The hedge fund universe is entering a new post credit-crisis era of increased institutional flows resulting in demand for greater Investor transparency and increased regulation & oversight. In this new environment, organizational maturity - a hedge fund's ability to match its operational and infrastructure needs with its size and scope - is becoming a key differentiating factor. The maturity of a fund's organizational structure, the robustness of its operational controls, and the resilience of its technology infrastructure are becoming determining factors in the allocation of capital.

In the second Prime Finance publication of 2010 this key topic has been explored through over 75 in-depth interviews with COO's, CFO's, and heads of strategy, from a broad cross section of hedge funds from start-ups and spin-outs, to emerging funds and institutional size firms, up to the franchise heavyweights of the industry. These interviews provide the foundation of views put forward in this article.

Findings of these interviews have been translated into a Hedge Fund Maturity Model that details the organizational, operational and technology characteristics of hedge funds across four stages of maturity linked broadly to the size of their AUM. This maturity model provides a framework for the industry to discuss organizational "best-practice" and forms the foundation for the Citi Prime Finance Business Advisory team to partner with our clients and help them shape their evolution and growth.

To view the full report please go to:

https://primebroker.citigroup.com/public/PlanningforChange_Dec2010.html

*this was reposted with permission from Citi*

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

In a market where investors are requiring greater transparency and reporting capabilities, the decisions surrounding your portfolio management and accounting system are more crucial than ever.  In this newsletter the HFBOA asked two hedge fund executives to weigh in on how to make these decisions and important factors to consider...

Check out the complete newsletter here!

The April luncheon was held April 22^nd in New York.  Thank you to Linedata Services for hosting this event.

The topics discussed were: Institutional Hedge Fund Due Diligence, Properly Managing Operational Risk –Technology’s Increased Role in Fund Management and What to Expect from Regulators in 2010.

 Institutional Due Diligence-The New Checklist.

 The panel started out by agreeing that investors are spending significantly more time on due diligence and that the investment process has lengthened averaging about six months in duration. Small hedge funds are being held to standards that previously only applied to larger hedge funds and investors are demanding proof that managers actually are doing what they promised to do.

 The panel suggested that managers put a risk assessment process in place to review (no less than annually) their firms in an effort to spot conflicts and issues with respect to their operations. Managers need to be able to recognize issues, address them and document how they resolve the particular matter. If necessary, it was suggested that Committees be formed and/or outside persons be brought in to assist with the review.

 Additional best practices suggestions were strengthening internal management, having real time risk management, automation of processes front to back and multiple prime brokers and custodians to reduce the risk to assets.

 Investors performing due diligence are looking for any inconsistency between what is in the fund’s marketing and organizational documents and what they hear or see is actually occurring. As part of the due diligence process, it is not uncommon for investors to ask to meet with traders, back office and compliance personnel as well as tracing transactions from front to back.

 New Operational Requirements

 Investors want to know who has access to information at a firm? They want to know what are the security protocols for data transmissions? What are the disaster recovery procedures? How quickly can you recover? What are the controls on cash and cash movements? How are trades aggregated and allocated when there are multiple funds or a managed account running alongside a commingled fund? What is the manager’s valuation policy? They want to test it.

 While an outside administrator is a necessity-How does the manager check the work of the administrator? Does the manager reconcile to the administrator? How often does the manager meet with their service providers? How often does the manager review the service provider’s level of service?

 The greater the degree of automation the better. Stand-alone excel schedules are frowned upon. Investors want to see systems in place and controls against human error.

 Remember, there are always other places to invest-investors want to be with managers that are continually upgrading their systems and controls and providing transparency on their operations.

 What Can We Expect From Regulators?

Most commentators are expecting that Advisors will have to register at some level of AUM whether that is 30 million, 100 million or 150 million. While it is expected that there would be some period to ramp up, the panel recommended not waiting until the last minute to register, as there may be delays in the registration process.

For advisors that have been in business for some time, that will most likely require a scrubbing and updating of their organizational documents. While most advisors whether registered or not, have best practices in place, the biggest change is probably undergoing the required audit by the SEC.

 SEC audits have become more intense and time consuming. Current areas of interest to the SEC are controls on cash, operational controls, insider trading, best execution, how analysts get their investment ideas, fund expenses, soft dollar arrangements and disclosure thereon.

 SEC examination teams may have enforcement division staff mixed in in an effort to obtain greater insight on the hedge fund business. This carries a greater risk to managers that may not be aware of the mixed make up of some teams.

 Advisors need to have procedures in place to maintain all of the information required by the SEC and be able to produce it in a short period of time if requested by an examiner.

 - George Roeck, Executive Board Member, HFBOA　

Technology Requirements: “Do we really need this?”
Defining the items you must have, should have, and don’t need at all

The Topic:
A common struggle for hedge fund operations managers lies in determining how, and how much, to
spend budget on IT. It can be difficult to understand how much a fund relies on technology, how that
technology will be managed by in‐house IT staff, and how to scale up or downsize technology when
necessary. Are your stakeholders asking you tough questions about the IT budget? The current
economic environment makes things even more difficult. How has it affected your fund’s technology
spend?

At this roundtable event, Vinod Paul, Managing Director at Eze Castle Integration, will guide participants
through the process of evaluating a hedge fund’s IT and determining the value of all the systems and
software that make a fund run, including:

• Infrastructure requirements
• Trading applications/ connectivity
• BCP/DR, including data protection
• Cloud computing/ managed services
• Regulations/ required systems, including email/IM archiving
• Voice communications

Participants will leave the event with the ability to answer tough questions like:
What is currently/ what will be required by law?
What are the industry best practices?
Where should we spend more?
What can we eliminate from the budget?

Moderated by:
Vinod Paul, Managing Director
Matthew Bretan, Senior Business Consultant

The Recap of the Luncheon:
Some of the more salient points from the presentation are as follows (a copy of the slide show is
available for download from the HFBOA website):
Overview of Eze Castle (Eze):

Eze gained 103 clients in 2009, of which approximately half were new accounts from existing
relationships, and the balance was new relationships. Approximately 25 client relationships were
terminated due to the underlying funds winding‐down, but net client growth represented approximately
20 clients. Eze has serviced approximately 2,500 start‐up clients globally since inception.
Headquartered in Boston, MA, there are 7 US offices, as well as London, Singapore (Feb. 2010) and
expectations of a Hong Kong office by the end of 2010. There are 20 employees working for Eze. Eze is
a privately held company, with over 550 Hedge Funds who rely on their services. 90% of their clientele
is from Hedge Funds, the remainder is from broker dealers, private equity/VC firms, and Fund of Funds.
The majority of their clients are Hedge Funds with between $150mm to $750mm.
Of particular interest was the statistic that 90% of their clients do not have internal technologists as part
of their staff.

Infrastructure Needs:
Eze described the need for IT as both an infrastructure risk mitigation tool as well as an opportunity to
enhance operational efficiency. The technology foundation of a firm needs to be designed to address a
firm’s current and future needs, as well as be consistent with the firms and markets economic
capabilities and climate.

The trading aspect of a firm can utilize technology to better access market data (real time market data
and analytics,) providing direct links for order executions and management, facilitating more robust and
active trading strategies, and provide pipelines to various networks, such as broker dealers, clients, etc.
An example would be tying in the front office activity with the back office via order management, trade
capture, portfolio accounting, risk, security master, and other systems. The security, redundancy, and
seamlessness of the systems working in concert and individually need to be addressed.
The IT infrastructure also needs to consider compliance issues and the applicable regulatory regime.
Both best practices and most regulatory requirements demand both Disaster Recovery and a Business
Continuity programs. Sometimes considered under the same umbrella, Disaster Recovery focuses on
accessing technology from locations other than the primary location, and Business Continuity focuses on
the distinct processes involved with the firm which starts with the various policies and procedures, as
well as the technology component associated with each. Institutional investors have been increasing
their focus on both these areas.

Additional compliance concerns, such as retention of (and access to) e‐mails, instant messaging, and
other forms of electronic communications and access to social networks can be addressed (and only
addressed) by the technology infrastructure, while remaining compliant with firm and regulatory
requirements.

Investor Relations is also a key component of the IT infrastructure. Properly capturing relationships,
facilitating periodic reporting to investors, and allowing for such data to be easily accessed and queried
are points to consider, as well as compatibility with other systems throughout the firm.
Trends include Cloud Computing and Hedge Fund Hotels

Cloud Computing is essentially a means to have applications and hardware utilized on a service or
consumption based term of usage through the internet via a provider, as opposed to needing all of the
the upfront investment, hardware, and expertise in‐house to manage the IT infrastructure. The speed at
which applications could be run can be greatly enhanced via the Cloud, as most functionality takes place
via the providers systems, not the local PC.

Hedge Fund Hotels are a more common IT solution for newer firms, whereby office space and
technology are hosted by the sponsor, with varying degrees of on‐site support and shared resources and
facilities.
Both Cloud Computing and Hedge Fund Hote

ls are possible solutions for smaller or less seasoned firms
to tap into robust IT infrastructure, without the sunk costs or in‐house expertise needed to fully support
the IT process.

Connectivity via microwave (roof top dishes) is another alternative to the more traditional T1 lines using
fiber optic cable. This technology (which was a significant part of the question and answer session)
mitigates the possible issues with cable such as telecom closet mishaps (installer or other tenants
cutting cables in risers), work on the ground beneath the street that could interrupt the cable network,
etc. Mitigating such risks could save time and money by negating the need to execute Disaster Recovery
or Business Continuity Plans. Speed and cost were deemed to be comparable to cable, with the major
limitations being Line of Sight requirements, and certain high intensity light interference issues.
When asked, Eze mentioned that their services have been paid by both managers and funds, although
this decision is made by their clients, which they do not offer guidance on.

In summary, there are common functions within each firm that are addressed and enhanced by the IT
infrastructure. These functions need to be designed and evaluated not only based upon needs for
today, but also with growth/contraction concerns and changes to the economy and regulatory
environment. Utilizing an out‐sourced vendor can assist asset managers with the proper design,
implementation, and maintenance of such systems and can help ensure business viability and
competitiveness from an IT and Due Diligence perspective.

By Dan Federmann