By: Ron Tannenbaum
Today’s savvy institutional investors demand more from the hedge funds in their portfolios. They expect hedge funds to consistently deliver sustainable performance, effectively manage cyber threats, hire the best service providers, and be flexible with their fee structures. Are you doing the right things to keep your investors happy?
Hedge funds must have a solid corporate governance structure, as weak corporate governance can expose investors to unexpected or unacceptable risk. Hedge fund boards must be independent and prioritize investors’ interests; the strongest boards regularly engage with service providers and scrutinize managers, their processes, and their decisions. To avoid conflicts of interest and malpractice, boards must be familiar with process controls such as third party cash controls, and expense allocations.
New threats are emerging, and hedge funds must be proactive not reactive in response to these challenges. Industry groups and regulators are increasingly focused on cybersecurity measures, and the topic is also prioritized in most due diligence questionnaires. Hedge fund processes and technical controls must effectively reduce the probability and impact of cyber threats. Since cyber threats are often triggered from within organizations by manipulating unsuspecting users, regularly-tested policies and procedures, staff monitoring, and user awareness training must be in place to reduce human risks . Managers must also review external providers who have access to sensitive data, to ensure they have solid cybersecurity measures in place.
Investors want to know that their hedge funds use the industry’s best service providers and many insist on initial and on-going due diligence reviews. Since operational due diligence teams at institutional allocators wield considerable say in the investment decision-making processes, choosing a sub-par service provider can seriously impact the ability to raise money. It’s crucial to have a forward-thinking fund administrator that provides excellent data transparency and exception-based reporting.
Today’s zero interest-rate market has adversely impacted returns, making fees a contentious issue. As more lower-cost alternatives become available to investors, the traditional 2% management fee/20% performance fee structure is under pressure. Some clients demand fee discounts if the underlying portfolio is illiquid or requires longer capital lock-up periods, and investors are setting tough hurdles for managers. Moving forward, early redemption fees may be subject to negotiation or removed for certain clients.
Chief operating officers at hedge funds must ensure their systems and processes for governance, cybersecurity, service provider selection, fees, and reporting are strong and effective, as most investors will not tolerate operational shortcomings and failures within a 2 percent fixed fee structure. SS&C is one of the leading fund administrators for both onshore and offshore hedge funds. We leverage proprietary technology and expertise to deliver outsourcing services to meet your business objectives.