Escalating compliance costs and the need to hit the ground running with an infrastructure capable of attracting institutional investors are the biggest operational challenges for new fund launches in the current climate.
With funds now forced to comply with filing requirements for FATCA, CRS and AML compliance from day one, directors are saying that the days of hiring a cheap administrator and prime broker for the startup phase are gone and funds need service providers that can handle this complex regulatory web.
“When I counsel startup funds I tell them they need to think like a $500 million hedge fund from day one,” said Scott Lennon, managing director of 19 Degrees North Fund Services, in an interview at the GAIM Ops Cayman conference.
“You will never attract institutional money if you don’t have an institutional infrastructure. You can get on their radar, but you need to be able to respond to a very in-depth operational review that will likely produce a laundry list of operational issues to be remedied. Until then they can’t invest in you.”
These issues include the right control processes, segregation of duties and a CFO/COO with experience running a fund of that size.
“For a standard long/short fund it is easier, but if there are any esoteric assets there needs to be an infrastructure to support the valuation process on those,” Lennon said.
Good corporate governance also goes a long way, with pressure from institutional allocators, but the big surprise, according to Lennon, is the still big divide between the UK and US.
“It’s a difficult selling point to US funds to say best practice requires independent oversight. They really come round only when they are told by an investor that they need to appoint someone like us,” he said.
“Even though we’ve come a long way, I’m constantly surprised when someone says they have no independent directors and need assistance on that front.”
Rounding up the operational challenges for funds in the current climate, cybersecurity remains a constant threat and requires the appointment of top tier service providers if a fund manager is a Registered Investment Adviser in the US. Funds need to protect client data and the SEC is hot on enforcing that.
“Best practice is to bring in an outside specialist so that your cyber policies are proactive and not reactive,” Lennon said.
“You need constant education to keep people up to date on how to recognise phishing and spoofing attacks and these firms will run internal and external hacking and phishing tests to identify vulnerabilities,” he concluded.
GAIM Ops Cayman conference, Investors, Operational challenges, Funds, Scott Lennon, 19 Degrees North Fund Services, Cayman Islands, US