• May 19, 2017

    Best Practices for Hedge Fund Managers Conducting Cybersecurity Due Diligence on Their Service Providers (Part Two of Two)

    Just last week, “a global hacking assault” that reportedly “crippled computer systems around the world” hit major companies, government agencies, hospitals and universities in over 150 countries in what to date has been the world’s largest cyberattack. Analysts have just started to assess the damage—a process that likely will continue for months to come—but what is known already is that hackers remotely spread the ransomware by taking advantage of a Windows vulnerability that could have been cured if the entities and individuals attacked had updated their computers and networks with a security patch Microsoft released in March. It’s not clear yet whether and which hedge fund managers directly were affected by the attack, but it’s hard to imagine that none were at least indirectly exposed, since managers rely on a web of third-party service providers—independent administrators, prime brokers and law firms, among others—to conduct their day-to-day business activities and that house managers’ sensitive information, such as portfolio holdings, and employee, firm and client financial data, on their systems. The attack highlights the point that now, more than ever, it’s imperative that hedge fund managers conduct thorough due diligence on their third-party vendors in order to cultivate a deep understanding of their cybersecurity capabilities and vulnerabilities, and to protect the firm’s devices, data and networks. This article, the second in a two-part series, addresses due diligence practices to effectively identify and assess the risks third parties pose to systems and networks, protections managers can put in place to mitigate those risks and ongoing due diligence procedures. The first article in this series reviewed the most important reasons hedge fund managers should conduct cyber due diligence on third-party service providers, regulatory requirements related to third-party due diligence and the service providers whose protocols it’s most critical for hedge fund managers to assess. Read More »

  • May 19, 2017

    Key Considerations When Contemplating Selling a Stake in a Hedge Fund (Part One of Two)

    In April 2017, hedge fund Sound Point Capital agreed to sell a 15% stake to Dyal Capital Partners, the private equity arm Neuberger Berman launched in 2012 to buy minority stakes in hedge fund businesses. The deal makes sense from both sides: On one hand, since 2015, hedge fund managers have been hit with accelerating outflows and mediocre returns, and selling a stake in the business creates a new revenue stream and potential to take advantage of new investment opportunities or strategies. On the other hand are the same benefits. Acquiring a stake in a hedge fund generates exposure to management fee revenue and allows investors in the acquiror to diversify their risk and potentially even reduce the overall fee across their portfolio by some metrics. Indeed, the deal environment for the hedge fund industry was strong in 2015 and 2016, as institutions, including banks, private equity firms and hedge funds, have sought to diversify their investments to achieve higher returns. It’s poised to get stronger in 2017, as recent reports show that the industry saw net inflows in the first quarter of the year, ending five successive quarters of net outflows, and shifting industry dynamics bolster sentiment that a partnership could be a mutually beneficial strategy to reach new investors and grow the business. This article, the first in a two-part series, explores additional reasons hedge fund managers decide to sell all or a portion of their business, common deal structures, recent hedge fund acquisitions and due diligence. The second article will address deal negotiations and terms, obtaining investor consent, regulatory notifications and finalizing the deal. Read More »

  • May 5, 2017

    How Hedge Fund Managers Can Conduct a Meaningful Risk Assessment

    Risk is a fundamental attribute of every hedge fund manager’s business, but not all risk is equal. Hedge fund managers are expert at gauging and accounting for the risks inherent in their investment decisions, but the operational risks appurtenant to running the business—conflicts of interest, legal risks and marketing risks associated with reporting performance, among others—must be carefully identified, evaluated, weighted, and ultimately, mitigated. Indeed, a firm cannot properly tailor its compliance policies and procedures and annually review their adequacy, as mandated by Advisers Act Rule 206(4)-7, known as the Compliance Rule, without first performing a rigorous assessment of business and operational risks. Moreover, the consequences of failing to quantify, qualify and plan for risks can be considerable and range from missed investment allocation opportunities to regulatory enforcement or investor redemptions. (For more on conducting an annual compliance review, see “Best Practices for Hedge Fund Managers Conducting an Effective Annual Compliance Review:” Part One and Part Two) This article addresses managers’ top questions about conducting a thorough risk assessment—the who, what, when, how and why—and offers best practices for ranking, and then tempering, the likelihood and potential impact of the risks specific to each firm. Read More »

Legal Proceedings & Laws

  • May 19, 2017

    Pair of Enforcement Actions Shows SEC Scrutinizes Forms ADV for Both Major and Minor Misrepresentations

    On May 5, 2017, the Securities and Exchange Commission entered two separate orders instituting administrative and cease and desist proceedings and imposing sanctions against two registered investment advisers and their founders for inconsistent or false statements disclosed in their Forms ADV. Although the facts underlying each action are distinct, taken together, they show just how meticulously the SEC reviews each of advisers’ Form ADV representations—on their face, as compared to prior and later Form ADV filings and against outside information and research. This article summarizes the SEC’s allegations in each enforcement proceeding. Read More »

  • May 5, 2017

    SEC Rules Firm Can’t Cherry-Pick Application of Attorney-Client Privilege Protection

    Hedge fund managers rely on outside counsel to advise on myriad legal matters, from fund formation to issues that arise in day-to-day operations. A recent Securities and Exchange Commission enforcement proceeding counsels, however, that the attorney-client privilege is not inviolate, especially if managers attempt to use it as a sword and a shield. This article reviews the SEC’s allegations against the firm, its president and founder, and its chief executive officer, and the administrative judge’s ruling. Read More »

  • April 20, 2017

    Recent SEC Complaint Confirms Aberrational Performance Inquiry Initiative Alive and Well

    The Securities and Exchange Commission’s Aberrational Performance Inquiry initiative continues to prove that it’s a valuable resource in helping the regulator verify the accuracy of hedge fund managers’ assets under management, returns and other marketing claims, according to a recent complaint the agency filed in federal court against an NY-based investment adviser. The SEC alleges that a hedge fund manager and one of its founders repeatedly conflated the firm’s AUM, misrepresented the firm’s ownership and use of a proprietary quantitative strategy and even embellished the “paper” returns that strategy purportedly generated in various correspondence with investors and prospective investors. In its press release announcing the case, the SEC credited the API initiative for uncovering the facts underlying the complaint. This article summarizes the SEC’s complaint. Read More »

Conferences & Seminars

  • May 19, 2017

    ACA’s 2017 Compliance Survey Covers Insider Trading; Business Continuity; Fees & Expenses; and SEC Enforcement Priorities

    ACA Compliance Group recently released the results of its 2017 Alternative Fund Manager Compliance Survey, its eighth survey outlining top-ranked regulatory examination focus areas and compliance issues facing hedge fund manager respondents. The survey covered four main categories of hedge fund concerns: the Securities and Exchange Commission’s priority focus areas, including funds’ compliance programs, conflicts of interest, and fees and expenses; the access controls managers employ related to material nonpublic information, such as information barriers, restricted lists and employee training; fund fees and expenses, including the types of fees charged to fund clients and controls, policies and procedures related to fund expenses; and business continuity and transition plans, and the specific controls firms have implemented to protect clients’ and investors’ interests in the event of a business disruption. ACA Compliance Director Danielle Joseph and Principal Consultant Tessa Carbone presented the survey results at a recent webinar. This article summarizes ACA's findings in the four main categories. Read More »

  • May 19, 2017

    New NYDFS Cybersecurity Regulation Aligns Interests of Firms, Investors and Regulators in Fight Against Attacks

    In many regards, cybersecurity is one of those anomalous issues in which strict regulatory compliance advances the interests of all market participants—adequately protecting sensitive and personally identifiable information is in the best interests of investors, regulators and firms. Over the last several years, various federal-level and national authorities have promulgated rules or guidance to ensure the protection of both firm and private client data: The Gramm-Leach-Bliley Act imposed requirements for firms in possession of consumers’ financial data; and the Securities and Exchange Commission and Financial Industry Regulatory Authority mandated that firms adopt strategies to prevent, detect and respond to cyber incidents and adopt written policies and procedures implementing those strategies. Most recently, in March 2017, the New York Department of Financial Services’ rule imposing new standards and rules mandating corporate cybersecurity took effect. During Crystal & Company’s third annual Alternative Asset Management Symposium, panelists summarized the requirements of the NYDFS cybersecurity regulations and discussed how hedge fund managers can implement a cybersecurity program that meets the requirements of the rule. This article summarizes the key takeaways from their discussion. Read More »

  • April 20, 2017

    SEC Officials Discuss State of the Commission, Impact of Executive Orders and Current Examination Initiatives and Priorities

    Despite the unpredictability of the climate in Washington and the reverberations brought by a new presidential administration and changes in Congress, remarkably, within the SEC it’s been business as usual, as examinations of and enforcement against registered investment advisers have continued apace. During the recent Investment Adviser Association's annual conference, several panels hosted high-level officials with the SEC, including Acting Chairman Michael Piwowar, that discussed current goings-on at the Commission, the impact of the president’s several executive orders, the status of rules concerning investment advisers and the SEC’s examination and enforcement priorities. This article highlights the key takeaways most relevant to hedge fund managers on each of these topics. Read More »


  • May 19, 2017

    Citco Survey Indicates Continued Fundraising Challenges for Managers, Benchmarks Sales and Marketing Efforts

    A survey recently published by Citco Fund Services and HFM Global sought to better understand hedge fund managers’ asset growth, distribution trends, and sales and marketing strategies in the prior 12 months, and prognosticate results in the near future. The survey results indicate that managers are still facing fundraising headwinds, but that they are slowly and steadily adapting to the new environment. This article summarizes the survey’s key points. Read More »

  • May 5, 2017

    Facing Investor Pressure, Hedge Funds Are Experimenting With Novel Fee Structures

    It’s an investors market, according to Peltz International’s latest white paper, "Rethinking the Fee Paradigm." Facing continued pressure on fee terms, hedge fund managers are becoming more flexible, not just in the fee levels they charge, but in how they are structured. Peltz also found that current trends indicate institutional investors are directing their allocations to funds that offer flexible fees, and that newer and emerging managers are better positioned than larger managers to offer innovative and flexible fee terms that meet investor demands. This article highlights the white paper’s key findings regarding investors’ current positions on fees, where management and performance fees stand currently, and novel fee structures and terms managers are employing to attract capital. Read More »

  • May 5, 2017

    Barclays Survey Reveals Investors’ Perspectives on Current State of Hedge Fund Industry

    Barclays Capital Solutions Group recently published a survey analyzing the steadily evolving asset raising landscape of the hedge fund industry from a variety of investors’ perspectives. Noting a “considerable improvement in sentiment versus a year Read More »

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