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Constellation Investment Consulting Announces Hedge Fund Managers Welcome Invasive Due Diligence


Date: Thursday, March 19, 2009
Author: Businesswire.com

In a web-based survey conducted by Constellation Investment Consulting Corp., a leader in risk management for the hedge fund industry, the company today announced that in light of recent scandals, managers now expect due diligence to be highly invasive, a practice not generally accepted by hedge funds in pre-Madoff times. Of the well over 300 participants consisting of money managers, investors and service providers, 80 percent of the managers and 75 percent of the service providers said they expect due diligence teams to conduct valuation analysis, test trades, examine trade tickets, and perform various additional risk management procedures, a previously unacceptable practice.

“In an industry that lacks transparency, this is a huge step forward,” said Boris Onefater, president and CEO of Constellation. “Regulation and investor sentiment is changing the way this industry is operating forever,” he added.

The study also showed that investors are shaken, but not deterred from continuing to include hedge funds in their portfolios. Only 13 percent of the investors said that they will no longer trust alternative asset managers, and will be managing their own portfolios from now on or will rely on traditional asset managers. “This was a surprise. We expected an immediate shift towards use of asset managers that already have greater transparency,” said Berl Kaufman, managing director and COO of Constellation. “It is obvious that investors will conduct more due diligence and expect third-parties like administrators, auditors and consultants to become a part of the process even more.”

One hundred percent of investors surveyed and 96 percent of service providers believe that lack of third-party verification of Madoff’s investments, such as custodying assets with an external custodian rather than a captive broker / dealer was a key enabler of the alleged fraud. Additionally, 70 percent of the investors agreed that use of a top-tier auditor would have prevented the Madoff scenario.

Two of five managers thought that hedge fund managers should register with the SEC and 56 percent of service providers endorsed registration. In spite of this, 88 percent of the service providers and 93 percent of the managers felt that SEC was negligent in the scrutiny of Madoff. Over half of all managers thought the SEC was chronically understaffed and will continue to fail to provide appropriate oversight of the investment managers until this issue has been resolved. In addition to increased hedge fund regulation, nearly half of all service providers and managers agreed that the US government should regulate service providers, such as administrators and those professionals who advise the industry.

Survey results also indicated that administrators will be viewed as day-to-day watch dogs for the industry. To ensure additional oversight, 83 percent of the investors now insist that funds utilize independent administrators to perform accounting and bookkeeping functions. However, only 33 percent of the managers are planning to outsource their back office functions.

“We have seen a significant increase in business over the last several months,” said Fred Jacobs, managing director of SS&C Technologies, a large fund administrator based in Connecticut. “Managers and investors are looking to us to be their eyes and ears, while maintaining our independence and the integrity of the process,” added Joe Holman, CEO of Columbus Avenue Consulting, a New York based fund administrator catering exclusively to the hedge fund industry.

For an in depth discussion of the survey and its impact on the industry please log onto Advent.com events to register for the March 25th Web Seminar.

About Constellation Investment Consulting Corp.

Constellation, a leader in risk management for the hedge fund industry, is a group of highly specialized and skilled investment management and financial services professionals. The company serves the ever-changing needs of the increasingly complex asset management environment for hedge funds and traditional managers. Its goal is to help clients manage, control, expand and grow their businesses by more effectively utilizing people, processes and technology, while maximizing efficiency, reducing costs and managing their risks. In addition, Constellation works with fund managers, boards, investors and other stakeholders to assist with dispute resolution, fund liquidations and other issues facing the managers and funds in this difficult environment.

If you would like to receive a copy of the full survey, or would like to contact Constellation Investment Consulting, please contact Boris Onefater 732-995-1777 or visit www.constellationinvest.com.