What are todays investors demanding of their hedge funds? Aside from exceptional financial returns, there is an increasing tendency to hold fund management accountable for expenses, sound compliance policies, and overall adequate disclosures. If investors detects a problem in any of these areas, they stand ready to walk away from the deal. In response to such savvy investors, hedge-fund managers are making serious efforts to improve fund transparency.
Fund Freedom of Expression
Last years changes in the way hedge funds may be offered and solda result of the federal Jumpstart Our Business Startups (JOBS) Acthas unleashed a flood of advertising and other promotions to the general public that were previously subject to the 80-year-old ban on general solicitation. Private issuers may now publicly ply their investment opportunitiesincluding boasts of past performancethroughout all media venues, but along with such freedom of expression comes greater disclosure obligations to the consumer.
Red Flag Awareness
Issuers may only sell securities to accredited investors, i.e. people whose net worth is in excess of $1 million and/or who have an annual income in excess of $200,000. Hedge funds are designed for sophisticated investors, yet not all investors have in fact displayed such sophistication when it comes to conducting due diligenceuntil now. An Operational Due Diligence Survey of global hedge fund investors conducted by Deutsche Bank found that the five most common red flags for investors were a lack of willingness on the part of fund promoters to provide transparency, inadequate compliance controls, poor segregation of duties, inexperience in critical roles, and inappropriate valuation policies.
Priority of Concerns
Of the 70 global investor entities polled (both institutional and individual), 64% said that investigation of miscellaneous expenses was important to them, 38% cited valuation policies as being of major concern, and 73% placed the focus on compliance and regulatory framework and in particular mitigation of risk in a cross-border regulatory environment. Satisfaction with the level of experienceor lack thereofof the funds manager is another factor that can prompt an investor veto. Interestingly, failure to provide adequate transparency trumped all other concerns.
Hedge Funds Respond
Scott Carter, an executive with Deutsche Banks Markets Prime Finance, America in New York noted,
Investors increasingly access hedge funds as part of a broader set of portfolio solutions which deliver superior risk adjusted returns. With this comes an expectation for robust operational controls, and we are seeing hedge funds successfully respond to these demands.
Hedge funds increasingly view transparency and compliance as not merely regulatory obligations but rather a key marketplace differentiator for the diligent investor.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI