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Operational Risk - New Pressures on Hedge Funds

Date: Wednesday, February 14, 2007
Author: Michael Giuliano, Jr. (New York), RiskCenter

Hedge funds, which have grown into managing an estimated $1.2 trillion in assets, are facing new challenges when it comes to investor relationship management (IRM). Due to larger and more varied investors, and the possibility of regulatory action, it has become necessary for managers to provide efficient access to hedge fund information. In an article from Deloitte and Touche LLP, it is reported that automated IRM solutions are being implemented by hedge fund managers in an effort to ease investor and regulatory pressure.

Mason Snyder, the director of Capital Markets for Deloitte and Touche LLP, says, "Sophisticated institutional investors that have begun to pour money into hedge funds are demanding greater financial transparency following a number of well-publicized investment manager frauds and failures. These clients are also seeking clarity on investment style and detailed performance at more granular levels."

Currently, the SEC does not possess rigorous regulatory power over hedge funds, but have increased their efforts to do so. Hedge funds, while under observation by the SEC, must maintain access to information regarding investor and fund interaction. Automated IRM solutions supply this, by providing the necessary information in an organized state. Hedge funds must also have a sufficient and prompt method for accessing equally important information when facing litigation from investors.

Once hedge funds attain 100 investors or $250 million in managed assets, they normally explore automated IRM solutions. It is occasionally explored earlier in an effort to reduce employee time spent on investor relationships, and to make themselves more appealing to institutional funds and additional investments. Once the decision is made to invest in automated IRM solutions, hedge funds have several options in how to implement the system.

Programs like Netage Solutions' InvestorDynamo and SS&C's FundRunner interact easily with already existing portfolios and accounting methods, providing the funds with a user-friendly and easily searchable database. Some funds create their own IRM solutions by merging their internally used common applications, such as e-mail, database tools, and contact programs.