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This issue of the Association's newsletter includes:
Why Are Back Office Teams Working Harder Than Ever?
Annual Meeting Update-Mark Your Calendars for September 10-11, 2207
Monthly Luncheon Roundtable Reviews
August Member Social at the Beer Bar in NYC
Meet New Board Member Duncan Huyler
Introducing the Association Job Bank
Watch for the Online Member Forum
Calendar of Events
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Why Are Back Office Teams Working Harder Than Ever?
by Jim Haner
Back office teams -- already strained by explosive growth in assets under management and increased complexity of investment strategies -- are now facing demands for greater transparency from federal regulators and institutional investors that has fund managers scrambling to find back office talent in a depleted labor sector.
A well-documented shortage of accountants and auditors has struck industries across-the-board in recent years. Hedge funds have traditionally relied on out-sourcing to meet their administration requirements; but the complexity and quickened pace of their transactions has forced many managers to face a new reality: the need for beefed up in-house staffs.
What they are finding is a worldwide shortage of seasoned financial services professionals – at a time when they are facing mounting pressure to tighten financial controls, reporting and retention protocols.
“The supply of skilled professionals is not keeping pace with assets under management,” warns Todd Noah, a principal at Rothstein Kass Executive Search Group (RKES), the consultative placement arm of the well-known public accounting firm. “The actual pool of prospects…is not expanding anywhere near fast enough.”
Noah forecasts that the pattern will continue for at least the next 4-5 years: “Some funds are experiencing trouble because their front offices have gotten very good at making money, fast. But they’re not paying enough attention to their back office work loads, and that’s when we start seeing the accounting irregularities and filing slowdowns. You might say that some of them are becoming victims of their own success.”
Such financial service giants as JPMorgan and Citigroup are moving into fund administration -- building out their infrastructure to take on more back office and middle office functions by acquiring smaller, settled specialty firms and developing new proprietary IT systems to automate some back office tasks.
But investors are looking to the funds themselves for assurances of rigorous monitoring, reconciling and reliable pricing of hard-to-value securities. And their advisors may be leery of funds that over-rely on “outsourcing of outsourcing,” “offshoring” of critical internal functions, or off-site automation that’s not coupled to rigorous in-house quality controls.
“Where are hedge funds raising their money now?” Noah asks. “It’s the banks, endowments, foundations, municipalities, and the pension funds to some extent. You’re looking at a more risk-averse clientele. The kind of ‘true transparency’ that these institutional investors demand requires out-sourcing to an independent third-party, of course, but it also requires the fund to have a mirror staff internally for quality-assurance.”
“When a bank or an advisor representing an institutional investor comes in, they’re asking about the firm’s back office now. Of course, any investor is looking for performance as their first gauge, but very closely behind it is operational risk, which speaks to the need for these funds to have a strong back office component. They need that sense of security.”
Analysts also say that these public entities are looking for “headline insurance.”
Federal regulators have grown increasingly restive about the largely unrestricted hedge fund sector after a string of highly publicized failures.
When Long Term Capital Management imploded in 1998, after losing $4 billion in a matter of weeks, then-Fed Chairman Alan Greenspan sent many investors’ heads spinning with his remark that the failure “could have potentially impaired the economies of many nations” if not for a government orchestrated bail-out of the fund’s creditor banks.
Subsequent implosions impacted a range of investors -- from wealthy individuals to civil service pension fund shareholders – making the hedge fund sector a target of intensifying interest from congressional committees, federal regulators and state financial control commissions.
In fact, most employee pension funds (public and private) have “little or no investment” in hedge funds, according to SEC estimates. But almost two-thirds of endowments now do; and growth in the sector has been nearly geometric in recent years, with an estimated 2,000 new funds opening in 2005 alone. From a relatively quiet preserve of wealthy individual investors, hedge funds have gone from boutique products to increasingly attractive investment vehicles for public trusts. Assets under management by the funds have grown 3,000% in the past 16 years, the SEC asserts.
Hence, the labor crunch.
A recent survey by the American Institute of Certified Public Accountants found that college enrollments and graduations have ticked upward by 19% over the past four years. Most forecasters predict continued expansion of accounting careers – and eye-popping salary increases (up 30-35% nationwide on average in the just the past three years) – on the heels of Sarbanes-Oxley and a wave of financial mega-scandals that began with the blow-up of Enron.
The hiring trend is expected to be so brisk that business schools have begun adding Masters programs in accounting. In conjunction with the Big Four accounting firms, the University of Maryland Robert H. Smith School of Business is among the latest, announcing this summer that it will offer an MSA curriculum for the first time in 2007.
But these generally optimistic reports come against a backdrop of dismal enrollment numbers in the 1990s, as students who may have been interested in financial careers surged into IT specialties at the nation’s universities. Some leading business schools saw their accounting majors decline by as much as 50%. The number of candidates sitting for CPA exams dropped 15% by 1997 – and graduations barely kept pace with retirements, according to estimates at the time by the National Association of State Boards of Accountancy.
From a high of some 61,000 accounting graduates in 1994, universities began a slow crawl back to 54,000 a decade later, according to a Reuters report, as salaries for experienced auditors nearly doubled (now as high as $90,000 or more at a Big Four firm).
The result: a worldwide shortage of senior accountants at the millennium, and a steady rise in accounting irregularities, errors, and reporting slowdowns that many analysts now see as precursors to the scandals and shareholder lawsuits that followed.
George Yulis, a principal at Rothstein Kass Executive Search Group, sees important parallels to the current state of hedge fund back offices, where he says workloads are expanding faster than the labor pool will allow. Estimates of the industry’s assets under management now range from $1.3 to $2 trillion, with no end to the growth in sight.
Noah and Yulis started RKES in 2005 with one employee. They now oversee a 10-person team that focuses exclusively on consultative staffing services for alternative investment firms – from start-ups to multibillion funds -- testament to the skyrocketing rise in demand.
“It’s actually easier to identify a good CFO or COO right now,” he notes. “It’s when you reach outside that circle for the mid-level accountant or controller that you begin to realize how tight the labor market is.”
The current accounting and operations software packages can assist with some back office functions. But Yulis says it’s highly unusual to have the expertise within a current management team to maximize these systems. “It takes time and training to gain those proficiencies – and time is not exactly on their side at some firms.”
Beyond Sarbanes-Oxley and the recent regulatory moves of the SEC, Congress could soon move “very swiftly, and very deeply” to clamp down on hedge funds, one member of the House Finance Committee told the Los Angeles Times in July – straining already short-handed staffs (in-house and out) with bigger documentation and disclosure loads than they are presently equipped to handle.
With or without a dramatic shift in government regulatory policy, experts say, the business trend is toward more and finer-grained reporting, retention and disclosure. Meanwhile, back office work loads continue to grow exponentially – and often quite suddenly -- as the funds themselves achieve success.
“Traditionally, the impulse at hedge funds has been to keep these operational areas to a minimum,” explains Noah, a CPA and one-time fund auditor who became the firm’s Human Resource Principal after joining Rothstein Kass in 1997. “But with the changing nature of our client bases, and the greater demand for transparency, back offices are taking on greater and greater importance. It goes way beyond the normal reaction to regulatory pressure.
“If we want to look at the trend in positive terms, the strength and integrity of your back office operation becomes a branding tool -- a way to set your fund a cut above in the eyes of the big institutional investor who absolutely must have that sense of security.”
Jim Haner is an investigative reporter based in Washington, DC. A past winner of the Rutgers University Award For Distinguished Business & Financial Reporting, his work has appeared in the Miami Herald, Philadelphia Inquirer and Baltimore Sun. He is the author of the critically acclaimed 2006 book, Soccerhead, an in-depth look at how a youth sport became a multibillion-dollar industry.
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Annual Meeting Update-Mark Your Calendars for September 10-11, 2007
Important Update for Association Members
If you are unable to join us for the conference, be sure to stop
by the cocktail reception on September 9th.
The cocktail is open to all members and you just need to RSVP at
hmurrin@frallc.com by September 3rd.
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As the agenda for the Hedge Fund Business Operations Association’s annual meeting has been finalized and printed, your invitation should have arrived via email/mail. If you’re a new member and haven’t received your copy yet, you can view a copy of the program on the Association’s website.
This year’s meeting has taken a new approach designed to help you not
only gain fresh insight on some of the most challenging issues facing hedge fund operations professionals, but to also promote idea sharing and discussions among your peers! Plus, this year’s agenda offers longer sessions to allow for more interaction with the presenters and get in-depth information on topics that have yet to be addressed elsewhere in the industry. I extend a tremendous thank you to the Association’s Board for all of their time and input on the agenda as well as to all of the members that shared their educational needs with us.
The meeting begins with the pre-conference workshop: Operational Due Diligence- Expert Update and Roundtable Discussions. The first half of the workshop brings you an investor panel that will cover the latest issues arising during their reviews of fund operations. The second half offers you one-on-one face time with the panelists and the workshop will break into investor lead discussion groups. You won’t want to miss the opportunity to get first-hand investor insight on fine tuning your operational policies and procedures!
The main meeting is designed to encourage discussions among attendees with direction from industry experts on timely issues including:
- Navigating the fragmented landscape of hedge fund lending
- Counter-party document demands: Tactics for tracking the various deal terms and provisions
- Current valuation practices and preparing for FASB 157
- The impact of FASB Interpretation No. 48 on financial statements and NAV calculation
- Industry growth and what it means for risk and operations management
- Section 409A and its impact on offshore hedge fund deferral arrangements
- The regulatory landscape for hedge funds and the implications of the hedge fund world going public
- Laying the groundwork for your next/first SEC review
- CFO, COO, and/or CCO: Prioritizing the responsibilities of multiple executive roles
- Performing vendor due diligence for productive on-going relationships
Plus, be sure to plan on staying for the cocktail reception at the end of day one to network with your peers.
We hope you’ll be able to join us at what promises to be a resourceful meeting, As you register to save your spot, be sure to mention the member code sent to you via email for a 10% discount off the registration fee.
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Monthly Luncheon Roundtable Reviews
The monthly Luncheon Roundtables were announced in the last newsletter and you’ve probably seen emails announcing each month’s topic. If you haven’t had the opportunity to participate in these informal peer-lead meetings, here’s some insight on what you’ve been missing:
- Timely discussions with your peers on how to manage the daily operational issues of supporting a hedge fund
- The opportunity to develop a peer network that you can turn to as new business challenges surface
- A confidential, no-service provider format where no topic is 'off limits'
- An open format where new issues are aired for discussion and consideration for future luncheon meetings
The luncheons will take a break during August and September but be sure to watch your email for announcements on the October luncheon. Since each luncheon is limited to 12 members, signing up early is essential!
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August Member Social at the Beer Bar in NYC
While the luncheons are on break during August and September, members are still going to meet at 5:00 pm EST on Thursday, August 9th at the Beer Bar in Midtown Manhattan. The gathering is open to all members and will be a great networking opportunity.
There is no fee to attend the event and it will be a cash bar. Please RSVP with Hollie Murrin at hmurrin@frallc.com.
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Meet New Board Member Duncan Huyler
The Hedge Fund Business Operations Association welcomes Duncan Huyler of Thesis Capital Management, LLC to the Board of Directors.
Duncan has held the position of Chief Financial Officer at Thesis Capital Management, LLC since April 2005. He is responsible for all back office and support functions including portfolio & partnership accounting, compliance, marketing, human resources and technology.
Prior to joining Thesis, Duncan was Vice President, Operations and Technical
Services for Media Sciences International, Inc. (NASDAQ:MSII) from 1999 to 2005. Media Sciences is a manufacturer of supplies for digital workgroup color printers. While there he was a member of the ASTM F05 committee on business imaging products and authored ASTM F2406-04.
Duncan’s previous professional experience includes Cadapult Graphic Systems: Director, Technical Services from 1993 to 1999, Lord & Taylor: Director, Advertising Systems from 1988 to 1993, The May Department Stores Company: Senior Financial Analyst from1987 to 1988 and the United States Army from 1983 to 1987 where he attained the rank of Captain, Corps of Engineers.
Currently Duncan is a member of the HFA, the HFBOA, the Regulatory Compliance Association and is a Cornell alumni volunteer. Additionally, he was a founding member of the Children’s Cancer Research Fund of New York Medical College.
Duncan received an M.B.A. from the University of Louisville, and a B.S. from
Cornell University. He resides in Marlboro, New York with his wife and two sons.
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Introducing the Association Job Bank
A few months back, the Job Bank page was launched on the Association’s website. Any visitor to the site can view the page, but only members can add/delete posting to the site. Just log in using your email and password and you can add a posting with as little/much information as you chose. We hope you find this a valuable resource and welcome any feedback on the feature.
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Watch for the Online Member Forum
Once again, the Board of Directors has been hard at work finding new resources for members to connect and share ideas. In response to a recommendation for a member forum on the Association’s website, we are currently working on adding this feature. The forum will be open to all members and will give you a platform to post questions or share suggestions with your peers. I’ll send an email as soon as the new feature is available.
Also, please share your ideas for other resources that you would like to see the Association offer. You can share your requests and ideas with Hollie Murrin at hmurrin@frallc.com or 630-790-4215.
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Calendar of Events
Webinars
Build, Buy or Outsource- Selecting and Implementing the Optimal Technology Solution for Your Hedge Fund - August 9th, 2007 10:30 a.m. EST
Unique Accounting, Tax and Operational Challenges for Fund of Funds - August 16th, 2007 10:30 a.m. EST
Primer on Modeling and Pricing CDOs - August 22nd, 2007 10:30 a.m. EST
Conferences
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