the manufacturing of armaments),
trustee will have the power to create sub-trusts and certain products (such as alcohol and pork) and
issue different classes of units with respect to each certain investment strategies (such as speculative
sub-trust. Each sub-trust may have separate invest- or interest-related strategies) are prohibited.
ment objectives and therefore invest in different sec- A Shariah board, consisting of leading Shariah
tors/geographical regions as appropriate. scholars has been appointed with a remit to oversee
This structure is no different to a conventional the business, activities and investments of the sub-
fund structure, other than the exposures being cre- trusts and to provide a Shariah oversight function.
ated and the fact that the trust will need to comply In addition, an expert Shariah advisor has been
with Shariah (e.g., no interest can be paid on any appointed to advise the Al-Safi platform and will
cash held). Investors can therefore take comfort on provide day to day monitoring of the investments
the robustness of, and market conventions relating of the trust. The Shariah advisor receives daily “ex-
to, such structures. ception reports” from the prime broker highlight-
This umbrella structure has been used to mini- ing any potential deviations from the investment
mise cross liabilities between any sub-trusts and guidelines and the Shariah advisor will suggest,
therefore assists in the mitigation of risk by pre- with final approval required from the Shariah
venting cross-contamination of liabilities across board, how such investment will be dealt with
different sub-trusts. The trust deed will not permit either by divestment or a purification procedure.
the trustee to be indemnified out of, or to have re-
course to, the assets of any sub-trust other than the Final thoughts
sub-trust to which the liability pertains. Therefore, Market demand for Shariah compliant investment
any liabilities or expenses incurred with respect to alternatives has led to the creation of funds which
a particular sub-trust are enforceable against the seek to comply with Shariah. The current econom-
assets of such sub-trust only. ic climate has also encouraged the development of
The trustee has appointed service providers to such innovative and alternative financial products
the trust to provide, inter alia, investment manage- to provide investors with new platforms for invest-
ment, prime brokerage, Shariah advisory and ad- ing in order to maximise their returns whilst
ministration services to the trust. managing risk.
An information memorandum has been is- There is an acceptance across the Islamic finance
sued in relation to the trust and a separate offer- industry that if the industry is to continue to de-
ing memorandum will be issued in relation to each velop, the more traditional boundaries of Islamic
sub-trust. Each offering document will set out pro- finance will need to be expanded. Consequently,
visions relevant to that particular sub-trust, which these developments have received the approval of a
may differ from other sub-trusts, particularly in re- number of high profile scholars which will inevita-
lation to investment objectives, redemption and li- bly open the door to further progress in this latest
quidity provisions. Also, a subscription agreement area of Islamic structured finance.
will be entered into between the investor and the
35
Hassans

The Gibraltar Experienced Investor Fund Regime


Hassans partner James Lasry explains how the Experienced Investor Fund
regime in Gibraltar has proven to be an extremely versatile way of setting
up a fund within the European Union.
Experienced Investors an investment manager in Gibraltar or in any other
In order to qualify for this jurisdiction. It is sufficient under Gibraltar law that
regime, marketing must that investment manager or adviser is licensed or
be restricted to investors entitled to give investment management/advice in
who are deemed to its home jurisdiction. An investment manger or
be experienced under advisor license in Gibraltar is a full European Union
the Financial Services license. This means that the license can be passported
(Experienced Investor anywhere within the European Union. As such, the
Funds) Regulations 2005 normal capital adequacy requirements that exist in
Investor Services Journal | Hedge Fund Services Market Guide 2009

(the EIF Regulations). other European jurisdictions also apply to the Gi-
The EIF regulations define Experienced Investors as braltar managers or advisors. A Gibraltar investment
investors who have a net worth of 1m aside from manager/advisor must have a physical presence and
their residential property, individual investors whose staff in Gibraltar.
normal business activity includes investment related
activity (i.e. investment professionals) or investors Depositaries
who invest a minimum of 100,000 in the fund. It is An EIF that is open ended must have a depositary.
important to note that these definitions are individual The fund may also appoint brokers to assist with
and not cumulative so it is sufficient for an investor their trading activity. Neither the depositary nor the
to invest 100,000 for it not to have to prove any of the brokers need be in Gibraltar although in the case of
other conditions. Protected Cell Companies “PCCs” there may be some
advantage to having these in Gibraltar, as there is
Promoters more certainty that a Gibraltar court will enforce the
Unlike in other jurisdictions there is no requirement statutory segregation of cell assets than a non-Gibral-
for the promoters of the fund to be licensed. It is tar court that may not be as familiar with Protected
sufficient for the fund administrator to perform the Cell Companies legislation.
normal know your client and client acceptance proce-
dures for them to be able to set-up a fund in Gibraltar. Prospectus
The reason for this is that each fund must have two An EIF must issue a prospectus that is consistent with
directors who are authorised by the Financial Services industry standards and which will allow an investor
Commission (“FSC”) to act as EIF directors. The EIF to make an informed investment. The prospectus/
directors’ role is to ensure proper governance of the private placement memorandum (PPM) must state
fund. Where the fund is a unit trust with a corporate the fees that are chargeable out of the property of the
trustee or where the fund is a limited partnership fund, the investment objectives, borrowing or invest-
with a corporate general partner, two directors or the ment restrictions, if any, and the risks associated with
trustee or general partner, as the case may be, must be such investment. The prospectus/PPM is a private
FSC authorised directors. document in all cases except if the fund is incorpo-
rated as a public limited company. As mentioned
Management above, however, there is no legal requirement to use a
Although many funds in Gibraltar do not have public limited company for a fund in Gibraltar even if
investment managers and are managed by their the fund has more than 50 investors.
boards of directors, an EIF may choose to appoint

36
Hassans

Authorisation and Regulatory Requirements stamp duty of £10 on the creation of share capital
One of the key unique selling points of the Gibraltar of a company and on any increase in share capital.
fund is the authorisation process. For an EIF it is Furthermore, there is no tax in Gibraltar on dividends
sufficient for the fund to incorporate, appoint its from quoted securities or on income from trading
service providers, produce its prospectus and hold listed securities. Indeed, a fund may find it more
a board meeting to launch itself as a fund. There beneficial not to apply for the certificate of exemption
is no regulatory pre approval necessary for launch. from the Commissioner of Income Tax in certain
Within 14 days of launch, a fund must notify the FSC cases and to rely on the regular internal tax regime
of the launch along with a copy of the prospectus, of Gibraltar which will invest in the majority of cases
the memorandum and articles, a legal opinion from not tax any income or gains earned by the fund. The
senior Gibraltar counsel stating that the fund was set- reason for this is that Gibraltar, being part of the Eu-
up in accordance with the EIF regulations and other ropean Union, can benefit from the European Parent
relevant legislation, a form signed by the administra- Subsidiary Directive. This means that payments to a
tor and the license fee of £2,500. This is very signifi- Gibraltar company from subsidiaries in certain Eu-
cant as it means that effectively there is no regulatory ropean jurisdictions (such as Luxembourg) will not
down time and the fund may be launched as quickly be subject to withholding tax. This is another one of
as necessary. The FSC will then review the submitted Gibraltar’s unique selling points and it is particularly
documents and may come back with questions or relevant in private equity and real estate funds.
comments. Going forward is necessary for an EIF There is no withholding tax on payments from a
to ensure that it complies with the EIF regulations. Gibraltar fund to its non-Gibraltarian investors.
Breach of certain regulations requires the directors The valuation methods for EIFs must be disclosed
and/or administrator of the fund to notify within the prospectus. There are no particular rules
the FSC. on valuations other than their disclosure. Although
The directors authorised (especially the directors) any internationally accepted accounting standard
and the administrators are charged with ensuring on- might be used for the audit, many Gibraltar funds are
going compliance with Gibraltar legislation and with audited under IFRS or UK GAAP.
corporate governance requirements. An EIF must
have a fund administrator that is authorised and has a Protected Cell Companies (PCCs)
presence in Gibraltar. In addition to the two Gibraltar The third unique selling point of Gibraltar is that
based EIF directors, the fund must also appoint it is possible to set-up a fund in Gibraltar as a Pro-
auditors that are registered in Gibraltar. Three out of tected Cell Company (PCCs). PCCs are companies,
the four “big four” auditors are based in Gibraltar as which can segregate their assets into cells, which are
are several other firms that have ample experience in statutorily, protected and are remote from each other
fund audit. in bankruptcy. This means that if one cell incurs a li-
There are no restrictions on borrowing or own- ability, the creditors of that cell will be unable to satisfy
ing investments. A fund may invest in any class of their debt from assets attributable to another cell.
investment and at any percentage given that this is This is particularly useful to investment mangers that
a fund that is targeted to experienced investors who wish to set-up several funds with several strategies
are informed and are able to bear the risks of such under one vehicle and save with economies of scale.
investments. The fund may, however, impose certain Investors can invest in one or more cells according to
restrictions on itself. These are disclosed in the pro- their investment strategies.
spectus and, of course, must always be adhered to.
Conclusion
Taxation The quick and easy regulatory notification process,
Gibraltar funds may obtain an exemption from the possibility of setting up PCC funds and Gibraltar’s
the Commissioner of Income Tax on any tax on position within the European Union are all factors
investment income. There is no capital gains tax, that are certain to make Gibraltar a very interesting
inheritance tax, wealth tax in Gibraltar. There is a and competitive jurisdiction for the set-up of funds.

37
PNC Global Investment Servicing

Survival of the fittest


Mark Mannion, managing director, PNC Global Investment Servicing,
explores how to survive in the new era

shock absorbers of the downturned market.


However, the rumors of the hedge fund’s
demise have been greatly exaggerated. In
fact, for the astute and skilled hedge fund
manager, opportunities for growth continue.
Some managers are already responding to the
current market to meet the evolving needs of
investors and changing regulatory landscape.
Fund managers as well as administrators
are currently introducing new products and
services that embrace the alternative mindset,
Investor Services Journal | Hedge Fund Services Market Guide 2009

but are designed to perform in varying market


conditions. That said, no strategy is without
The global financial landscape continues to risk and a manager must commit to adhering
transform almost daily. Many experts do not to best practices and risk management,
see the crisis plaguing the markets over the last especially within the current market.
18 months slowing in the near future. Dur- Successful strategies are those that continue
ing the market’s peak, investors continually to deliver capital preservation and absolute
searched for alpha outside of the traditional returns in a market downturn. Put simply,
strategies. As a result, we have witnessed the those that substantially decorrelate from
convergence of traditional and alternative equity markets are better positioned. There
products and strategies to produce what could is variation between periods in performance
be termed hybrid products. At the very least of individual strategies, as returns driven
we’ve seen ‘hybrid managers’ offer or deal by specific sectors inherently positioned to
with these products. Thus, hedge funds have capitalize on certain opportunities during
ingrained themselves in many more corners of periods of market dislocation. While these
the financial services industry. instances generate successful decorrelation,
they are specific in nature and not
representative of a larger strategy. Looking
Rumours of the at the industry at large, the correlation
between HEDGE Index and the MSCI World
hedge fund’s demise demonstrates that during times of market
stress we see a sharp decline from HEDGE’s
have been greatly previous peak levels of positive variable
equity correlation with MSCI World. This
exaggerated. demonstrates the ability of hedge funds
to decorrelate from broad equity market
As a result, some hedge funds have wound indices. During market bull runs, we see
up at the forefront of the global market hedge funds exhibit trends of correlation.
decline. In many ways, these alternative During a financial crisis, almost all sectors
investment products—with complex and are affected. Those holding fundamentally
intricate strategies—have now become the strong stocks are more likely to retain them
38
PNC Global Investment Servicing

until the market recovers. However, it is more perfect storm within the financial markets.
difficult for those with hedge funds that are Another strategy that has gained in
highly leveraged to do so, as investors are popularity is associated with managed futures
faced with squeezed liquidity and margin and CTAs, which focus on investing in listed
calls. Hedge fund strategies popular at bond, equity, commodity futures and currency
the moment—partly because of credit markets. These strategies capitalize on a bull
crunch—are those that have demonstrated this market run within the commodities market,
decorrelation, such as global macro; managed especially within the energy and agriculture
futures and Commodity Trading Advisors sectors. Managed futures have benefited from
(CTAs); and equity market neutral strategies. increased energy prices, the depreciation
of the U.S. dollar, and supply-side pressure.
CTAs leverage unanticipated surprises. The
No matter the futures markets move gradually to reflect new
conditions, which in its full extent were not
anticipated by the general investing public.
strategy, the The equity market neutral strategy
has benefitted from the decrease in the
availability of capital and lower levels of
fund manager leverage. Thus, there are fewer dollars chasing
similar opportunities within quantitative
must devote a trading. Higher levels of market volatility
provide a robust short-term quantitative
trading opportunity. A quantitative approach
large portion of to trading and neutral positioning partly
insulates strategies from challenging

his or her time periods within the equity or credit markets.


As with managed futures, quantitative
strategies make use of what could be termed
to valuation the ‘herd mentality’ of the markets.
It must be remembered that hedge funds
accentuate a downturn due to their size, and
Global macro and managed futures have strategies that employ aggressive investing
benefited from opportunities due to continued using leverage and derivatives not only
volatility and rising commodities prices. increase the opportunity for profit, but also the
They’ve posted solid gains because of the potential for higher losses. All of the strategies
continued unpredictability within the market that have gained in popularity are specific to a
and central bank cycles that have offered market environment and require an immense
opportunities for managers trading in a variety level of financial acumen and knowledge.
of economic and market conditions. Macro In less liquid markets, the price impact
funds have higher levels of cash therefore of any crisis is larger, has a greater effect on
offer greater liquidity, leading some to see balance sheets, and effects more participants.
these funds as a ship riding the wave of the Illiquidity has resulted in a shift in investor
39
PNC Global Investment Servicing

strategy and popularity of sectors. At this end The accurate valuation an asset or position
of the spectrum are managers who have moved within illiquid markets poses challenges.
away from less liquid strategies and sectors This is not as significant an issue within
and into those that offer greater liquidity liquid securities, as a manager can use recent
and less risk. This has resulted in a greater transaction prices and readily available
popularity of funds of funds. However, these marketable bids and offers to provide fair
complex instruments require greater flexibility and impartial valuations. However, in less
and risk management from the manager. liquid securities that trade more infrequently,
No matter the strategy, a fund manager transactional prices are not always available.
must devote a large portion of his or her In such instances, it is necessary to seek broker
time to valuation, especially in an illiquid quotes to gain an idea of a positions value.
market. A manager has to ensure a fund Adding to the difficulties within markets that
uses fair and proper prices for positions are traded infrequently, obtaining quotations
held within the fund. Employing robust and they may be unreliable. For example,
Investor Services Journal | Hedge Fund Services Market Guide 2009

standards to do so is essential to encouraging broker quotes for some types of mortgage


investors to invest in a fund. This not only backed securities can vary by 20-30%.
provides confidence to investors, but is a So, what is the best way for a manager
requirement for new capital allocations. to tackle valuation on behalf of the investor
In addition, issues related to valuation can and his or her interests? First, don’t create
underlie many of the operational risk factors valuation—source it independently from
faced by hedge funds. The correct handling an asset manager. Alternatively, a manager
of valuation is paramount to preventing such can source valuation from range of brokers,
problems. A recent study by Capco on the counterparties, and contacts. There are also
causes of hedge fund failures found that 35% very capable specialists who make valuation
of could be attributed, in either the primary their focus. A rule of thumb is to always
or secondary instance, to problems with attempt to obtain a valuation from more
valuation. And according to the UK Hedge than one source. There is a high level of
Fund Standards Board, valuation is one of five risk associated with valuation from those
general areas on which funds should focus. investors who want to know the exact extent
of their gains and losses, and managers
should be extremely mindful of this.
It is too early to sound As stated, it is too early to sound the death
knell for hedge funds. However, in these
the death knell for extreme times, managers must approach
all investment strategies with prudence and
hedge funds, however thoughtful judgement. Clearly opportunities
exist. But they must be handled by those
in these extreme who possess the keen intellect to gauge
times managers must the investment strategy against the risk.
With the investor’s interest at heart, such
approach all investment a manager can not only ensure a portfolio
maintains its liquidity, but also increase
strategies with the value of their client’s investment.

prudence
40
BNY Mellon

Hedge funds ride the J-curve


We often hear of the term “convergence” within the alternatives world, particularly in
the hedge fund and private equity arena. The term refers to the blending of these two
distinct asset classes into a new type of investment vehicle. Alan Flanagan, BNY Mellon’s
managing director in the Product Management explores the forces driving this trend
and how are they taking shape.

Hedge Funds vs. Private Equity The Emergence of Hybrids


Traditionally, the hedge fund model involves an We can readily see how these two distinct busi-
open-ended structure, meaning investors have nesses –hedge funds and private equity –have
the option to enter and exit at predetermined very different characteristics. They are each born
frequent intervals, such as monthly, quarterly, from unique cultures and organizations driven
etc. Hedge fund strategies generally seek market by the manner in which their respective portfo-
inefficiencies and pricing anoma- lio managers invest capital. However,
lies in publicly traded securities to despite stark differences there are
generate returns. Their portfolios two fundamental commonalities;
are generally short-to-medium they both represent private pools of
term plays, well diversified, and investor capital and they both pur-
typically hold no more than a port a modus operandi of achieving
small interest in any above-market returns. In this regard
specific security. convergence into a hybrid invest-
A private equity fund, on the ment form was merely a natural
other hand, would typically begin progression.
as commitment from investors. The original hybrid occurs when
This affords the manager an opportunistic a fund invests in both liquid and illiquid invest-
approach to investing. The manager or general ments. Hedge funds engage in hybrid investing
partner (GP) places a call on committed cash through the use of a “side pocket.” Side pockets,
from an investor as and when investment op- otherwise commonly known as “designated
portunities arise. The funds are closed-ended, investments,” arise when a hedge fund enters
meaning redemptions are prohibited and the into private equity type investments and these
fund only distributes proceeds as assets are investments are accounted for on a deal-by-deal
liquidated. Private equity funds have a typical basis in a “side pocket,” which as the name sug-
life term of usually seven years. The invest- gests is a segregated account which tracks that
ment strategy generally tries to create value by investment.
taking full or partial control over the compa-
nies in which they invest. Simply put, private
equity managers attempt to buy companies at Mixing hedge fund and
good value, and then improve or add value by
introducing new management, growing the private equity investing is
business by strategic purchases, refinancing
and/or restructuring measures that augment
not without its challenges
the company. The ultimate goal is to sell the
acquired company in 5 to 10 years for a profit, Side pocket investments contain transfer restric-
either through a private sale or an IPO. tions similar to private equity deals. The hedge

41
BNY Mellon

fund manager would typically be less involved in market volatility. And this reluctance still exists
the management of the side pocket than that of due to the belief in the hedge fund community
a typical private equity manager. Once an asset that the crunch has some way to go.
is designated into a side pocket, new investors The fact that the vehicles are locked up
do not participate in its performance and exist- provides investors, who can see beyond the
ing investors can only redeem their liquid share volatility, an opportunity to gain access to
holding. Their side pocket remains locked up long-term credit opportunities during these
until the side pocket investment is liquidated. turbulent times. Seasoned hedge fund investors
This promotes the liquidity of the hedge fund may see their returns severely impaired if the
with a closed private equity investment and price of the underlying asset falls more than
presents a broader base from which to gener- forecast, or if the credit crunch lasts longer
ate returns. Investors benefit from the added than expected. This is a where the hedge fund
efficiency of being able to invest in both markets manager takes the plunge down the dreaded
all under one roof. This has the added benefit of J-Curve, with the hope of longer-term upside.
reducing the administrative costs of having to On the other hand, this is a path well trodden
deal with a hedge fund and private equity by the seasoned private equity investor.
Investor Services Journal | Hedge Fund Services Market Guide 2009

firm separately. Unlike true private equity funds, where lock-


Mixing hedge fund and private equity up periods range from 5 to 7 years, the lock-up
investing, however, is not without its challenges. periods for hybrids are usually 3 to 4 years.
These center around accounting complexities, Some are stretching out longer into the private
in terms of management fees and performance equity realm, but involve penalties for exits after
fees, and careful consideration should be given shorter periods such as 10% at the three-year
to the drafting of the fund documents when stage. Similar to private equity funds, the ve-
considering this option. The strategy may also hicles are structured with a finite life and upon
present liquidity problems. If too much of reaching a certain point in time must return all
the fund’s investments are in side pockets, the their profits and principal to the investors. Most
managers could find themselves in a cash flow private equity funds will not take performance
crunch when redemption notices arrive. To fees until investments are realised, and even then
avoid liquidity issues funds have typically lim- are subject to claw back based on the overall
ited their side pocket allocation to a maximum performance of the fund. But the hybrids are
of 20%. structuring their fees differently. They are pay-
ing performance fees after reaching a preferred
Seeking Opportunity Amid the Credit Crunch return (generally 8% to 10%) without the claw
The arrival of last year’s credit crunch saw back and then entering into the more typical
the emergence of a new type of hybrid, more catch-up, 80/20 split there after.
commonly known as the credit hybrid. This In conclusion, there is clearly a continuance
trend is clearly a sign of the times and takes of the convergence trend through the creation
the form of hedge fund investing wrapped of hybrid vehicles, which share both hedge
in a private equity structured vehicle. These fund and private equity components. What is
new funds are investing in a wide range of most compelling is that we are seeing the theme
debt instruments - everything from mortgage evolving through ever changing market condi-
portfolios and asset backed and other tions. While we may not see any measurable
structured products, to traditional distressed impact for some time yet, the trend of hedge
debt and bank loans. Since the liquidity crisis fund and private equity fund convergence does
first arrived, hedge fund managers were not seem to be going away.
generally not prepared to take these positions
in a regular open-ended structure due to the
42
Ask the Experts

Stephane Leroy - head of


global sales & marketing, QuantHouse
“How is trading technology changing the evolving in a known universe driven by human
behaviour of the financial community? behaviors.
There has been an ongoing revolution in …and the Quants are coming !
trading since the first exchanges went fully elec- Everything could carry on like this forever
tronic back in the 1990s. At that time, screen- if the “Quants” were not on their way. For this
based trading applications new community of trading
began to be created to meet actors, GBP/USD, SoyBean
the needs of users regarding or IBM stock are just signals
reliability, speed and in a universe of data. They
volumes. research all markets and
More than a decade ago, analyze it through statistical or
full end-to-end automatic mathematical filters to detect
financial processes like elec- patterns and trends they could
tronic trading, black box leverage to generate profits.
trading, algorithmic trad-
ing, automatic execution If you want to talk to a human
engines and direct market trader… press #1,to connect to a
data feeds were concepts on “Silicon Valley” trader… press #2 !
which a few leading edge ex-
perts were working. Systematic trading innova- The entire financial community is going
tors were already showing the path along which through a quantum leap. New profiles are join-
trading technologies would ing the traders’ community with an improved
ultimately evolve. analytical and scientific background. The IT/de-
Recent modifications such as the combina- velopment teams who were seen as minor in the
tion of regulatory changes, technology’s rapid picture are becoming key elements of the trad-
evolution and new trading needs are forcing the ing teams inside each systematic trading firm.
financial community to change at an even faster Each organisation has to find its own evolu-
pace to stay ahead. tion path and manage its transition from discre-
tionary trading business models to systematic
Finance and Technology are merging… trading oriented organisations.
In today’s world of discretionary trading,
the vast majority of traders are specialised Whether you work for a buy side, a sell side or an
by asset classes. Those specialisations are the exchange … it’s maze time!
consequence of years and years of human Look for a next generation provider to help you
experience dedicated to trading those specific go through this Quantum gap.
instruments and asset classes. Human traders It’s time to reassess your business model in
are known for their in-depth knowledge as light of what’s going on in your landscape: new
they “feel the market”. They also ensure the competitors, new technologies, new market
success of the trading desk they are working for rules. As there is a high probability that you’re
through their strong relationships with their not in a relationship yet with a next generation
clients built over years. Traders working for provider who could help you and your company
Market makers, clients and prime brokers are find your way in this maze, be on the move!
43
Ask the Experts

Eric Marcombes – CEO Cogitam


“Technology is progressing at a swift rate, and Presuming this (and proven, since the inception
sectors such as aerospace, automotive, engi- of the first fund that the team created back in
neering and even Hollywood are managing 2004: Ecofi Quant Trésorerie Dynamique), we
to take full advantage of the most recent ad- think that this phenomena will continue and
vances. However the financial sector still lags that we can capture this, and can therefore ex-
significantly behind in this area. Whether it tract money from the markets. Of course to do
be in regards to risk management, valuation, this requires statistical models which are not
communication, messaging, or other func- that simple and require a reasonable amount of
tions, what role would you like to see technol- powerful technology.
ogy play in the day-to-day management of Our intention is to profit from technologi-
your fund? How could technology improve the cal advances to heighten the frequency of ob-
operations of the fund?” servation. Today we look, and react if the pre-
determined criteria are met, at
I do not believe that the fi- prices on several markets every
Investor Services Journal | Hedge Fund Services Market Guide 2009

nancial industry is behind minute. We have the systems to


in regards to technology; be able to observe them
at least it is not the case in tick-by-tick.
France. The first center of Otherwise, technological
calculations in this coun- progress will allow us to perfect
try is in the energy sector the algorithmic, order-routing
and the second biggest is system of our program trad-
an investment bank, whilst ing process; since we want to
other financial institutions be able to react to the markets
rank in the top places. tick-by-tick, we will therefore
These investment banks are have a new frontier to pass our
renowned for their efficient orders efficiently.
valuation, pricing, and the We are permanently obliged
options-based hedging to be on the cutting edge be-
calculations which are primarily used for struc- cause there is stiff competition between those
tured products. active in this sector. The world-wide quotation
COGITAM is a high-frequency, bi-direc- systems are faster and faster (example being the
tional, systematic, long/short, quant asset man- new system eminent in New York by NYSE-Eu-
agement company which specializes in alterna- ronext) and we must match these technological
tive investment, and though we launched our advances to remain in the game.
first fund but a year ago (the 5th of September: Everything COGITAM does is automatic:
COGITAM T 15 Systematic) the combined ex- from the investment decisions, to order passing,
perience of our personnel amounts to many the risk control systems, including execution
years of market experience. capture, to our client and market reporting, so
We have no intention of predicting what the to be at the height of technology is a necessity;
market will do; we do not have a dynamic hedg- it is a challenge, however it is one that we feel
ing system to cover our positions; we content comfortable betting on.
ourselves to simply acknowledge the past. We
find that what has happened before, will hap-
pen again (wasn’t it Winston Churchill who said
that history repeats itself? or was itNapolean?!).
44
Ask The Experts

Katya Azzopardi - GVTH


Why redomicile an existing fund into Malta? There have been a number of legislative devel-
opments to ensure that Malta keeps
There has been a sharp increase in the abreast with this dynamic industry.
number of funds domiciled in Malta One to the main developments in the
lately, especially since Malta’s acces- past twelve months has been the in-
sion to the European Union in May troduction of the Professional Inves-
2004. From the number of funds that tor Fund (PIF) targeting extraordi-
have been licensed this year up till nary investors. This is the third type
June 2008, it is clear that the growth of of PIF available in Malta, the other
the previous years has been sustained. two being the already very popular
Amongst these funds one finds a regimes of PIFs targeting experi-
number that have been incorporated enced investors and PIFs targeting
in another jurisdiction and have since qualifying investors. The minimum
been redomiciled into Malta. entry level for a PIF targeting extraordinary inves-
A redomiciliation means that there is a change tors is EUR750,000. This PIF can be licensed within
in the nationality of the company and hence in its three days of the submission of application since
regulator in the case of a licensed entity such as a the due diligence is carried out post licensing. PIFs
fund. The company is not terminated but merely promoted to Extraordinary Investors may choose
continued into another jurisdiction. Therefore the to provide clients with a Marketing Document,
assets remain unaffected and do not need to be which must have the latest version of the scheme’s
transferred and the status of the unit holders re- constitutional document or a summary thereof at-
mains unchanged too. tached to it.
All funds domiciled in Malta are regulated by The Marketing Document
the Malta Financial Services Authority, (MFSA), must contain the following information:
which is the single regulator of all financial ac-
tivities in Malta. A redomiciliation may be carried > a list of service providers including the Direc-
out in terms of the Continuation of Companies tors, General Partner(s) or Trustee (as appli-
Regulations 2002. The requirements to continue a cable), and their respective contact details;
company into Malta are not too onerous. It is pos- > a definition of Extraordinary Investor;
sible to redomicile companies which have been in > a risk warnings section;
> investment objectives, policies and restrictions
existence for a minimum period of one year. The
of the Fund;
process involves primarily submitting a number of
> details of fee structure;
documents, resolutions, certificates and declara-
> details of the classes of Units on offer; an
tions which all seek to ensure that any funds redo- overview of the safekeeping arrangements
miciled are reputable and satisfy Malta’s regulatory (where a custodian/ prime broker is not
standards. appointed);
There are a number of reasons why a fund > a statement identifying the holders of the
manager may wish to redomicile an existing fund voting shares of the Fund. This section should
into Malta. Here there is a flexible and EU com- also provide that the identity of the ultimate
pliant regulatory regime, a transparent tax regime beneficial owners of the holders of voting
along with an extensive list of double taxation trea- shares will be disclosed upon request;
ties. Furthermore, the costs involved such as the > Standard text excluding MFSA
licensing and registration fees, audit fees, legal fees, responsibility
office space rental and salaries are very competitive > the Subscription Form;
when compared to other jurisdictions. > Extraordinary Investor Declaration Form.

45
Ask The Experts
Nicholas Griffin - head of transaction
services Europe, KPMG
Will M&A activity continue in the hedge fund for strong market growth at double digit rates.
administration sector in 2009? However, as I predicted in this journal last year,
the ‘barbell’ effect, whereby a handful of play-
2009 may well prove to be an industry-defining ers hold 65-70 per cent market share and a large
year for the hedge fund administration sector. 2008 number of small players occupy the other end
witnessed a series of transactions that included of the market, is starting to have significant con-
outright acquisitions of administrators, sequences for the small-medium sized
asset book sales, equity investments and providers. Working on a good propor-
the purchase of technology companies tion of the transactions that have taken
to enhance propositions and improve ef- place over the last few years, I have ob-
ficiency. served a distinct change in the attitude
Deutsche Bank acquired Hedge- of buyers to the acquisition of smaller
Works, Fulcrum Group acquired the administrators.
Investor Services Journal | Hedge Fund Services Market Guide 2009

much larger Butterfield Fund Ser- Previously, valuations, by almost any


vices in a transformational deal, Cus- metric, were high across the board from
tom House and Equity Fund Services merged, the largest to the smallest. This was driven in
ALPS Fund Services acquired the assets of Price part by the belief that ‘anyone can be a market
Meadows, XL Capital acquired a minority stake leader’ given sufficient capital and access to dis-
in Equinoxe Alternative Investment Services tribution. Buyers are now more discerning as
and BNY Mellon acquired Lamp Technologies. they realize this assertion to be unproven, if not
No doubt other off-market transactions were simply untrue. The gradient of the valuations
executed quietly. curve is becoming steeper. Several smaller play-
Interestingly, 2008 activity failed to produce ers are struggling to sell their businesses as they
a major transaction between the largest play- continue to hold out for valuations last seen in
ers. The majority of hedge fund administrators, 2006 and the first half of 2007.
and in particular the largest players, had clients There is the prospect of a ‘roll-up’ play
under pressure due to the credit crunch. Sev- among the smaller players. A financial investor
eral had large funds fail. Consequently, much of may spot the opportunity to buy a smaller-sized
the year was spent focusing on the immediate player with a strong technology platform and
agenda of servicing current clients rather than good management. The strategy would then be
making acquisitions. to bulk up by acquiring stressed and distressed
It is likely that 2009 will be a year in which administrators.
several of the largest players decide whether they Predictably, the industry-defining deals will
are in hedge fund administration for the long be those involving the largest players. One or
haul. We may well see at least one player sell more very large transactions are likely as those
because its parent needs the cash a deal would at the top end make bold strategic choices.
generate to repair the group balance sheet. Perhaps, by the time you are reading this one
Other major banking groups are assessing the of those will have happened or the process may
long-term prospects for operating margins and well be underway.
returns on capital. Several realize they need to
invest heavily to achieve or sustain a top 3-4 po-
sition, or exit to willing buyers who are keeping
valuations high at the top end of the market.
The medium-term prospects remain good

46
Ask the Experts

Chris Cattermole
European sales manager, Advent Software
“How does a fund’s selection of a technology suite has institutional investors, who tend to be more
impact other areas such as choice of fund adminis- risk averse and have a more onerous due diligence
trator - is the compatibility of technology between process, and so will only commit monies to a fund
front, middle and back office systems a decisive that has a transparent and robust infrastructure.
factor?” And having this level of IT set up has even more
credibility with institutional investors
Traditionally, hedge funds have taken when a hedge fund can show it uses the
an operational-lite approach to their same platform as its fund administrator
organisational set up, preferring to con- and/or prime broker. Where that is the
centrate on their core investing compe- case, the transference of information
tencies and to outsource the infrastruc- between the prime broker, fund admin-
ture suite that supports those functions istrator and hedge fund is faster and
to their prime brokers and hedge fund more accurate, the data is consistent
administrators. Increasingly though making reconciliations easier, and there
there are compelling reasons for a hedge fund to will be less manpower required to maintain the
include robust middle- and back-office IT systems sundry processes. As a result, the hedge fund will
in-house. have a more cost efficient operation, and be able to
For one, hedge fund managers are scale its business and so grow more effectively.
diversifying into a broader and more complex The compatibility between the front, middle,
range of instruments and asset classes. But and back-office systems of a fund and its service
rather than relying on their fund administrator providers can therefore produce sizable benefits.
to provide daily or intraday reports on their All other capabilities being equal, it may then
positions and valuations, which can be costly prove to be a decisive factor for the manager in its
and cumbersome, many hedge funds want the choice of software vendor and/or service partners.
capability to bring that tracking in-house, so It is also important to note that by holding
as to have an immediate view of their current its books and records in-house, supported on an
exposures and how they need to react to them. industry-leading platform that is widely-used
Another driver, which is especially important by market participants, a hedge fund will ben-
in today’s market conditions, is counterparty risk. efit from greater flexibility and negotiating power
The Bear Stearns collapse and wider liquidity cri- should it decide at any time to switch administra-
sis has served to sharpen the focus of hedge funds tors in favour of a more suitable provider, since it
– and their investors – on this area, exacerbating won’t have to endure the agonies of extracting and
managers’ desire to diversify their trading across transferring its entire back office from one firm to
multiple counterparties. However, given a fund another. And that can only serve to enhance its op-
will have different financing agreements with each erational competitiveness.
counterparty, if it doesn’t have in-house systems This trend is however causing fund adminis-
that can track those then it will be reliant on its trators to react and to be more proactive in servic-
administrator for details of its exposures. ing their hedge fund clients and adding more value
By contrast, an in-house technology platform en- for example with faster, more accurate reporting.
ables a hedge fund to prove to its investors that, Also those FA’s with a flexible infrastructure are
with the click of a button, it can see where its able to support their clients who are looking to
counterparty risk lies at any given time. This ca- pursue more complex investment strategies using
pability is of particular importance where a fund a broader range of instruments.
47
Head to Head - Hedge funds

Head to Head - A discussion on risk, transparency,


regulation and back to front office issues
Guy Martell - UBS Global Asset Management’s Charlie Woolnough - Fortis European regional
European Head of Business Development & director for sales and relationship management
Client Relationships, Hedge Funds Europe

further enhancements risk has become more


may be greater this effective over the last few
year due to increasing years through various
volatility and stress risk control initiatives
across financial markets. aimed at strengthening
1. Hedge funds are many will continue to do hedge fund operating
Investor Services Journal | Hedge Fund Services Market Guide 2009

installing more risk Martell: In our view, all what they have been doing frameworks. Some of
managers and risk employees are to some successfully over the last these initiatives include
management systems extent responsible for several years. However, increased outsourcing
in their front offices, performing various their profile certainly has of administration and
why was this not done risk management or been. I believe it is always the range of services
earlier? risk control functions, the case where we are offered by administrators,
rather than it being operating in a heightened the choice of various
Woolnough: Hedge funds the sole responsibility risk environment that offshore domiciles with
have been increasing of a dedicated risk prudent fund managers their differing levels of
their risk management management specialist. pay more attention to regulatory oversight, as
practices for a number However, it is fair their risk teams. It follows well as the quality of risk
of years now. The drive to say that over the that risk managers will management IT systems
for greater resources last 18 to 24 months, wield more influence. implemented by hedge
in risk management is hedge fund managers What is interesting is that fund managers - both in-
as a result of enhanced have become more under previous conditions house and outsourced.
monitoring by underlying focused on utilising risk the influence of risk
investors and greater management specialists managers has increased 3. Is more regulation
professionalism within and/or have invested and decreased with market and transparency
hedge fund firms. more in dedicated risk conditions. However, if we needed in the hedge
However, the risk management platforms. believe that the financial fund sector, or is the
monitoring requirements Recent events and landscape has now ever-present threat of
of hedge funds do uncertainty in financial changed irrevocably it regulation enough to
undoubtedly vary across markets has led to the may be that the influence ensure good practice?
the different strategies. development of even of risk managers will do
For example, you would more sophisticated risk as well. Woolnough: I think it is
expect to find a more management systems and important to distinguish
expansive risk analysis techniques. Martell: Risk management between operational
infrastructure within a is currently centre transparency as opposed
statistical arbitrage fund 2. Is the role of the risk stage and is receiving to portfolio level
than you would for a manager now enhanced? a significant level of transparency. Operational
concentrated long/short Will the risk manager attention. This is the transparency is always a
equity fund. wield more influence result of a number of good thing and shrewd
That said, whilst a lot across the front, middle factors, one of which is investors should be
alternative investment and back offices? the growing importance interested in such things
managers already of a robust operating as valuation policies,
had expansive risk Woolnough: The role of framework within which a gating provisions and
infrastructures prior to the risk manager may not hedge fund operates. the internal processes
this year, the push for have been enhanced as The management of and independence of a

48
Head to Head - Hedge funds
manager’s procedures. and constructive way. In the appointment of
Portfolio level tandem with this there Martell: As the prime broker also takes
transparency however should be a hierarchy alternatives industry into consideration the
is not necessarily in place which supports continues to evolve and counterparty risk to the
always beneficial if it this culture and ensures allows hedge funds to be hedge fund of appointing
compromises a manager’s consistent application of distributed on a broader that prime broker. This
competitive edge and the firm’s principles. and more mainstream is seen in the increasing
ability to generate alpha. I basis - in particular numbers of hedge funds
believe greater regulation Martell: As an through certain retail-like appointing more than one
is inevitable. However, administrator, we represent structures - so public prime broker.
it needs to be carefully the back office to a fund, perception, as well as
considered to ensure it is while our client - the trust, confidence and 7. How key has the
not counterproductive. hedge fund manager - reputation, become role of the hedge fund
represents the front increasingly important. sector now become in
Martell: Regulation office. The effectiveness the grand scheme of the
continues to develop and of the administration 6. Has the role of the financial system? Where
as an administrator we and accounting services prime broker in regards does it enhance the
have to be in a position provided to the fund is to the hedge fund sector system? Where does it
to adapt and respond to heavily dependent on the now changed? If so, detract from it?
these changes. Increased quality of the information how?
regulation will make our we obtain from the Woolnough: One
industry more attractive investment manager. Woolnough: The role of accusation often levelled
to institutional investors, The accuracy and efficiency the prime broker has at hedge funds is that the
thereby encouraging a of the interface between changed insomuch as very short term trading nature
broader investor base. the investment manager few funds now have only of some strategies and
Regulators ultimately and administrator is the one prime broker. This their ability to turnover
decide on the level of basis for how successfully trend has been further positions quickly can
regulation they determine the administrator can fulfil expedited by the current create instability in
appropriate for their its responsibilities. economic environment specific stocks. This is
jurisdiction. In most which has seen many especially true in more
jurisdictions in which we 5. Perception of hedge funds add additional crowed trades.
operate, the regulator fund by the media brokers in order to However, it should not
pitches regulation at a level and the public is still diversify counterparty be forgotten that hedge
which protects investors largely negative – does risk. funds are becoming more
while encouraging the hedge fund sector In addition to this and more important to
enterprise and innovation. need to devote more fund managers are now the financial system as
Different hedge funds time and energy to paying greater attention providers of liquidity and
are regulated to differing public relations? Does it to the ultimate custodian diversifiers of risk.
degrees, depending on matter? of their assets, which
their risk profile and is not necessarily the Martell: Hedge funds are
investor base. Good Woolnough: It does matter prime broker, and the an important tool used to
regulators get the balance to the extent that public extent to which their facilitate diversification
right between creating a perception can and does assets are segregated and of an investor’s portfolio
compliant environment lead to regulation. The rehypothecated. risk. Institutional
while encouraging industry as a whole should allocations to hedge
business. devote more time and Martell: The role of the funds have increased
energy to public relations. prime broker is integral significantly in the last
4. Does the front The most obvious way to the hedge fund set up. five years with hedge
office need to be more to do this would be to Until fairly recently, the funds becoming more
accountable to the back increase transparency basis for prime broker and more recognised as
office? and understanding of the selection by a manager an addition to the usual
sector and promote best was driven largely by traditional asset classes.
Woolnough: It is healthy practice. Indeed, a number the markets and asset
to promote a culture of recent initiatives such as classes covered by the
whereby the back office the Hedge Fund Working prime broker. What we
is able to challenge the Group have attempted to are seeing now is that in
front office in an open do exactly this. addition to capability,

49
Head to Head - Hedge fund technology

Head to Head: A discussion of the issues


surrounding new technology and hedge funds
Andrew White Dermot Butler
managing director, Aquin International. founder and CEO, Custom House

outsource may be, initially, a cost factor. However, the


1. What tangible effects will the recent
advantage of outsourcing to a recognized company that is
proliferation of risk management technology have
Investor Services Journal | Hedge Fund Services Market Guide 2009

an expert in its field, is that the manager is, to a certain


on the hedge funds sector?
extent, transferring a risk to that outsource supplier. If
the manager purchases the systems and takes them in-
Butler: There are two questions here – secondly, what
house, then, if there is an error, it is the manager’s fault.
effect will the technology have. The first question is will
If, however, he outsources to a household name and they
the hedge fund sector use that technology. I think the
make an error, then it is up to them to compensate for
answer to that question is that larger hedge funds are
that error.
more inclined to spend the money using risk management
tools and particularly outsourcing them because they
White: Outsourcing is more a question of faith these days.
have a tangible cost to the fund, which, with the clear
Some companies openly embrace it, others reject it due to
minimum costs involved, which in turn tends to preclude
various reasons (lack of control, confidentiality etc.). We
many of the smaller hedge funds where the costs could
believe that it is a logical step forward for hedge funds,
amount to 50 basis points or more until such time as the
who find themselves incapable of staffing and maintaining
fund grows.
multiple IT solutions and databases. Outsourcing should
For the larger funds who can afford it, there is no
increase to a level where the investment manager is happy
doubt that new risk management technology and systems
that he/she is concentrating on their core competencies.
will be used and will help the investment managers. In fact it will probably come to resemble the world of
traditional asset management where the investment
White: First of all the usability of risk figures to the end manager concentrates on the investment decisions and
user will be greatly increased. All investment decisions the fund administrator takes care of all the backoffice
can be monitored and their impact on the risk profile processing.
of the fund assessed objectively. It will drive investors
(especially institutional investors) to demand more in- 3. Is the development of a standard messaging
depth reports and greater transparency. platform for all types of instruments a feasible
possibility for the future? How would this improve
2. Will the need to invest in new technology result efficiencies and could it help with the greater
in the need for more outsourcing? How much frequency of NAV calculation?
outsourcing is desirable?
Butler: Given the fact that nobody had dreamed of the
Butler: The cost of installing some of this technology Internet twenty years ago – perhaps, in some cases, ten
can be greater than the cost of outsourcing and, in years ago – I would not doubt that the development of a
the same way that there are companies out there that standard messaging platform for all types of instruments
provide a pricing service, which can be outsourced, so is a feasible possibility for the future and, frankly, I think
there are companies and, indeed, have been companies it could be the near future.
for some time, who are able to provide risk analytics and It is clear that a standard messaging platform that
risk management services. I am thinking of companies works would improve efficiencies and could help with the
like RiskMetrics, who started several years ago under a greater frequency of NAV calculation.
different ownership and who have now been followed by There is a huge attraction to having a daily NAV from a
several other like-minded companies. Thus, the need to risk management point of view and, obviously, if investors

50
Head to Head - Hedge fund technology
are able to get access to the daily NAV from a liquidity these managers develop their own risk management
point of view. However, there is also the school of valuation systems using their own models. We have
thought that says that the recent turmoil in the markets seen the weakness of that strategy over the past year
has demonstrated that there is too much liquidity in the or so, but, nevertheless, at the time they did it, it was a
hedge fund market already and that investors should be perfectly valid exercise. As technology catches up with
tied up for two or three years. I don’t think that either of the marketplace, so I think hedge fund managers use
those arguments fly, because many hedge fund managers them. I think for the second part of this question, I am
will not accept daily liquidity because it puts their not convinced of that either. Somebody who decides
investment programme at risk and many investors will not that they wish to leave the prop desk of a major financial
accept a three-year lock-up because they want liquidity in institution has to start somewhere and, if they are going
times of stress, therefore, the answer to the question is to run their own capital or that of family and friends,
yes – an efficient standard messaging platform could help then there is no reasons why three men in Mayfair should
with greater efficiency of NAV calculations. not do a good job on that. I am involved in a fund which
was recently set up and has probably not more than four
White: It is most definitely feasible, but the problem employees, all of whom are involved in the investment
remains that illiquid assets will always be difficult to management. Every other aspect of the operation of the
price. For plain vanilla instruments and exchange traded business has been outsourced and this has meant that
derivatives frameworks are already in place, in the near the managers can concentrate on the job of managing
future it will also be available for some types of OTC the money and they haven’t had to install massively
derivatives. Whether it will spread to all instruments is expensive systems and massively expensive staff to run
debatable. those systems, because all the work has been outsourced
to entities that can provide the middle and back office,
4. As quant funds continue to use ever more the banking, margining, administration, accounting, etc.,
complex algorithms and learn how to better etc. Therefore, those three men in Mayfair will continue
incorporate factors such as news, will they come to to thrive, providing they get the market right. Where
dominate the hedge fund sector? the three men in Mayfair fail and have consistently failed
over time, has been where they have set up a hedge fund
Butler: I have my doubts that quant funds will come knowing about the markets, but having absolutely no
to dominate the hedge fund sector, regardless of the idea how to run a business from buying paperclips to
evermore-complex algorithms that they have and how employing staff and complying with labour laws, etc.,
they better incorporate factors such as the news. In my etc., etc. More hedge funds fail because they are unable
mind, there is no doubt that the majority of hedge funds to run their business, than from so-called “blow up”.
will continue to be long short listed equity or security Indeed, the likelihood of start-up hedge funds making a
funds. disproportionately high amount of money is recognized by
As the quant funds become more sophisticated, if the seed capital merchants who base their business on the
they wish to dominate the whole hedge fund sector, they belief that a successful hedge fund will make more in the
are going to have to persuade the majority of investors first two or three years of the life of the fund and before
that their black box is better than anybody else’s black they get big enough to be cautious.
box and that their programme is better than more Finally, on this topic, I think that one thing we have
transparent programmes and programmes that are easier learnt is that technology becomes more affordable
to understand. over time and, therefore, the likelihood is that, five
years time, three men in Mayfair will be able to afford
White: They will very likely gain in significance, but they the sort of sophisticated technology systems that today
will not come to dominate the space as diversification will are very high ticket items.
always be necessary.

5. In the past have hedge funds ignored the White: The days are probably numbered, the main
advantages that technology can bring in terms of factor being the uptake in outsourcing and the quality
risk management, valuation and communication? of services provided by outsourcers. It is theoretically
Are the days of three men in Mayfair coming to an possible that a small team can use service providers to
end? do all non-core tasks, so they can concentrate on making
wise investment decisions. But it is more likely that hedge
Butler: I don’t think that it is fair to suggest that hedge funds will take a mixed approach, insourcing the most
funds have ignored the advantages that technology vital processes (and therefore requiring more staff) and
can bring. The problem has been that the hedge fund outsourcing all other tasks.
managers, who are, by nature, very sophisticated and
highly intelligent boffins, if you like, tend to bring
out products and technology has to catch up. Many of

51
Player profile

Guy Martell - UBS Global Asset


Management
As the financial system remains in
flux, change is afoot in the hedge
fund sector. Joe Corcos talks to
Guy Martell, UBS Global Asset
Management’s European head of
business development and client
relationships for hedge fund
services.
Investor Services Journal | Hedge Fund Services Market Guide 2009

ISJ: Where does the administrator fit into the risk ISJ: How are hedge funds perceived? Is this perception
management side of operations, and how can one changing?
best integrate with the front office risk management
operation? Martell: The perception of hedge funds varies depending
on who you talk to. For example a lay investor might make
Martell: As the back office to the fund, the administrator reference to the current financial crisis possibly being down
acts as the independently appointed third party keeper of to the actions of hedge fund managers or parts of the hedge
the fund’s books and records. This forms part of the risk fund market. When you look at hedge funds across the
management framework that the directors of the fund would broader investment community there can be a lack of real
be responsible for overseeing. understanding as to what they do and what they are for and
By virtue of using an outsourced fund administration solution, that can lead to misperceptions.
the fund manager is able to take advantage of the risk As hedge funds are vehicles which operate in an environment
management framework that the administrator has in place. where there is a low level of regulation imposed on them, they
If the administrator represents the back office and the are intended to be used as a sophisticated investment tool for
asset manager the front office, the degree to which we can sophisticated investors.
successfully provide our administration services depends The regulatory environments in places such as Ireland and
on how efficiently, accurately and timely the front and back Luxembourg are starting to permit structures which are more
offices are able to interact with each other. diverse as to investment type and restrictions and which are
able to be distributed on an increasingly broad basis. With
ISJ: When a fund chooses an administrator, how much of the changing nature of these distribution channels it has, and
a deciding factor is the technology that they use and the will continue to become far more important for hedge funds to
integration of the incumbent technology? manage their public perception.

Martell: Technology is a critical factor when it comes to a fund ISJ: It seems that there has been a certain amount of
selecting an administrator. What we are selling, in its plainest consolidation in the hedge funds sector – will this affect
form, is leading edge technology with experienced, qualified administrators?
people wrapped around it. This is a key distinguishing factor in
being able to win business. Martell: There has been a certain amount of consolidation
and I think there is nothing to suggest that this will not
ISJ: How important is fostering a culture of risk management continue. Consolidation implies that larger hedge funds will
to go alongside the technology? buy smaller hedge funds. Large hedge funds usually seek
administration services from the larger providers who offer
Martell: Fostering a culture of risk management is increasingly a wide service range and are able to support the significant
important, particularly in the current volatile economic levels of investment required to stay at the leading edge of
environment. This is something that asset managers are an industry which is continually evolving and advancing.
certainly focussing on in terms of their due diligence of While opportunities will always remain for boutique and niche
administrators and can be a key deciding factor when making administrators, this consolidation may imply an opportunity
appointments. for larger hedge fund administrators.

52
Harness the power
In a turbulent, fast changing world, there’s a rock-solid offshore location that is cost-effective,
well regulated and accessible. And with the unique advantage of being in the European Union.
This potent place is Gibraltar.

As a leading law firm, Hassans has steered many clients to the benefits Gibraltar offers, whether
they are global corporations or private individuals of means. They find us expert, innovative,
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Easy to deal with, too. There may be many miles of ocean between us but we’re only a mouse-
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Gibraltar's Premier Funds Team. Hassans have set up more than 80%
of funds registered in Gibraltar.
For more information please contact: James G Lasry - Partner
Head of Funds Team - Hassans International Law Firm
57/63 Line Wall Road Gibraltar. Tel: +350 200 79000 Direct Dial +350 200 79571
Fax: +350 200 77343 Mobile: +350 5760 6000

Banking & Financial • Corporate & Commercial • e-commerce • Litigation • Marine Shipping • Private
client affairs • Property • Tax • Trusts
Hassans 57/63 Line Wall Road PO Box 199 Gibraltar. tel +350 200 79000, fax +350 200 71966
email info@hassans.gi A member of the TerraLex global network of international law firms
Statistics

Hedge fund statistics 2008 -


Lipper Hedge Funds Insight Report
The degree to which performance issues as on identifying the cause rising energy prices. Many
apparently diverse the Reuters/Jefferies CRB of the current equity talk about the solution
strategies such as Event- Index fell. Certainly, it bear market, with the appearing to be the
Driven, Equity Market- made construction of a breaking of the subprime recapitalization of the
Driven and Long Short well-diversified portfolio crisis, its associated banking sector, the cutting
Equity increased their of noncorrelated strategies unique securitization of real interest rates, and
correlation exposure to more of a challenge. issues, together with an steps to address the issue of
commodity prices was The outlook for hedge overleveraged banking institutional investments in
probably one reason funds remains cautious sector. To these have commodities.
a number of hedge for the remainder of 2008. been added a collapsing

3 yrs
Correlation
1 yrs
Correlation
6mths
Correlation
funds of funds suffered Attention appears focused US housing market and

Correlation Credit Suisse-Tremont HF Indices_MSCI World TR Index July 31, 2008


1
Investor Services Journal | Hedge Fund Services Market Guide 2009

0.8

0.6

0.4

0.2

0
0
0.2

0.4

0.6

0.8

-1

Conv Arb Ded Sh Event- EventDriv EventDriv Emerging Eq Mkt EventDriv Fixed Inc Global Long/ Multi- Managed
Bias Driv Distr Multi- Risk Arb Mkts Neutr Arb Macro Short Eq strat Fut
Sec Strat

Ten Top-Performing Hedge Funds July 2008


Name Lipper Global Performance Performance Volatility
TR USD 1M TR USD 1Y TR USD
30/06/2008 31/07/2007 1Y 31/07/2007
To 31/07/2008 To 31/07/2008 To 31/07/2008
IKOS Financial EUR Hedge/Managed Futures 19.68 17.38 25.25
Ebullio Commodity Hedge/Managed Futures 18.19 NA NA
DL Partners LP Hedge/Multi Strategies 15.79 9.60 38.82
Mercury Mult-Strategy A Hedge/Fund of Funds 15.24 NA NA
Caduceus Capital LP Hedge/Long/Short Equity 14.35 4.26 19.95
Caduceus Capital Ltd Hedge/Long/Short Equity 14.33 4.22 19.88
Caduceus Capital II LLP Hedge/Long/Short Equity 14.14 4.70 19.25
Hillis Partnership Hedge/Long/Short Equity 13.86 -22.15 39.71
Melkart Diversified EUR Hedge/Fund of Funds 11.79 23.44 16.18
Clay Capital LP Hedge/Long/Short Equity 11.53 52.65 14.24

54
Company Profile - Aquin

Roman Harbich COO


Dresdner Bank, DWS, Legal & General
Investment Management, PCE Investors, Royal
Bank of Scotland, State Street and Union
Investment.
Key Services & Products
s Investment Compliance & Risk Monitoring
s Trade & Order Management
s Data Management & Fund Reporting
s NAV Reconciliation
Company Brief:
Aquin is one of the leading solution providers MIG21: A compliance & risk management
for the international asset management and solution for checking legal, contractual and
fund industry. internal investment guidelines. MIG21 was
Aquin has capitalised on its long-standing voted “Best Technology Solution 2008” by
experience and core competencies in the highly an independent jury at Complinet’s Annual
regulated and divergent European investment Compliance Awards.
environment to be recognised as the market
leader and innovation driver for investment LawCards®: predefined rule libraries for MIG21
compliance solutions across Europe. With that cover the legal investment restrictions for
our headquarters in Frankfurt, Germany, specific jurisdictions.
subsidiaries and local experts in all major
financial jurisdictions, Aquin is close to the DVS Fund Warehouse: A sophisticated fund
customer and has expertise in local market warehouse and calculation engine for data
requirements. management and reporting purpose-built for
Aquin services a blue-chip client base of the buy side.
the world’s leading investment management
companies, hedge funds, fund administrators
and custodians, such as: Allianz Global
Investors, BNP Paribas, CACEIS Investor
Services, Citi, Commerzbank, Credit Suisse,

Key Locations: Paris: Key Contacts:


T: +33 14 08 27 904
Frankfurt: Andrew White
T: +49 69 219 366 600 Luxembourg: Managing Director
T: +352 26 19 34 20 Aquin International Ltd.
London:
T: +44 20 7489 2121 Zurich:
T: +41 44 455 62 44
Dublin: E: sales@aquin.com
T: +353 14 40 22 41 W: www.aquin.com

55
Company Profile - Fidessa LatentZero

Richard Jones CEO


The hedge fund solution includes position analysis
by fund, strategy, sub-strategy, etc, with cross-asset
class real-time exposure and P&L, and integrated
Company Brief: market data. Orders can be easily created to open or
Fidessa LatentZero adjust positions, and trading connectivity is provided
is an international to global brokers, algorithms, DMA venues as well
technology firm that as ECNs/alternative trading systems. The system
specialises in developing supports pre-and post-trade allocation by fund and
complete, full asset class, strategy, and workflow controls with integrated
front-office solutions compliance reduce trading errors.
for the buy-side community. Our products are used
by over 180 buy-side companies, including nine EMS Workstation
of the world’s largest ten global asset management The EMS Workstation is a broker-neutral, low-
Investor Services Journal | Hedge Fund Services Market Guide 2009

organisations, through to smaller specialist managers latency trading application for equities and equity
and hedge funds. derivatives for global markets. The Workstation is
ideal for any asset manager, from small hedge funds
Richard Jones, CEO, Fidessa LatentZero to larger institutional managers, requiring out-of-
Richard Jones has been CEO of Fidessa LatentZero the-box access to a comprehensive set of brokers,
since its incorporation in 1999, working with Dan algorithms and DMA venues, with integrated real-
Watkins to create an agile, profitable business with a time, full-depth market-data with broker IOIs, news,
compelling proposition. charts and fundamentals.
Richard has two decades experience of working The fully hosted ASP solution is quick to deploy
in both the financial services and IT industries. and requires minimal or no technical support. The
As IT Director of Jardine Fleming Investment Workstation can also receive orders from and send
Management in Asia, Richard was responsible for all executions to any third party OMS via FIX.
aspects of IT strategy, implementation and support
across the region, managing a team of 80 IT staff. Connectivity
Fidessa LatentZero’s front office solutions are
Key Services & Products supported by the proven Fidessa network, which
Capstone for Hedge Funds provides connectivity to the DMA, Algorithmic,
Capstone for hedge funds is a broker neutral, Program and Care order execution destinations
pre-packaged and easy to implement application of 310 brokers across 100 markets worldwide.
that supports hedge fund investment and trading Connectivity to numerous ECNs, crossing networks
workflows for all asset classes, including and ATSs is also available, providing you with all the
OTC derivatives. global execution destinations you require in your
continual search for liquidity.

Key Locations: Europe North America


Melanie Smith Cindy Arcari
1 Alfred Place 160 Federal St
London WC1E 7EB Boston MA 02110
T: +44 (0) 20 7462 4200 T: +1 617 235 1000
E: info@latentzero.com
W: www.latentzero.com

56
Investor Services Journal | Hedge Fund Services Market Guide 2008

Company Profile - BIBA

Cheryl Packwood CEO

Company Brief: 3HEARMAN3TERLINGIN.EW9ORK#ITYANDTAUGHT


The Bermuda ATTHE-ARTIN,UTHER+ING *R(IGH3CHOOL ALSOIN
International .EW9ORK
Business Association
is a membership Key Services & Products:
organization of Legal
leading firms serving and working in the Accounting
international business community in one of the Trusts
world’s preeminent financial centers. It provides Telecommunications/Technology/e-Commerce
access to world leading fund administrators, legal Investments
and accounting firms, insurance and reinsurance Fund Administration
companies and investment banking and trust Insurance
service providers. Bankingw

Cheryl Packwood, CEO

-S#HERYL0ACKWOODJOINEDTHE"ERMUDA
)NTERNATIONAL"USINESS!SSOCIATION")"! ON
/CTOBERTH ASTHECHIEFEXECUTIVEOFFICER)N
"ERMUDA -S0ACKWOODHASHELDSENIORPOSITIONS
ASGENERALMANAGERAT$IGICEL"ERMUDAANDALSO
THE"ERMUDA-ONETARY!UTHORITYWHERESHEWAS
GENERALMANAGER CORPORATESERVICESANDSECRETARY
TOTHE"OARDOF$IRECTORSASWELLASDIRECTOR LEGAL
SERVICE ENFORCEMENTANDINTERNATIONALAFFAIRS
)NTERNATIONALLY SHEWASMANAGINGDIRECTOR
OF#/2!FOR7ESTERN7IRELESS)NTERNATIONAL
#ORPORATIONANDDIRECTOROFINTERNATIONAL
DEVELOPMENTFOR.p'OAN !SMAN!SSOCIES BOTH
IN!BIDJAN #ĊTEDp)VOIRE0RIORTOMOVINGTOTHE
#ĊTEDp)VOIRE -S0ACKWOODALSOPRACTICEDLAWAT

Key Locations: Cedar House Tel: 441.292.0632


Ground Floor Fax: 441.292.1797
20 Victoria Street Email: info@biba.org
Hamilton, HM 12

57
Company Profile - Hassans

litigation services at all levels for both local and


international clients.
International finance and banking: The firm
has particular experience in banking and
financial markets.
Funds: the firm has helped the Government
of Gibraltar modernise the fund legislation in
Company Brief: particular enabling experienced investor funds
Hassans was founded in 1939, and is the (EIFs) to be set up quickly and effectively.
largest law firm in Gibraltar. It was the first The fund team is by far the largest and most
to structure itself as a modern international active in what is a rapidly expanding market
law practice, with separate departments for in Gibraltar.
different fields of specialisation. The firm has Telecoms: the firm advised on the privatisation
an international clientele, which it continues of the Government of Gibraltar’s telephone
to develop. It has global links with major services and advises on all aspects of
international law firms and a presence in Spain. telecoms, including: broadcasting and
Investor Services Journal | Hedge Fund Services Market Guide 2009
2008

The majority of the firm’s work is related to wireless telegraphy, and was instructed by the
international clients. international Telecommunications Union to
Gibraltar’s status as part of the EU is a report on telecoms legislation in the
significant factor in attracting, such institutions Caribbean region.
and businesses. Private clients: the firm has specialist lawyers
Languages spoken: English, Spanish, French, who regularly advise on all aspects of private
Hebrew, Portuguese, German and Chinese client matters, including: asset protection
(Cantonese and Mandarin). trusts, domiciliation and taxation.
Key Services: Drafting: the firm advised the Government
Corporate and commercial: the firm provides on the transposition of EU Directives into
a full range of legal services for clients ranging Gibraltar law. This work has concerned
from small businesses to major multination- legislation relating to financial services and
als. It advises corporate clients working in or telecoms. Contacts have also been established
through Gibraltar on a wide variety of cross with a number of other Governments requiring
boarder transactions and financing structures. assistance in this area.
Other matters handled include: international Maritime: The firm has strong links with major
corporate restructures, joint ventures, M&A, English shipping firms.
Corporate franchising, tax and e-commerce. Property: the firm acts for most of the major
Litigation: the department handles most local and international developers and builders.
aspects of litigation, with a niche focus on E commerce: the firm has advised some of the
international commercial and trust litigation. major online betting operators on setting up
The firm’s litigators practice as both barris- their operations in Gibraltar.
ters and solicitors, and provide a full range of

Key Locations: 57/63Line Wall Road, Senior Partner:


Spanish office:
PO Box 199, James Levy QC.
Gibraltar. Number of lawyers: 60 Hassans Sotogrande SL
Tel:+350 79000 Centro Sotomarket oficina 8
Fax:+350 71966 Urb Sotogrande
Email:info@hassans.gi 11310 San Roque
Web: www.gibraltarlaw.com Spain
Email:info@hassans.gi
Web:www.gibraltarlaw.com
58
Company Profile - Custom House

Dermot Butler CEO


Custom House is authorised and regulated by the
Maltese Financial Services Authority (MFSA) and
the Dublin office, Custom House Fund Services
(Ireland) Limited, which is SAS 70 Type II compliant,
is authorised and regulated by the Irish Financial
Regulator under Section 10 of the Investment
Intermediaries Act of 1995
(which authorisation does not extend to any other
Custom House office).

Company Brief: Dermot Butler, who is Chairman of Custom


Custom House Global Fund Services Ltd. (“Custom House, the international alternative investment
House”) offers a full “round the world” and “round and hedge fund administrator, has over 40 years
the clock” service out of its various offices in experience in the financial services industry.
Amsterdam, Chicago, Dublin, Luxembourg, Malta Butler has worked variously as a stockbroker
and Singapore. Custom House, which merged its and stock jobber (specializing in South African
business with Equity Trust’s Fund services business on mining stocks), before becoming a commodity
1st September 2008 has approximately US$50 billion broker and market maker in metal options on
of assets under administration. Custom House’s the London Metal Exchange (LME). Butler was
administration services cover all aspects of day to day a member of the Options Sub Committees of the
operations, including maintaining the fund’s books LME, liaising with the Bank of England, the UK
and records, carrying out the valuations, calculating Department of Trade and the US Commodity
the NAV and handling all subscriptions and Futures Trading Commission (CFTC) on
redemptions, as well as over-seeing payment of the option regulation.
fund’s expenses. Reporting can be effected through
CHARIOT, Custom House’s secure web reporting Key Services:
platform for managers and investors. Custom House Full hedge fund administration service, to
is the only hedge fund administrator in the world to include: fund accounting and NAV calculation
have been awarded a Moody’s Management shareholder services corporate secretarial
Quality Rating. services fund formation services

Key Contacts: Chicago Singapore


+ 312 280 0330 T: +65 6303 8393
Malta
T: + 356 2010 6053 Samuel Crispino, Ralph Chicktong,
Dermot Butler, Chairman Vice President Managing Director
T: +353 1 878 0807 T: +312 280 0330 T: + 65 63038393

Dublin Luxembourg
T: + 353 1 878 0807 T: +352 427 1711
Dermot Butler, Chairman Mariusz Baranowski,
T: +353 1 878 0807 Managing Director
T: +352 229 444 701

59
Company Profile - UBS Global Asset Management, Fund Services

Guy Martell, Head of Business


Development & Client Relationships,
Hedge Funds Europe

Company brief: Through our comprehensive range of services


UBS Global Asset Management - Fund and products, leading edge technology
Investor Services Journal | Hedge Fund Services Market Guide 2009

Services is a dedicated fund administrator platforms and superior client service, we


providing customized and flexible services work in partnership to offer the solutions you
for traditional and alternative investments. need. For more information, visit
With more than 50 years of experience, www.ubs.com/fundservices.
we understand the importance of fund Guy Martell is responsible for business
administration to your business. development and client relationship
Fund Services holds a leading position management for hedge funds based in
in the area of hedge fund administration Europe and the Middle East. Guy began
with specialized teams around the world. We his career at UBS in 2004 as a business
offer a complete range of services including development manager with Fund Services in
accounting, NAV calculation, shareholder the Cayman Islands. Prior to joining UBS, Guy
services, banking and credit facilities. With worked in the risk advisory services division
specialist expertise in both single manager and of KPMG in Australia and the Cayman Islands,
fund of hedge fund administration, services and before that worked in fixed income
can be provided for both onshore and with JP Morgan in London. He is a member
offshore funds. of the Institute of Chartered Accountants in
Australia.

Key Locations/Contacts: Americas: Ireland: Switzerland:


Jennifer Lisbey, Guy Martell, Michael Baechle
tel. +1-345-914 6086, tel. +44-20-7901 5770, tel. +41-61-289 01 27,
jennifer.lisbey@ubs.com guy.martell@ubs.com michael.baechle@ubs.com

Hong Kong: Luxembourg:


Michelle Chua, Bettina Graeber
tel. +852-3712 2387, tel. +352-44-1010 6274,
michelle.chua@ubs.com bettina.graeber@ubs.com

60

HFMG 49-64.indd 60 19/11/08 15:30:55


Company Profile - PNC Global Investment

Bill Salus, chief business


development officer

Company Brief: Key Services:


PNC Global Investment Servicing is a leading As one of the world’s leading third-party
provider of processing, technology and fund administrators, PNC Global Investment
business solutions to the investment industry. Servicing has over 30 years of experience
We service onshore- or offshore-domiciled delivering personalised solutions to the global
funds, trust vehicles, limited partnerships, and marketplace. Our services include:
commingled investment products from service
centres in Luxembourg, Ireland, Poland, and Securities Services:
the United States. Our multi-jurisdictional, s Fund accounting and administration
multi-fund capability allows us to process s Custody
complex fund structures-from hedge funds, s Securities lending
fund of funds, and private equity funds to s Middle office
master/feeder and multi-managed funds. We s Corporate secretarial services
cover all legal structures including UCITS,
PIFs, QIFs, SIFs, VBFs, corporate, trust, Shareholder Services:
open- and closed-ended. s Transfer agency
s Trustee and depositary services through
PNC International Bank Limited
s Foreign Exchange

Key Locations: Luxembourg: Key Contacts: William Salus


+ 352 26 29 56 1 Chief Business Development
Dublin: Officer
+ 353 (0) 1 790 3500
Poland: Simon Behan
+ 48 71 734 64 00 Director, Head of European
London: Sales
+ 44 (0) 20 3170 5980
United States: Diane Cassidy
+ 1 302 791 2000 Head of Alternative Sales
Website: www.pncgis.com (U.S

61
Company Profile -

THE DOWNTURN & LENDING

TIME WARP TO THE 1970s. THE IMPORTANCE OF


With the economy expected to slow dramatically FINANCIAL TUITION
and inflation worse than it has been in FinTuition as a leading provider for securities
over two decades, we maybe in for a bit related training programs and offers a variety of
of a time warp back to the days of courses covering today’s challenges:
polyester shirts, when spiraling inflation Collateral management
joined forces with economic stagnation - Post credit crunch custodians face new challenges.
slow to no growth, combined with rising Is my counterparty engaged in Alt-A or
unemployment - leading to a stagflation. leveraged loans? Do my assumptions concerning
the probability of default differ from the rating or
Status Quo models? How can I improve my collateral position
Oil and other basic commodities are surging in and how will collateral be affected in a continuation
price to new heights, with double digit growth of the downward spiral?
Investor Services Journal | Hedge Fund Services Market Guide 2009

rates. At the same time the growth picture is just


as bleak. Now that consumer power has been Securities Lending
weakened by the credit crunch some economists Understanding the mechanics of a securities
are predicting anemic growth for 2008, and a loan is challenging. You have to understand the
growing number of experts are even predicting a relationship between the risks and returns and
recession. Sectors like automotives, airlines or the risks are complex. We all know the devil is in
retail which are sensitive to oil prices, consumer the details. These are two simple examples how a
confidence and – due to high leverage – to interest small mistake can corner you in these volatile
rates, are facing fresh downgrades by analysts. markets:
How will the future look? - Using the wrong day-count convention
Slowing economic growth and the insatiable need trading with a foreign counterparty will
for liquidity has been triggering the Federal probably delay the settlement.
Reserve’s policy of lowering interest rates but it - Marking to market every month or week
seems as if this time is now over. Bernake could can prove lethal as collateral fluctuates and
not be in a worse position. The Federal Reserve the longer the period of time you mark to
now has to fight inflation and at the same time market you are more exposed to risk.
stabilise the deeply disturbed financial markets, Collateral margining is a common way to avoid
which means that the liquidity drain will stay and mishaps but the question of whether
asset values should face more write-downs at counterpartieties
least until next year. under these circumstances will do business
with you is a different matter. Understanding you
Custodian banks are the winners and your counterparties’ collateral can give you
Global custody banks have experienced better risk- adjusted returns.
unprecedented
growth in their securities lending businesses Hedge funds are your clients
in the past year thanks partly to the global Understanding the motivations, strategies and
credit crunch. The explosion in revenues can be needs of hedge funds, trading desks and asset
put down to the impact of the credit crisis, which managers is key to improving your products and
has pushed up collateral reinvestment returns. processes and to maximising your fee income.
This anomaly has not only affected returns but
also inherent risk profiles have changed significantly.
On top of this, we have learnt from clients New experts need fresh courses
that some banks have earned the best margins by As market conditions are changing we are adapting
lending cash internally. our courses to ensure that they are practical

62
Company Profile -

and relevant. We have also expanded our trainer


FinTuition Upcoming Courses
pool with Jens Ebinger, head of short term products
structuring and sales at Dekabank, Grant
Equity Finance & Structured Products
Saunders, head of short term products trading at 23-24 July 2008 – London
Dekabank, and Alex Krunic, senior sales custody 16-17 September 2008 – Hong Kong
client services at citigroup. 9-10 October 2008 – New York
5-6 November 2008 – London
Global Collateral Management Trainer: Grant Saunders
15-16 October 2008 – London
Trainer: Alex Krunic /Kathleen Tyson-Quah Moving on from plain vanilla stock borrowing and
lending, this intermediate-level course examines the
This course explains the rationale and current expanded product range that comprises equity
best-practice functioning of collateral management finance, including collateral swaps, repos, structured
programmes for financial institutions. It is designed repos, and derivatives. The course explains how
to build up a sufficient level of expertise to give these structures are used to reduce dealer funding
attendees a good grasp of the legal, technical, costs and enhance yields through tax and balance
process and economic issues and drivers affecting sheet management. Ample hands-on opportunities
the profession. It is therefore suited to individuals are provided through the use of exercises and case
who are either starting up a collateral management studies to develop participants’ understanding of
function or seeking to improve their unit’s capability how and why trades are structured using various
to add value to the front and middle offices through economically equivalent derivative instruments.
adoption of more efficient collateral management
processing. Bond Financing (REPO)
8-9 July 2008 – New York
International Securities Lending 12-13 November 2008 – London
9-10 September 2008 – London Trainer: Paul Carroll
18-19 September – Hong Kong
7-8 October 2008 – New York This course provides a comprehensive overview of
the fixed income repo product. You will be introduced
Trainer: Walter Kraushaar / Jens Ebinger to the economic motivations of market players and
This course explains the mechanics of securities learn the main trading structures, delivery methods,
lending as well as the motivations of the various risk elements and documentation. As part of a small
market players. The focus is on how the economic group, you will employ alternative trading structures
benefits of securities ownership are retained even as in an extensive case study using SunGard’s Personal
legal title is transferred. Lending and collateral Martini trading software. You will gain an
options are outlined and assessed. We then examine understanding
the borrowers perspective and the trading strategies of the role of the repo desk as the ‘hub’ of
that drive securities lending. Why borrowers reward the fixed income trading floor. You will learn what
lenders for collateral flexibility will become clear. factors drive demand to borrow specific securities
Following a review of the risks incurred in a securities and create ‘specials’ in the market through a review of
lending programme, and the protection offered the main bond trading strategies.
by good documentation, the course explains the
different routes to the lending market and provides a
comparative review of the main electronic securities
lending exchanges and their impact on the industry.

63
Company Profile - Fortis

Charlie Woolnough - Regional director for


sales and relationship management

provided from key locations, supported by


Investor Services Journal | Hedge Fund Services Market Guide 2009

representative offices around the globe.


Providing a first class package of fund
administration, cash management, clearing,
custody, securities borrowing & lending, risk
management and bridge and leverage finance,
Company Brief: we are ready to support our clients’ challenges.
At Prime Fund Solutions, the part of Fortis Charlie has over 8 years experience in the
Merchant Banking dedicated to servicing hedge fund industry having previously worked
the alternative and traditional investment for HSBC (formerly Bank of Bermuda) before
community, we are committed to building joining Fortis Prime Fund Solutions where
strong and asting relationships within the he is European regional director for sales
global investment industry. and relationship management. Previous to
Focusing on the future needs and this he has worked in a variety of hedge fund
opportunities in all type of investment funds, related roles including fund trusteeship, client
ranging from traditional through hedge funds relations, strategy and business development.
to funds of hedge funds, we deliver cutting- Charlie is a member of AIMA’s Investment
edge services and invest in state-of-the-art Management Research Committee and holds a
information technology. These services are degree in Business Law and an MBA.

Key Locations/Contacts

London (+44) 203 296 8682


Dublin (+353) 1607 1860
Luxembourg (+352) 42 42 81 07
New York (+1) 212 340 55 43
Hong Kong (+852) 2823 0596

www.merchantbanking.fortis.com

64
Successful Hedge
Fund Administration?
It’s a question of
partnership.
Find out more by visiting www.ubs.com/fundservices
or e-mail us at fundservices@ubs.com
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Management You & Us
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