Demand Rises for Operational Experts

Date: Wednesday, July 15, 2009
Author: Frances Denmark, iimagazine.com/Alpha

In the post–Bernie Madoff era, it seems an investor can’t have too much help. At least that’s what the emergence of independent hedge fund operations experts, the newest group of consultants looking for a place at the table, seems to prove.

Due diligence specialists are in demand, and operational experts — people who oversee accounting reports, data feeds from prime brokers, trade confirmations and clearance — are betting that hedge funds are more likely than before to pony up for their services.

Even funds of funds, once billed as the hedge fund due diligence gurus, are being targeted as potential clients.

"It’s not just legal or accounting or background checking — it’s comprehensive," explains Jason Scharfman, who in January established Jersey City, New Jersey–based Corgentum Consulting, an operational risk consulting firm (Scharfman used to oversee operations for Graystone Research, a $6 billion alternative-investment allocation group at Morgan Stanley).

In March, Patricia Watters and Mason Snyder launched Catalina Consulting Partners in Newport Beach, California, stressing the importance of watching risks stemming from leverage, credit, litigation and counterparties and other service providers.

"The market meltdown followed by the Madoff scandal caused many investors to lose confidence in fund managers’ ability to manage business risks," says Watters, who recently left her seven-year post as chief operating officer and chief compliance officer at $9 billion fund of funds Pacific Alternative Asset Management Co., based in Irvine, California. "And their caution is growing, in light of the continuous uncovering of investment Ponzi schemes."

Catalina will offer fraud and risk concentration screening as well as a suite of services for investment advisers that includes operational risk assessments, controls and governance. Snyder, a former consultant in the regulatory and capital markets practice at Deloitte & Touche, says that the hedge fund industry is moving to a mutual-fund business model that will require more formal oversight.

"The scrutiny by people like us is about to increase dramatically," he explains.

Chicago-based Foxdale Management, a consulting firm that may have been a bit early to the party, is staging a comeback now. Foxdale was put on hold in 2005, when founder Samuel Weiser left to become head of hedge fund consulting at Citigroup’s prime brokerage unit.

"Following the events of fall 2008, we anticipated increasing demand for the services we developed in 2003 and decided to reoffer them," Weiser says.

"There are too many moving parts with dependencies built in," adds Weiser, a former president of the Managed Funds Association. "Investors ought to be demanding more of the people who have control of their funds."