Emerging Managers Series 2014

Emerging Managers Insight Ar cle Series

Advice for today’s hedge fund managers from experts in prime brokerage, legal, compliance, technology and more

TABLE OF CONTENTS Unveiling our Emerging Managers Insight Ar cle Series ………….………….……………………………...….3 The Prime Brokerage Perspec ve for Emerging Hedge Fund Managers ………...………………..…....4 Should I Go With the Flow Into Liquid Alts? ………………………………………………..……....…………..…...6 Assessing Never‐Examined SEC‐Registered Investment Advisers: An SEC NEP Priority ….….….12 A Hedge Fund’s Guide to Technology Decisions: From Cloud to DR ….…………………………….…...15 Can an Alterna ve Strategy Investor Know the Valua on Given is Correct? .…………………….….19 At Hedge Fund Trading Desks, Furniture Ma ers …………………………………………………………………22 About Eze Castle Integra on ……………………………………………………………..….……………………….…….24

© 2014 Eze Castle Integra on 2

UNVEILING OUR EMERGING MANAGERS

INSIGHT ARTICLE SERIES

3 © 2014 Eze Castle Integra on

The start‐up environment for hedge fund firms con nues to evolve as

managers face changing investor and regulator expecta ons, increased due

diligence, new investment opportuni es and advancing technology innova ons.

To help firms navigate the new launch environment, Eze Castle

Integra on is excited to share our Emerging Managers Insight Ar cle Series. The

Series, created for emerging hedge fund managers, brings together expert

guidance from industry insiders across prime brokerage, legal and compliance,

technology and fund management.

Contributors to the Series include senior leaders at Eze Castle

Integra on, Jefferies & Company, Rothstein Kass, Tannenbaum Helpern

Syracuse & Hirschtri LLP, Wells Fargo, FQS Capital Partners, and CFS Group.


THE PRIME BROKERAGE PERSPECTIVE FOR EMERGING

HEDGE FUND MANAGERS BY: GLEN DAILEY, FORMERLY OF JEFFERIES & COMPANY

Star ng a hedge fund is easier than ever with

many vendors offering turnkey services to get a fund up

and running quickly. The challenge is star ng a successful

hedge fund that will grow and become a viable

organiza on. With over 8,000 hedge funds opera ng

around the world, the compe on to a ract hedge fund

investors is greater than ever. For someone star ng a

fund, you have to rely on your own capital and that of

your friends and family to get the fund

off the ground. From there, the key to

success is outstanding performance.

Someone star ng a fund

should set a realis c schedule to

launch and not rush to get the fund up

and running too quickly. Take the me

to partner with the right service

providers that will support your

business from the start and be there

as you grow. Have a plan going into your new venture,

which should include lining up friends and family as day

one investors as well as reaching out to other investors

to start a pipeline before you actually launch the fund.

Once you are under way, you will end up ge ng ed to

your screens, focused on performing, and me for

marke ng becomes scarce.

I would also recommend for a new fund to

budget for a marketer in their first two years of

opera on. You can contract with a third‐party marketer

or hire an in‐house person. If you look at the largest

funds in the industry, they all have substan al investor

rela ons teams that keep current investors informed

while prospec ng for future investors. The largest funds

did not get to where they are by wai ng for someone to

knock on their door looking for a good hedge fund. They

built their funds by ac vely seeking new investors and

building a brand that becomes known in the market

place.

With so many compe tors in every strategy, you

have to be proac ve in your approach to make sure that

when an allocator is looking for a

par cular strategy, you have already

laid the ground work by having a pre‐

exis ng rela onship, which makes it

easier for an investor to perform due

diligence and ul mately make the

investment.

Prime brokers offer services

such as por olio and risk repor ng

which makes your ini al technology

investment fairly minimal. There are other outsourcing

services for technology, compliance, trading and

accoun ng that are very economical and provide an

ins tu onal infrastructure. Capital introduc on is a

much sought a er service from prime brokers which

could be very helpful in providing a new fund exposure

to poten al investors. Capital introduc on is exactly

what a prime broker provides.

A fund has to take advantage of introduc ons

and begin to build rela onships and add to their list of

investors and poten al investors. All professional hedge

fund investors want to know about new funds and funds

that are performing well. They may not be willing to have

“The largest funds did not get to where they

are by wai ng for someone to knock on

their door looking for a good hedge fund”


mee ngs up front, but they all want to be on your

mailing list and follow your fund’s performance and

growth through your monthly le er.

Star ng a fund is about star ng and managing a

business. Most new managers come with great

investment capabili es and li le business opera ng

experience. The services of your prime broker and other

service providers can make the transi on a whole lot

easier.

Many prime brokers offer consul ng services to help

guide you through the maze of real estate, technology,

benefits and staffing. These services can be a great value,

and their experience can help you avoid costly mistakes

that may distract you from your real mission, which is to

make money for your investors.

The hedge fund industry has grown and become

more ins tu onalized over the past 25 years. The

industry is expected to con nue to grow for years to

come as absolute returns become the only alterna ve in

a vola le market for corporate and state pension funds

that are underfunded with huge obliga ons to meet in

the years ahead. There will always be room in the market

for talented individuals, and the most successful will be

the ones that start with a solid founda on.

A A

Glen Dailey is the former Managing Director and Head of Prime Brokerage at Jefferies & Company. He

previously founded Banc of America Prime Brokerage in 1995 and was most recently their Chief Opera ng

Officer. Prior to Banc of America Securi es LLC, Glen was a Managing Director and Head of Prime Brokerage

for twelve years at Furman Selz LLC.


As regulatory requirements become more

complex and onerous in the alternative investment

space, there is clearly an evolution taking place in the

market. There is an ongoing trend toward adding

registered or retail products among many hedge fund

managers. They are seeking new structures to bring their

strategies to market while putting themselves in the best

position to tap retail investors and wealth advisors in the

new competitive landscape.

It’s no secret that a significant amount of capital

is looking to move into the alterna ve investment space

– just look at the numbers. According to Ci group, assets

in liquid alterna ve funds have surged from $95 billion in

2008 to more than $300 billion last year. Ci es mates

that number will hit $1 trillion by 2017.

If you look at the trajectory, what seems to be

clear is that liquid alterna ves are here to stay. What

may not be so obvious to some alterna ve managers is

whether they should stay on the private fund side or

follow the asset flow into the retail space by adding

addi onal product offerings. It’s not a move that should

be taken lightly.

Managers have to make smart, informed

decisions about whether a registered product is right for

them, and how they can best implement the strategy if

they decide to make the move. There are many

ques ons that need to be answered, and many op ons

that need to be considered before making such a cri cal

decision.

To help managers make more informed

decisions in the new liquid alterna ves reality, Rothstein

Kass has compiled a set of important ques ons

managers must ask themselves, and other cri cal

considera ons that should be part of their decision‐

making process.

For hedge fund managers, the potential to tap

into the mass affluent market through retail distribution

channels is extremely enticing, but not if it comes at the

expense of their current business. The goal of launching

a liquid alt fund should be to gain access to a new pool of

investors that could not be reached with a private fund,

not to move current investors from one product into

another. Managers have to take a hard look at how a

SHOULD I GO WITH THE FLOW INTO LIQUID ALTS? BY: FRANK ATTALLA, CPA, AND MARC J. WOLF, CPA, ROTHSTEIN KASS

1.Will a registered product cannibalize my exis ng private fund business?


registered product will impact their existing private fund

business.

For example:

Will it be additive or will be it be competitive?

Can you clearly articulate the differences between

the product offerings and the value to different

investor segments? If not, then it is unlikely you will

be successful long‐term.

If investors feel they can get the same

diversification and upside in a retail product — without

paying the performance fees of a hedge fund — why

wouldn’t they simply move their assets from one

product to another at the first opportunity?

Beyond investor perception, managers must also

consider operational resources and other elements that

may take away from the success of a current business. It

may seem like a product extension but, in reality,

launching a liquid alt fund is like launching a new

business that requires a:

Well‐thought‐out business plan,

Thorough competitive analysis, and

Realistic view of what impact that new business will

have on your existing revenue.

This may seem like a simple question, and for

some managers it is. The reality is that most strategies

can fit into a mutual fund or liquid alt model, as long as:

You have the proper structure for trading

commodities,

You don’t have a significant amount of illiquid

assets, or

You’re not highly levered.

And, in some cases, even if managers do have

significant illiquid assets, they can utilize a listed or

unlisted closed‐end fund and still reach a new pool of

investors.

So, instead of thinking of this as simply a yes or

no question, this decision may come down to a question

of nuance. The following are all questions that managers

should not only consider, but talk through with their

team of experts:

Do you fully understand what you can or cannot do

from a strategy standpoint inside a registered

vehicle?

Do you understand how you can or should alter your

strategy to be most effective in the registered

arena?

Are you aware of the registered product structures

that would be most conducive to your particular

strategy?

The reality is there is no typical alternative

mutual fund, and there is no cookie‐cutter approach to

being successful in the liquid alts space.

Distribution is critical to the success of any

investment product, but in the increasingly competitive

world of liquid alternatives it’s even more so. Managers

can have the best investment strategy out there, but if

they do not have a sound distribution strategy with the

right distribution partners and channels, it will not

matter.

What managers have to understand is that retail

distribution is a whole different animal than private fund

distribution. Hedge fund distribution is more

relationship‐driven, while mutual fund distribution

requires systematic institutional selling. Mutual fund

distribution requires managers to consider everything

from strategic product positioning and pricing to

2. Will my strategy fit inside a mutual fund?

3. Do I understand the distribution landscape?


understanding the peer group that a fund is competing

against.

Managers have to be confident that they can

execute their strategy effectively either by themselves or

with a trusted partner.

Organizing a registrant and launching a mutual

fund is a complex process with a lot of requirements. The

first decision that managers need to make is whether

they will set up their fund as a stand‐alone trust or

through a series trust. The decision often comes down to

weighing multiple factors such as cost, time to market

and control over the process.

With a series trust, the regulatory compliance

and operational structure is already in place, which can

reduce startup costs, administrative burdens,

operational costs and, ultimately, time to market for

managers. The trade‐off is that the manager is fitting

into an existing structure and inheriting an existing board

that might not be tailored for their specific strategy.

If you do decide to go the series trust route, it’s

important to understand that there are a growing

number of options and there can be huge disparity when

it comes to everything from expertise and assets to costs

and technology. So, you have to do your series trust “due

diligence.” For example:

Talk to managers who are in the trust already.

Look at the trust sponsor’s experience.

Gain a full understanding of the expertise and

reputation of the board, the audit firm and the legal

counsel.

Understand the distribution channels being utilized.

While many managers may think the answer to

this question is yes, this response may be anchored more

in perception than reality. The operational, compliance

and reporting responsibilities may seem more onerous

and costly in a registered fund, but the reality is that

they are just different. If a manager works with the right

partners to put the right infrastructure, processes and

controls in place, the operational efficiencies and cost

savings will follow.

4. Should I use a stand‐alone trust or a series trust? If a series trust, how do I choose the right one?

5. Is a registered fund too expensive?


All registered funds are not created equal. There

are many different varieties of mutual funds and closed‐

end funds, each with different:

Tax considerations,

Reporting requirement, and

Fee structures.

Managers should have an understanding of all

the options and determine what works best for their

strategy and their business.

While every product structure has different and

often complex tax requirements, managers also need to

be aware of the tax implications of a registered fund at a

higher level. For example, they need to have the

answers to the following questions:

Will my strategy qualify from a tax code

perspective?

Will my investment mix pass the asset

diversification test?

Do I have a firm grasp of ”good” income versus

“bad” income?

Do I understand how the structure impacts the

needs of different types of investors?

These may seem like obvious questions to some,

but if they are overlooked from the onset, problems will

arise further down the road. In addition, there are

significant advantages for tax‐exempt and pension plan

investors, such as the elimination of unrelated business

taxable income (UBTI) and an exemption from the

ERISA1 rules, that could be touted if the advisor is aware

of them. The answers to some of these questions may

eliminate the possibility of a move to retail altogether.

What’s most important, however, is that you are

thinking about them.

When alternative managers make the decision

to launch a registered fund, they have to be sure they’re

fully committed – both mentally and financially – for the

long haul. While there is the potential to access a whole

new pool of investors and assets in a registered fund,

it’s not an overnight proposition.

It takes time to build assets and a track record

and it takes a financial commitment to fund operations

while the assets are building. Like with most hedge

funds, managers will have a management fee to cover

expenses, although the fee could be limited by an

expense cap. Therefore, a fund manager should prepare

a break‐even analysis, which the fund’s administrator

can usually assist with. In the absence of this

commitment, it will likely be a waste of time and money

for managers to jump into the liquid alts arena.

Many investors make investment decisions

based on a fund’s track record. Unfortunately for

alternative managers making the shift into the

registered space, their track records are rarely portable.

Beyond that, it takes three years for a fund to get

Morningstar® rated, which is a major validation point in

the retail space.

In some cases, there are product structures that

can potentially allow managers to leverage their track

record from the alternative space. Managers need to

fully understand track record implications before

making the move to the registered space and work with

a legal or compliance expert to make sure they’re taking

all the right steps along the way.

6. Do I understand all my product options?

7. Do I understand the tax implications of a registered fund?

8. Am I ready to make the commitment for the long haul?

9. Do I understand the track record implications?


Some alternative managers look at the mounting

regulations in the private fund space and see the move

into the registered space as an obvious one. They think

that if they’re already dealing with increased regulation,

they may as well make the move to retail and reap the

rewards of gaining access to a new and larger capital

base. But it’s not that simple.

The regulatory requirements in the registered

world—from the need for independent boards to

required compliance with a

whole new set of SEC,2 CFTC3

and FINRA4 regulations — is

different from the private fund

world. Managers who aren’t

realistic about this fact will be in

for a rude regulatory awakening.

It’s critical for managers to work

with seasoned experts to gain a

full understanding of the

regulatory landscape and the implications it will have on

their business in both the short‐ and long‐term.

However, advisors to registered funds get the benefit of

avoiding the Form PF filing requirement.

Transparency has become the norm for

managers in all asset classes since the financial crisis.

That said, when an alternative manager crosses over into

the registered space, transparency becomes a regulatory

requirement as opposed to simply an investor demand.

You need to be aware of this shift and make sure you’re

ready to execute on it. From a practical standpoint, this

means:

Disclosing all investments over 1 percent or, at a

minimum, the top 20 positions on a quarterly basis

as opposed to only those that make up more than 5

percent of the total fund, and

Daily asset valuation and liquidity, if organized as an

open‐ended (mutual) fund.

These are all factors you need to consider before

making the move and deciding whether your strategy

and your business are ready for the leap into the

registered space.

Moving to a liquid alts

strategy seems simple enough for

most hedge fund managers. It’s just

a matter of executing a proven

strategy in a different product

structure, right? Well, not exactly.

What’s important to

remember is that in a mutual fund

structure, fund managers must

report to a board that has a fiduciary responsibility to

ensure that the shareholders’ best interests are being

considered, such as reviewing investment decisions and

fees charged to a fund. This requires a major change in

mindset for most hedge fund managers who essentially

ran their own fiefdom, answering only to investors with,

in most cases, long‐term lock‐ups provisions.

Many managers can and have made the shift,

but those who go in with that understanding from the

get‐go are much more likely to be successful long‐term.

The liquid alternative space has grown at a

breakneck pace in recent years, and there doesn’t seem

to be any slowdown in sight. But while there is clearly a

lot of opportunity, there is also a lot of competition, as

“Before making any move, managers need to take a

hard look in the mirror and consider all the business

implications”

10. Do I understand the regulatory implications?

11. Is the additional transparency that a registered product requires acceptable?

12. Am I prepared for the change in mindset required to operate a mutual fund structure?

The Last Word


well as the need to create the correct operational

infrastructure, and it’s not the right fit for every

manager.

Before making any move, managers need to take

a hard look in the mirror and consider all the business

implications — and consult with their service providers

— before getting caught up in all the liquid alts

excitement. The questions above may not be the only

ones that need to be asked, but they’re a good place to

start for any manager who’s thinking about following the

flow of liquid alternatives into the retail space.

A A

Frank A alla is a principal at Rothstein Kass, located in the firm’s Roseland, N.J., office. He has over 15 years of experience

exclusively in the financial services industry. He specializes in audit and tax services for a variety of investment partnership

structures, including domes c and offshore funds, master‐feeder structures, funds of funds, and registered investment companies.

Frank is a cer fied public accountant in New Jersey and New York.

Marc Wolf is an audit principal in Rothstein Kass’ Beverly Hills office. Marc’s areas of specialization are focused within the firm’s

Financial Services Group, specifically hedge funds, regulated investment companies (RICs), commodity pools, real estate, private

equity and other types of investment vehicles, broker‐dealers, private foundations and family offices. He is a certified public

accountant in California, Colorado, New Jersey, New York and Texas.


ASSESSING NEVER-EXAMINED SEC-REGISTERED

INVESTMENT ADVISERS: AN SEC NEP PRIORITY BY: SHELLEY ROSENSWEIG AND BETH SMIGEL, TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT

On January 9, 2014, the Office of Compliance

Inspections and Examinations (“OCIE”) of the Securities

and Exchange Commission (the “SEC”) published its 2014

examination priorities for its National Exam Program

(“NEP”). While the examination priorities include

multiple areas that OCIE believes are higher‐risk areas of

the business and operations of investment advisers, this

article focuses on the NEP’s initiative (the “Initiative”) to

conduct focused, risk‐based examinations of investment

advisers who have been registered with the SEC for at

least three (3) years (including non‐U.S. advisers) but

have not yet been examined by the NEP and are not

subject to the “Presence Exam” initiative discussed

herein (“Covered Advisers”).

The examinations conducted by the NEP in

accordance with the Initiative focus on two

approaches. The first approach consists of risk‐

assessment reviews which allow the NEP to obtain a

better understanding of each Covered Adviser and

include a high‐level review of the Covered Adviser’s

overall business activities, with a particular focus on the

compliance program and other essential documents

needed to assess the representations made on the

Covered Adviser’s disclosure documents. The second

approach utilizes focused reviews which emphasize

certain high risk areas of the Covered Adviser’s business

and operations, including the following:

Compliance Program: NEP staff will examine the

Covered Adviser’s compliance program and the

effectiveness of such program (including a review of

its books and records, even such records existing

prior to such Covered Adviser’s registration with the

SEC) to determine if a Covered Adviser has

adequately identified conflicts of interest and

compliance‐related risks, adopted appropriate

policies and procedures to mitigate and manage

those conflicts and risks, and empowered a

competent chief compliance officer to administer

the compliance program;

Filings/Disclosure: NEP staff will review the Covered

Adviser’s filings and disclosure documents to assess

the content and scope of disclosures that have been

made therein (in particular whether conflicts of

interest and potential conflicts of interest have been

adequately disclosed);

Marketing: NEP staff will review the Covered

Adviser’s marketing materials and evaluate whether

a Covered Adviser has made false or misleading

statements about its business or performance

record, made any untrue statement of a material

fact, omitted material facts, made any statement

that is otherwise misleading or engaged in any


manipulative, fraudulent, or deceptive activities in

such marketing materials;

Portfolio Management: NEP staff will review and

evaluate the Covered Adviser’s portfolio

decision‐making practices, including the allocation of

investment opportunities and whether the Covered

Adviser’s practices are consistent with disclosures

provided to clients; and

Safety of Client Assets: NEP staff will review a

Covered Adviser’s compliance with the relevant

provisions of the Investment Advisers Act of 1940, as

amended (the “Advisers Act”) and other applicable

laws that are designed to prevent loss or theft of

client assets.

The SEC specifically excludes registered

investment advisers to private funds from the Initiative,

as those advisers are subject to examination pursuant to

the SEC’s “Presence Exam” initiative launched in October

2012. The Presence Exam program focuses on newly

registered private fund investment advisers that

registered with the SEC as of July 21, 2011, the date

when the definitional rules under Dodd‐Frank Wall

Street Reform and Consumer Protection Act of 2010

became effective (which, among other things, removed

the “less than 15 clients” exemption from SEC

registration on which most private fund advisers

previously relied). It is worth noting for those advisers to

private funds subject to Presence Exams that the five (5)

key focus areas (some of which overlap with those

mentioned above) are the adviser’s marketing, portfolio

management, conflicts of interest, safety of client assets

and valuation procedures.

Covered Advisers should anticipate being

examined by the SEC pursuant to the Initiative. To

prepare for such exams, compliance officers of Covered

Advisers are encouraged to review their compliance

policies and procedures to ensure that such procedures

(i) adequately address the foregoing matters, (ii) are in

compliance with the Advisers Act and SEC guidance and

(iii) accurately reflect the operations of the Covered

Adviser. Covered Advisers should also ensure that

disclosures made to its clients are consistent across all of

its disclosure materials including ADV filings, offering and

related documents, client agreements and marketing

materials. We note that OCIE indicated its intention to

invite Covered Advisers to attend regional meetings later

in 2014 where they can learn more about the

examination process.

As the SEC’s Division of Enforcement has the

ability to bring charges against a Covered Adviser based

on deficiencies discovered by OCIE in the course of

examination, Covered Advisers should consider meeting

with their legal advisors to better understand what to

expect during the examination process and how best to

prepare.

If you have any questions regarding this update, please

contact Shelley Rosensweig at 212‐508‐6774 or Beth

Smigel at 212‐702‐3176.


A A

Shelley Rosensweig is a partner in the Financial Services, Private Funds and Capital Markets

department at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Shelley advises clients regarding

matters which include design, structure and operation of US and non‐US investment funds and

portfolios, distribution and marketing issues as well as commodities, futures and derivatives issues.

Shelley also advises and assists clients with regard to seeding arrangements, managed account

platforms and the organization of joint ventures. Further, Shelley advises investment advisory clients

regarding investment products and services, SEC, FINRA, CFTC and blue sky regulatory and

compliance matters, as well as trading issues and employment matters.

Beth Smigel is partner in the firm's Financial Services, Private Funds and Capital Markets

department at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Beth's practice includes forming and

structuring domestic and offshore private investment funds (including hedge funds and private

equity funds) and advising with respect to ongoing operational and U.S. regulatory matters for the

funds. In addition, Beth advises U.S. and non‐U.S. investment advisers with respect to registration

(and exemptions therefrom) under the U.S. Investment Advisers Act of 1940 and compliance matters

arising thereunder, including assisting in preparation of compliance manuals and code of ethics.

Beth also counsels investment advisers, fund operators and investment funds with regard to various

U.S. regulatory matters, including those arising under the U.S. Securities Act of 1933, the U.S.

Investment Company Act of 1940, the Commodity Exchange Act as well as SEC, FINRA, NFA and CFTC

compliance and registration issues.


A HEDGE FUND’S GUIDE TO TECHNOLOGY DECISIONS:

FROM CLOUD TO DR BY: MARY BETH HAMILTON, EZE CASTLE INTEGRATION

The Cloud: Every Hedge Fund is Doing It

Here at Eze Castle Integration, we see that 9 out

of 10 hedge fund startups are selecting a cloud‐based

solution versus a traditional on‐premise solution. If you

aren’t already sold on the cloud, here are a few reasons

we typically see clients select the cloud:

Easy and Complete IT Package: Cloud computing

can support front‐, middle‐ and back‐office functions

– everything from business applications and client

relationship management systems to data

management solutions and accounting systems

Cost Containment: CapEx to OpEx: While building

out a Comm. room or data center requires capital

expenditures, using an external cloud service that

offers a pay‐as‐you‐go service falls into ongoing

operating expenditures. The transition to a cloud

service provides many cost‐savings beyond just

eliminating the need to purchase and refresh

equipment.

Improved Flexibility and Scalability of IT: Cloud

computing is uniquely flexible and scalable,

operating on a utility basis ‐ allowing firms to pay as

they go and only for the resources they will use.

Simplified IT Management = Less Maintenance:

With cloud services, firms no longer need to handle

server updates, patches, hardware installs and other

computing maintenance issues. This saves firms from

having to hire dedicated IT resources or allows them

to focus IT staff on higher value projects.

Mee ng the SEC’s Cybersecurity Expecta ons

Regardless of whether your firm opts for an on‐

premise solution or the cloud, security is fundamental

when considering a fund’s technology setup and network

infrastructure. It is so important that the SEC this month

issued a risk alert providing additional clarity into how it

will examine registered investment firms regarding their

cybersecurity practices.

All financial firms are at risk because hackers see

value in gaining a firm’s business secrets and intellectual

property ‐ such as business plans, trading programs,

market forecasts and investment strategies. Therefore, a

multi‐layer security approach is essential to protecting

the critical information that passes through the

organization’s system every day.

This strategy, known as Defense in Depth,

recommends that investment firms maintain up‐to‐date

anti‐virus and anti‐malware software as well as network

firewalls, deep inspection proxy and intrusion detection/

prevention (IDS/IPS) to reduce the amount of traffic on

the network, thereby decreasing opportunities for an

intrusion. In addition to these technical layers, firms

should also implement the following policies and

procedures to ensure their critical systems and data do

not fall into the wrong hands.

Acceptable Use Policy. Define what acceptable behavior

is for your employees as it relates to their technology

usage. It is best to be specific within this policy regarding

what activities and programs employees are or are not

permitted to access. Firms can employ web filtering


practices to block access to identified websites. They can

also use third‐party software to log activity around which

employees are accessing what and what other actions

they are taking (e.g. printing, copying, forwarding, etc.).

Principle of Least Privilege. This involves restricting

access to only those employees who need it. Keep access

control lists on all applications and data and inbound/

outbound Internet access to keep track of who can gain

access to what. Also, log the use of audited one‐time

passwords and minimum privilege shared accounts.

Secure User Authentication

Protocols. Secure user

authentication protocols include

assigning unique domain user IDs

to each employee, implementing

strong domain password policies,

monitoring data security passwords

and ensuring that they are kept in a

secure location and limiting access

to only active users and active user accounts.

Information Management Security Policy. Develop a

plan that details how the firm will handle a security

incident. The plan should outline who is in charge of

managing a security incident, the required reporting and

investigation procedures, communications policies for

contacting clients and the post‐incident remediation

procedures.

Visitor/Contractor Premise Access Policy. It is essential

that firms keep track of all people who have visited the

site through the use of physical security checkpoints and

surveillance.

Mobile Device Policy. Develop guidelines for the use of

personal mobile devices in the workplace, and train staff

on mobile device security practices. Employ security

measures such as requiring passwords, having the ability

to remotely wipe devices and employing encryption

tools.

Preparing for the Inevitable Disaster

Disaster recovery and business continuity plans

are crucial for sustaining operations during outages or

disasters. A disaster recovery plan addresses how the

business will resume normal operations in the event of a

catastrophe. A business continuity plan is somewhat

broader in nature and deals with sustaining normal

business operations during periods of disruption.

Both disaster recovery and

business continuity planning are

essentially means of systematically

assessing the potential impacts of

various unexpected incidences and

determining the organization’s

preparedness to deal with such

events. During the planning process,

firms should aim to ensure little to

no business and project interruption during either a

planned or unexpected event. In this planning phase, be

sure to take the following steps:

1. Assess the business risk and impact of

potential emergencies.

2. Prepare for possible emergencies.

3. Document a disaster recovery plan.

4. Outline the business recovery phase.

5. Train staff for the business recovery phase.

6. Test the plan with a realistic dry run.

7. Keep the plan timely.

Avoiding Common Technology Mistakes

Finally, following are five common technology

mistakes that new funds make and what you can do to

“All financial firms are at risk because hackers see value in

gaining a firm’s business secrets and intellectual property”


avoid them.

Looking for the perfect solution. During the

planning phase of your new fund, the idea that there

may be one or more solutions that can meet 100% of

your technology requirements can be an appealing

thought. Some vendors are attempting to develop a

turnkey platform to deliver on this promise. However,

unless your business is narrowly focused, the chances

that a single vendor will meet every aspect of your needs

are very slim. Realistically, you will likely need to

negotiate, purchase and deploy systems from multiple

vendors and service providers. Selecting a single vendor

and relying on it to be around in the years ahead may

cause your firm to assume more concentrated business

risk than you are willing to accept.

Insufficient planning for the future. Without

envisioning how your practice will look over the longer

term—in three or five years—you may be setting

yourself up for some short‐sighted solutions. Despite

your intense focus on completing the immediate tasks of

launching your fund, understanding what your firm will

look like in the future is important as well. If your fund

grows significantly, will you have the necessary

technological systems to support that larger business?

Failing to understand how much you rely on

technology today. Think about the work you currently

do today and write down some notes on which systems

you use to complete that work (email, reports, phones,

quote feeds, etc.). Now, consider the work that will need

to be done in your new hedge fund and what systems

you and your team will require to complete it. More than

likely, you will need most – if not all – of the same

systems, with some additional ones as well. Use this list

as a shopping guide when building out your technology

platform.

Overestimating your capacity to manage

technology. Managing technology is a profession unto

itself. Unless you spend most of your free time building

servers and managing networks, you will need help

managing technology at your new firm. For project‐

related work (“one‐and‐done” jobs), you can use

consultants and contractors. For ongoing interaction and

maintenance of the technology, you can contract with a

third party. Also, be sure to consider hiring support or

administrative personnel that is skilled with technology.


Shortchanging the training options and resources. Once

you have all of your new systems lined up, you need to

learn how to use them. Most vendors provide some sort

of onsite or web‐based training options. If it is

reasonably priced, you will most likely want to take

advantage of it. Often, the vendor’s professional services

arm will know all the quirks of the software package so

well that many important details are glossed over

during the sales process. They can help you develop the

correct workflow to maximize your investment, as well

as get you past some of the inevitable challenges. Also,

ask the vendor whether there are any established user

groups for their so ware and systems. O en, these

communi es can be invaluable resources for ge ng up

and running more quickly and with less frustra on.

Avoid rushing the installa on in order to make a set

deadline and address any subsequent issues that may

arise.

A A

As vice president of marke ng for Eze Castle Integra on, Mary Beth Hamilton is responsible for mar‐ke ng strategy and integrated marke ng programs to drive awareness and demand for the company’s IT services and solu ons. With a decade of marke ng experience, Mary Beth is skilled in guiding mar‐ke ng efforts for services organiza ons. She holds a BS from Loyola University New Orleans and MBA from Boston College.


CAN AN ALTERNATIVE STRATEGY INVESTOR KNOW THE

VALUATION GIVEN IS CORRECT? BY: DANIEL JOHNSON, OF WELLS FARGO GLOBAL FUND SERVICES, AND ERIC LAZEAR, OF FQS CAPITAL PARTNERS

Traditionally, for most investors, the main

concern when investing in a hedge or private equity fund

was whether the manager could generate a sufficient

level of return for an acceptable level of investment risk.

But operational matters have increased in

importance and operational due diligence has now

evolved to the point that many investors will reconsider

an investment on operational grounds alone, regardless

of the return profile.

Operational risk can take many forms, but

valuation is a good place for investors’ initial focus: are

the holdings of the fund accurately valued, and is there a

process in place to ensure that they are

accurately valued at each dealing period?

Valuation risk is particularly critical for more

complex strategies, such as structured credit, where the

risk of pricing irregularities is significantly higher.

However, it is also important to review and understand

pricing policies and procedures for strategies that trade

listed securities. For example, it is useful to know

whether the manager marks their equity longs at the bid,

mid or close and, if it is the mid, if the manager

determines the impact on the portfolio if priced at the

bid. It is also important to understand if adjustments are

made for large positions, less liquid holdings, or for

securities that trade less frequently.

How the holdings of a fund are valued is

important for many reasons: it drives the net asset value

(NAV); it sets the price for subscriptions and

redemptions; and it determines the level of performance

fees. While this point may be obvious for most investors,

many investors are often unsure of what detailed

valuation related questions to ask the manager and,

equally as important, the administrator who is

responsible for producing the NAV.

Valuation Risk

Unlike reviews of performance, it is essential that

any review of valuation risk include all parties involved

in valuing the assets of the fund. This will often include

speaking to the administrator about their role in the

process and what the involvement of the investment

manager has in determining the final prices.

However, when reviewing the valuation process

it is often too easy to adopt a checkbox approach. It is

essential for investors to understand that the questions

one should ask must change depending on the strategy

of the fund and the assets it trades. The questions asked

of a distressed debt manager are different from those

that should be directed to a long/short equity manager

who only trades listed securities.

But there are also some common questions that

should be asked of all funds and questions for fund

administrators covering key areas (see boxes). These

questions are just some examples to help investors more


fully understand the valuation process for funds they are

considering investing in.

Common Ques ons to All Funds

Who approves the valuation policy, how often is it

reviewed and re‐approved?

How are policy exceptions reported and to whom?

What is the role of the governing body in the

valuation process? How much knowledge do they

have of the asset class being traded by the fund?

What valuation service providers are used and

exactly what type and level of service is being

provided?

What due diligence was performed on the provider?

How involved is the investment manager in the

process? Can they pick the price‐providers and, more

importantly, can they change the providers each

month?

Are third parties involved in the pricing process at

any stage?

Does the investment manager have a valuation

committee to review valuation processes, approve all

policy exceptions and if necessary approve all

investment manager prices?

Key Questions for Fund Administrators

Is there a clearly defined and documented process

that covers how all major asset classes will be valued

for the fund? This is normally more detailed than the

NAV section of the prospectus and provides specifics

on what the administrator will actually do to value

the investments.

Does that process cover not only the primary and

secondary data sources, but which prices should be

used (mid/bid/ask, and so on), what time the prices

are taken, how the prices can be independently

obtained and what to do when the process cannot be

followed?

Is the administrator SSAE16 Type II or ISAE 3402

certified? This shows they have documented

processes that have been reviewed by a third party.

Is the administrator independently valuing the

portfolio, or acting as a price validation/ verification

agent?

Do investors or the fund’s directors receive any kind

of NAV transparency report showing a breakdown of

pricing sources and methods, as well as a breakdown

of assets by ASC 820 levels?

Most administrators can provide this and should

be able to walk investors through all of the numbers.

“Valuation risk is particularly critical for more complex strategies, such as structured credit, where the risk of pricing irregularities is significantly

higher.”

A A

Daniel Johnson is vice president, valuation services at Wells Fargo Global Fund Services and Eric Lazear is head of

operational due diligence at FQS Capital Partners (US).


AT HEDGE FUND TRADING DESKS, FURNITURE MATTERS BY: JEFF BRECHMAN, CFS GROUP

There are many layers to creating a successful

launch of a hedge fund, and often one that is overlooked

is implementing the right furniture, while keeping in

mind budget, timeline and dimensional restraints for

your new office space. For someone starting a fund, and

relying on your own capital, creating an office space

within a budget is essential. In order to do so, you must

partner with a furniture dealership that understands the

marketplace and has the creativity to provide a solution

that is light on the wallet but has the feel of stability and

success.

As you would expect, just like many other

businesses, the commercial furniture industry is a very

competitive, relationship‐driven sale, and unfortunately

the client is usually on the raw end of the stick. Let’s give

an example:

Hedge fund A has six traders, and in their mind “we

need a trading desk.” But the fund's users only have one

PC and two monitors each, which equates to a minimal

technology requirement. The fact is that a full‐blown

trading desk can range from $2,000 to $5,000 (for height

adjustable product) per user.

Here is what the fund manager needs to know.

There are other options that will adequately handle your

technology, save you up to 60‐70% and give you the look

and feel of a trading desk solution. Savings of $10,000

just by having the proper relationship and information.

Hedge fund B has six traders, and they are looking for a

new trading desk. The fund’s users have two or three PCs

and three to six monitors each. Based on the amount of

technology required, a trading desk does seem like the


right fit and would run on average between $20,000 and

$24,000. Having a relationship with a furniture vendor

that stocks used trading desks may just save hedge fund

B 100%. This is another example of making sure a

vendor’s vision is aligned with the fund.

The world of technology platforms is ever‐

changing. Therefore, knowing the technology is the key

to understanding the furniture requirements to any

successful hedge fund build out. As a result, hedge funds

should look for a furniture partner that has the ability to

identify each client’s specific needs and provide them

with the right product for their furniture application. As a

specialist in the industry, CFS Group knows hedge funds

need a “go to” to embrace change as it unfolds. A typical

build‐out provides practical solutions that elevate the

aesthetics and performance of each hedge fund's

facilities.

The secondary key is having the right dealership

to align each hedge fund with the manufacturers based

on their budget. Besides looking at the technology and

aesthetic requirements, understanding the budget is just

as critical. Our job as a dealership is to remove that

stress of purchasing furniture by creating furniture plan

layouts and managing projects from start to finish.

A A

Jeff Brechman is the Director of Sales at the CFS Group. Prior to CFS Jeff was a Principal and Sales

Director of one of the leading trading desk manufactures in the country. With over 15 years of

industry experience, Jeff is helping to build the business as well as taking the financial furniture

arm of CFS to new heights.

ABOUT EZE CASTLE INTEGRATION Eze Castle Integra on is the leading provider of IT solu ons and private cloud services to more than 650

alterna ve investment firms worldwide, including more than 100 firms with $1 billion or more in assets

under management. We provide one global financial cloud pla orm that is complimented by excep onal

service and opera onal excellence.

Our Eze Private Cloud is built to deliver the high performance, applica ons and excep onal user experience

demanded by the hedge fund and investment industry.

To learn more about Eze Castle Integra on, contact us at 800‐752‐1382 or visit www.eci.com.


Complete Managed IT — So ware as a Service Eze Managed Suite is a fully managed IT solu on that provides flexibility and

simplified IT opera ons. The hosted IT solu on combines a robust, highly secure

private infrastructure via the Eze Private Cloud with key business applica ons and

professional IT management.

Applica on Hos ng — Infrastructure as a Service Eze Managed Infrastructure provides clients easy access to an enterprise‐grade

private environment with the latest hardware and so ware without capital

expenditures, expensive upgrades or ongoing maintenance and monitoring. It is ideal

for hos ng applica ons used by hedge funds and investment firms.

Disaster Recovery as a Service Eze Managed Data Availability delivers a full range of business resiliency services

including Disaster Recovery, Online Backup and Message Archiving. Via the Eze

Private Cloud, your cri cal data and applica ons will be available and protected

24x7x365.

Emerging Managers Series 2014

Economy & Finance

Transcript of Emerging Managers Series 2014