Risk: How To Get In Front Of The Problem

Feb 26 2015 | 10:53am ET

By Robert M. Barsky
Principal, IT Practice, C&A Consulting

In considering the topic of risk in the hedge fund world, specifically, the oversight and protection of your firm’s intellectual property, it’s helpful to begin by looking at the confluence of drivers relating to risk. 

The first driver is the regulatory environment. Firms must fulfill registration requirements and be prepared for SEC audits and extensive, ever increasing tax reporting and disclosure requirements including Form PF, AIFMD, and others. 

The second driver is investor diligence, which is increasingly comprehensive and carried out by consultants interested in details well beyond a particular investing strategy.  Diligence involves how data is collected, organized, and reported; who manages that data and how it is protected.  In other words, it is understanding the firm’s underlying operating model.

Diligence efforts demand third party administration of books and records, a robust business continuity strategy, and a degree of transparency in disclosure that is not typically built into the hedge fund culture.

A third driver is one you read about all the time these days: breaches of data security and confidentiality. These serious problems could impact your firm and your investors publicly or without you’re ever realizing the consequences. 

The fourth driver is legacy: The “legacy” of how the hedge fund’s internal structure evolved and the increasing cost of resistance to change:

• The legacy caused by the expansion of asset classes
• The legacy of custom developed applications (which operate in silo’s, inefficient and endlessly reconciled, relying on a technology now obsolete, where fixes cause more breakage, with single points of failure.  In other words, expensive and risky.)
• The legacy of multiple accounting systems and retrieval of historical data
• And the legacy of a reactive decision-making culture.

Implementing solutions case by case carries a very high cost. The first step to addressing all of these issues is a carefully considered operating model strategy.

Developing an operating model strategy is an essential step, crucial toward identifying and managing the priorities and risks in your business environment.

The first requirement is a straightforward assessment of the current environment.  Start with points of frustration and complaint, with any documented audit issues, and requests from your investor relations staff and the portfolio managers. Consider any recent system outages, your level of documentation, operations errors, compliance concerns, costs of consultants and any unplanned expenses.

There are established guidelines and standards to help in the evaluation as well as the going-forward design. These include SSAE/16 which is a set of audit standards and requirements for organizational processes and handling of data. They also include ISO (International Organization for Standards) which provides standards for the quality of IT practices including information security, quality management, information technology services and financial services communication. 

The second step is to envision a desired future state, a target operating model. Start by understanding your firm’s business drivers. These should closely reflect the strategy and plans of the firm’s leadership. The drivers include projected business direction, needs and expectations of the front office, the full range of regulatory and compliance requirements, and the capability and desire of your firm to make technology investments. 

The target operating model should reflect a contemporary design structure, a centralized structure which maximizes efficiency (for example, by providing for fewer instances of data duplication) and maximizes control by consolidating and managing access to the firm’s intellectual property.

Once the current state assessment has been completed and a target operating model developed, a roadmap can be designed to move the organization forward according to plan. The roadmap includes specific deliverables and milestones with metrics to measure progress.

Robert M. Barsky is a principal in the Information Technology Practice at C&A Consulting LLC. C&A’s IT practice provides strategic guidance including technology, data security, operations assessments, future state roadmaps, and digital media planning, along with tactical assistance including business continuity planning, vendor evaluations, PMO, and data management and governance.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...