Hedge funds adopting best practice procedures

Date: Thursday, May 21, 2009
Author: Hedgeweek.com

Alternative investment firms are adopting best practices in the face of looming regulation and demands from clientele for greater transparency, according to TKS Solutions.

In the past, hedge funds accounts payable typically operated more like a small business than an institution responsible for billions of investor dollars. It was not atypical for funds to leave themselves open to chicanery by having a single person handle bill paying using low-end software packages.

Funds are now beginning to institute an automated approval process that requires disbursement review and sign-off by several people. This reduces the risk of irregularities and provides investors with the assurance that the organization has implemented the proper safeguards to manage their capital.

"New regulations are not the only issue funds have to deal with," says Ron Kashden, president of TKS Solutions. "With the tight capital market many investors are demanding more flexibility in their fee structure and liquidity terms."

The firm says the days of complacent investors willing to lock in their capital for years at a time may be over. Funds that have always allowed for annual and even quarterly redemptions are finding that they have to offer monthly liquidity to attract new capital. While this makes sense from a business stand-point, it introduces accounting complexities that are wreaking havoc in the back office. Simple tasks, such as accruing management fees, can quickly become an arduous calculation when funds that charge quarterly allow redemptions on a monthly basis.

Adding to the complexity, fund administrators are reporting new fee structures with innovative loss-recovery provisions. Contractual terms that include factors on prior loss carry-forwards and multiple hurdles have joined guaranteed return provisions as commonplace in new fund offerings.

While this adds pressure for portfolio performance, it also provides the fund with a revenue source to live off of in bad times. Managing these intricacies necessitates accounting tools and practices that funds may not have required historically. Yesterday's spreadsheets are giving way to sophisticated software packages specifically tailored for the back-office needs.

TKS Solutions says from an operational perspective, the hedge fund industry is finally growing up. Their ad-hoc practices are being replaced with a regulatory best practices framework and the expert systems used by their institutional counterparts.