Technology 'Bar' May Lead to Consolidation of Hedge Funds
March 16, 2010
The technology ‘investment bar’ required to meet investor and regulatory requirements from financial system reforms may be high enough to lead to consolidation of hedge funds, according to a synopsis released Tuesday of discussions held at Global Hedge Fund Forums in New York and London.
The cause of the consolidation: A desire to merge on the part of smaller funds, unable to meet the costs of compliance on their own, said the synopsis from Indus Valley Partners, a provider of data processing platforms for hedge fund managers, fund administrators and prime brokers.
Financial reforms around the world, pressed since the credit crisis of 2008, are seeking to deliver more information to investors about the portfolios being held by hedge funds as well as report net asset values more frequently, the synopsis noted. The synopsis summarized comments of 45 chief operating offices, chief technology officers, chief compliance officers and chief risk officers representing 20 large multi-strategy funds managing in excess of $140 billion in assets. The forums were held in November.
Fund administrators, for instance, may find themselves providing investors with independently confirmed net asset values, to be reconciled against the fund’s own “marks.” This is due, in part, to the lack of any assets underlying investments reported to be held in accounts by jailed Ponzi scheme operator Bernard L. Madoff.
Some participants in the New York forum, for instance, said they were selectively calculating “shadow Fund Administrator NAVs” in order to give investors more con¬fidence in their marking process and the reliability of their valuation models.
Participants in London also indicated verifying details of trades between executing brokers also was an area of concern for both regulators and funds.
Among the solutions: looking at historic trade blotters for missing trade data.
But one “major implication” is that funds “would have to revamp their data management infrastructures in order to store increasing amounts of data,’’ the synopsis said.
The “investment bar” that would have to be crossed could then put the squeeze on smaller funds. But, some executives in the forums said there “would alwaysbe capital looking for niche funds (e.g. “a $20mm fund launched in Australia focusing on wind energy investments.”); and as long as prime brokers were willing to facilitate the trading and support such niche funds, “the regulatory impact
would not deliver a mortal blow to them.”
