In the ever-expanding area of operational due diligence, a major focus is given to the operational integrity and risk controls of a hedge fund’s service providers. Of specific concern are those firms with direct access and control of a fund’s assets: administrators and custodians. Some level of risk-management comfort is given by a certification of the service provider’s processes by an SAS 70 audit by an independent audit firm. Coming in June 2011, the current SAS 70 examination guidelines will be superseded by Statement on Standards for Attestation Engagements 16, or simply SSAE 16.

Currently, successful completion of a SAS 70 audit represents that a service organization has been through an in-depth audit of their control objectives and control activities, which often include controls over information technology and related processes. In my fund-of-funds firm, we seek this certification from not only our fund’s service providers but also of those for the underlying funds that we invest in. One technical hitch that can arise in getting access to the SAS 70 reports for the external hedge funds’ service providers arises from the fact that the reports are not meant to be distributed beyond the service provider’s direct clients and their auditors. Not a huge hurdle if you can rely upon a representation of the SAS 70 audit, but there’s an increasing the need to see and verify, which may be solved by a disclosure option under the new SSAE 16.

SSAE 16 highly similar to its SAS 70 predecessor again seeks to have the service organization demonstrate the establishment of control objectives and effectively designed control activities. (As part of the migration from GAAP to IFRS, it has complies with the new international service organization reporting standard – ISAE 3402, for the accounting technicians). SSAE 16 will have three reporting levels, identified as SOCs (Service Organization Controls), two of which can enable external distribution of results. Between the migration to international standards and ability for greater dissemination of reports, one can forecast an increase in demand for these audits.

As the demand for attestation as to service provider controls increases, a greater burden increases on the smaller service providers to have audits of their processes and controls. Many operational due diligence personnel are somewhat wary of firms of small scale, as perceived enterprise risk for these firms are higher. For these small firms, an SSAE 16 examination may be a business imperative.

Matthew Jenal, Senior Advisor, CADOGAN MANAGEMENT, LLC

Executive Board Member, HFBOA

What have reactions been to the latest regulatory initiatives, and what are the expectations moving forward?  The HFBOA sat down with three panelists: A legal expert, a CCO from a non-registered investment adviser & hedge fund, and a CCO from a registered investment adviser & hedge fund.  Each brings to the table a unique perspective on the hottest issues, including: Registration with the SEC and with individual states; financial reporting requirements; the expected impacts on smaller funds and private equity firms; and things we should all be working on to ensure we're prepared.

Download the latest HFBOA Newsletter now!

Adam Alesandro, Chief Technology Officer from fund administrator AFA (Advanced Fund Services) shared his thoughts on technology as a differentiator in the fund admin space. AFA was founded in 2007 by Peter Young formerly of Citi Hedge Fund Services and BISYS and uses SunGard’s VPM product suite in their firm.

Adam stressed the flexibility of the platform when choosing a portfolio and partnership accounting package and noted the three levels of software packages as well as the pros and cons of each: excel based, proprietary and enterprise level systems. Two of the main differentiators are whether the software uses "structured data" as well as whether the system is scalable. He noted that while excel is flexible and generally easy to use it is typically not sufficient in today’s demanding hedge fund back office environment.

Adam also highlighted the importance of "straight through processing"- limiting the amount of manual intervention and the potential errors and additional manpower that goes along with those entries that need to be done outside of a fully automated workflow.

The group discussed the potential of the administrator and their technology’s ability to enhance and facilitate the internal processes and policies of the hedge fund CFO. AFA frequently provides customized reporting to the funds as often as daily to help the fund back office in their responsibilities to their clients. For those funds that chose to not shadow their administrator’s work on a daily and monthly basis AFA can provide reports and extracts to compare to the prime broker’s data in helping the back office get a comfort level that their controls are sufficient.

For smaller funds or funds with limited internal systems the fund administrator should be able to provide services to facilitate working with third party risk management and reporting firms.

Additionally, the ability of the fund administrator and their systems to provide daily NAV’s has become an increasingly important function of hedge funds with limited internal resources.

The luncheon concluded with a networking session where many hedge fund executives got to share ideas between themselves as well as key service providers.

-Duncan Huyler, CFO, 360 GLOBAL CAPITAL and Executive Board Member, the HFBOA

Linedata Exchange invites HFBOA members to join them this October 19th in New York City for a networking and educational event with some of today's market leaders.  Registration opens at 7am and the networking cocktails end at 7:30 pm

Register online today!

Exciting sessions focus on relevant and current issues in our industry today:

• Compliance
• Trading
• Outsourcing
• Upcoming regulations
• New investment strategies

and more!