Amber Certifies 28 Funds, Sees 50 By Year-end

Date: Wednesday, September 13, 2006
Author: Bill McIntosh, Financial Correspondent,

LONDON (—Amber Partners, an independent advisory firm, has completed certification of 28 hedge funds and expects to raise that number to 50 by the end of 2006.

Amber started offering its services in late 2005 Previous HedgeWorld Story. It is the first firm to offer operational risk certification and is headed by Reiko Nahum, who founded the firm after being president of UBP Asset Management and a member of senior management at Union Bancaire Privee, a major hedge fund investor.

In an interview, Ms. Nahum was careful to emphasize that the firm issues reports on specific funds, not the managers or the operating firms. "There are times I have passed some funds and failed others on the same platform," Ms. Nahum said. "Different fund strategies have different levels of operational complexity. Corresponding controls and procedures are necessary to mitigate these risks."

Amber has nine employees and all professional staff are qualified accountants. To begin the process, Amber reviews a fund's corporate documents and marketing materials, then meets with the manager and reviews five areas: organisation, fund structure, back office processes, valuation procedures and independent oversight by administrators, auditors and other service providers.

The due diligence also looks at how offshore administrators independently value securities for the purpose of each NAV calculation. Ms. Nahum said reports are around 15 to 20 pages and typically involve some 100 to 200 hours of work to prepare.

"When we started, some of the established rating companies were already in the hedge fund space," Ms. Nahum said. "But nobody did pure operational risk analysis. Our aim is to provide transparency on the operational risk investors are taking on and to provide investors with a report which they can use as an important research tool."

"Many firms using the service have submitted their flagship funds which are closed," she added. "These funds have hired us to do a thorough operational review of the management firm and fund once a year as it's a healthy check for their business."

Ms. Nahum said Amber is referred to funds by around 50 firms ranging from family offices and pension funds to funds of funds and institutions who are collectively responsible for allocating billions of dollars to hedge funds. "They are a group of investors, referred to as Amber's User Network, that can collectively put pressure on hedge fund firms to consider our services and who will use our reports as an important operational risk research tool," she said. "Managers therefore know that they will save time and money as our reports are recognized by reputable investors in the industry."

She said 600 people from pension funds, endowments, funds of funds, family offices, consultants and banks are accessing the manager-provided reports. "As the universe of certified funds grows, investors will have better transparency and be better informed of the risk reward profile of funds."

The typical report features an executive summary highlighting strengths and weaknesses uncovered through the due diligence process in each of the five areas. The full report then expands further on each category.

When a fund is certified, the fund and its manager take on an ongoing legal obligation. They are required to notify Amber for one year from the date of the due diligence report on a variety of matters, including: revisions to a fund's prospectus; a change in key service providers; turnover in key back office personnel; changes in ownership of the management company and notification of results of any regulatory inspection.

"I have been of the belief that if you are going to do this work, then you have to be thorough," Ms. Nahum said. "Your mindset when you conduct investment due diligence is more about performance and alpha generation. When you do operational due diligence, your mindset is focused on one thing—what can go wrong. Therefore, completeness and accuracy of information is paramount."

Amber has financial backing from Bear Stearns, BNP Paribas, Alexander Fund Management (a subsidiary of Singapore's Temasek Holdings), and third party marketer Anchor Asset Management as well as some principals of Vega Asset Management.