Hedge fund managers are facing a number of challenges today: increased pressure on management and performance fees, greater reporting and transparency requirements from regulators and investors, and last but not least higher return expectations.
According to data group HFR, hedge funds were down more than 7% on average amid March’s turmoil. This was their second biggest fall on record, beating anything suffered in 2008 or in the eurozone crisis a few years later.
However, the hedge fund industry is dynamic and both fund managers and investors can benefit from anticipating, and preparing for, the changes likely to occur. Firms that can evolve with the industry improve their chances of success, while inactive firms remain so at their own risk.
With so much to consider, we at Lawson Conner have put together five top tips to help hedge fund managers clarify and navigate what they need to know from a compliance and regulatory perspective:
- Start your planning – Starting a hedge fund in the UK is much more complex than in the US and will take, at minimum, three months, so factor this into your time plan. The process is so complex that many new firms hire an external provider to help with establishment and to ensure the fund is fully compliant with all laws and regulations. This is a worthwhile investment that will pay dividends down the line and keep fund managers on top of the ever-changing regulatory requirements imposed by the Financial Conduct Authority (FCA). Outsourcing some or all components of the technology and operational infrastructure is increasingly viewed as a way to improve efficiency, control costs, reduce risks, and achieve compliance goals.
- Do your due diligence – Advanced technology that improves data quality and delivers real-time information has become both a competitive and a regulatory necessity. Fund managers are increasingly conscious of operational risk and take a close look at compliance systems in the course of due diligence. The systems fund managers use and the way they use them can give regulators greater confidence that they are exercising due diligence and have the controls in place to properly monitor their activities for compliance. It’s critical, however, to perform due diligence on technology and service providers to ensure that they are thoroughly knowledgeable on regulatory issues and that their processes meet current compliance standards.
- Take the necessary steps to adhere to external regulations – Hedge fund managers must meet strict regulatory requirements, file the necessary documents and seek approvals in order to operate. The first and most fundamental step of starting a hedge fund firm in the UK is therefore learning how to navigate the governing body – in this case the FCA . Gaining approval from the Financial Services and Market Acts 2000 to establish a new fund is crucial. Hedge funds in the UK are more highly regulated and also have to comply with the Alternative Investment Fund Managers Directive (AIFMD).
Regulation is the reality. It is here to stay and likely to become even more complex. That makes it incumbent on hedge fund managers to institute leading compliance practices and invest in the necessary technology infrastructure (such as Lawson Conner’s MaxComply software solution). As competition, volume and complexity accelerate, technology that makes a firm’s operations more transparent and its data more reliable will deliver a powerful competitive advantage.
- Consider relevant operational factors – In addition to navigating the external regulations and authorisations, there are many internal factors that must be considered. These include deciding on the jurisdiction, structure, oversight and providers, and components for the new hedge fund. Jurisdiction, or where the fund is based, is important because it establishes the fund’s tax structure. For example, many funds are based offshore in places like the Cayman Islands, Bermuda, Luxembourg or Ireland.
- Recognise the compliance opportunity – Instead of a burden, compliance may in fact create an opportunity for hedge funds. Aside from keeping the right side of the law, the ability to demonstrate adherence to industry best practices is becoming increasingly vital when seeking to attract institutional investors. It does, however, require a lot of work and resource. To this end, Lawson Conner’s ‘one-stop shop’ solution provides hedge fund managers with: regulatory infrastructure, managed compliance services, post-trade surveillance, delegated risk management, regulatory reporting (for example Annex IV, FATCA, Gabriel reporting) and compliance software – thus keeping the fund manager on top of, and in line with, the latest FCA requirements.
How can Lawson Conner’s compliance technology and know-how add value?
Compliance is an everyday event with regulatory examinations and audits becoming a way of life. At Lawson Conner, we provide deep knowledge, expertise and smart software solutions to hedge funds and the broader alternative asset management industry to tackle the challenges posed by an ever-changing regulatory environment.
We can launch new managers and their associated investment funds under our regulatory platform and in a fraction of the time that it takes for them to receive their own direct authorisation. This can be done on both a temporary and longer term basis.
So, if you are thinking of launching a new hedge fund or need help with your existing related compliance and regulatory infrastructure, contact us to discuss the various options we have available:
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