Articles By Topic
By Topic: Risk Management
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From Vol. 6 No.19 (May 9, 2013)
ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority
On April 16, 2013, ACA Compliance Group hosted a webinar in which it discussed findings from its recent survey of hedge and private equity fund managers regarding annual compliance reviews, forensic testing, risk management, custody, safeguarding of client assets, fee calculations and resources dedicated to compliance. This article summarizes the survey findings and the practical takeaways from those findings as communicated by ACA in the course of the webinar.
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From Vol. 6 No.18 (May 2, 2013)
Risk Management Survey Reveals Buy-Side Professionals’ Perspectives on Risk Management Approaches, Challenges and Concerns
A recently released report detailed findings from a survey of 375 buy-side professionals who were polled on their attitudes concerning risk management. This article discusses salient points from that report. For the SEC’s take on the issues addressed in the report, see “SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program National Seminar,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012). For a discussion of operational risk management best practices, see “Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).
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From Vol. 6 No.14 (Apr. 4, 2013)
Former Deputy U.S. Attorney and WilmerHale Partner Boyd M. Johnson III Addresses Risk Management Imperatives for Hedge Fund Managers: Insider Trading, Defense Strategy, Crisis Management, Money Laundering, Cyber Security and Tax Shelters
Risk plays a different role in investments and operations. In investments, as a general matter, returns are broadly correlated with risk. In operations, on the other hand, quality tends to be inversely related with risk; there is no greater upside potential from increased operational risk, just a greater likelihood of fundamental error. At the same time, operational risk is generally more dangerous to hedge fund managers than investment risk. Investors understand that generating returns inevitably involves mistakes, but operational failures call into question a manager’s basic competence as a steward of capital. Managing and mitigating operational risk are thus increasingly critical aspects of the hedge fund business. But doing so is easier said than done. In the first instance, it is challenging to identify the full range of operational risks facing a manager. There is a group of usual suspects, but the less obvious and more insidious risks are unique to a manager’s strategy and operations. Once risks are identified, best practices for addressing risks are hard to come by. In an effort to assist hedge fund managers on both counts – identifying relevant risks and deciding what to do about them – The Hedge Fund Law Report recently interviewed Boyd M. Johnson III, a partner in the Litigation/Controversy Department and member of the Investigations and Criminal Litigation Practice Group and the Business Trial Group at WilmerHale. Prior to joining WilmerHale, Johnson served as Deputy U.S. Attorney in the Southern District of New York with supervisory authority over 230 Assistant U.S. Attorneys. As Deputy U.S. Attorney, Johnson managed the largest crackdown on Wall Street insider trading in history, including the prosecution of Raj Rajaratnam of the Galleon Group; criminal prosecutions and civil forfeiture proceedings related to the Bernard Madoff fraud; the investigation and prosecution of individuals and entities responsible for structuring and promoting international tax shelters; and numerous cyber security and other investigations. For our interviews with other leading prosecutors in the Rajaratnam insider trading case, see “Former Rajaratnam Prosecutor Reed Brodsky Discusses the Application of Insider Trading Doctrine to Hedge Fund Research and Trading Practices,” The Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013); and “Rajaratnam Prosecutor and Dechert Partner Jonathan Streeter Discusses How the Government Builds and Prosecutes an Insider Trading Case against a Hedge Fund Manager,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012). The bulk of our interview with Johnson covered various aspects of insider trading – not surprising, given that insider trading remains primus inter pares among the various risks faced by managers in many strategies. Specifically, with respect to insider trading, we discussed with Johnson: challenges in defending simultaneous civil and criminal insider trading actions; challenges in coordinating defenses to insider trading charges levied by multiple jurisdictions; considerations in evaluating an insider trading plea deal; strategies for obtaining prosecutorial leniency in insider trading cases; addressing insider trading risks from communications among investment professionals at different managers; maximizing the effectiveness of insider trading training; insider trading crisis management; and strategies for documenting findings from insider trading internal investigations. Beyond insider trading, we also covered: anti-money laundering and cyber security risks confronting managers; identifying risky tax shelter pitches; and navigating fraud risks in healthcare investing. This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013. That Symposium is scheduled to include a panel covering government investigation and prosecution of hedge fund and private equity fund managers entitled “Post SAC Capital – Investigation, Enforcement & Prosecution of Hedge & PE Managers.” For a fuller description of the Symposium, click here. To register for the Symposium, click here. Subscribers to The Hedge Fund Law Report are eligible for a registration discount.
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From Vol. 6 No.7 (Feb. 14, 2013)
How Should Hedge Fund Managers Approach Formulating Risk Assessment Plans and What Regulatory Risks Should Be On Their Radar?
On January 30, 2013, consulting firm The Regulatory Fundamentals Group (RFG) and risk management software developer MyComplianceOffice hosted a webinar entitled “Enterprise-Wide Hedge Fund Risk Assessment,” designed to help hedge fund managers understand risk assessments. More specifically, the webinar described the “framework for conducting an enterprise-wide risk assessment” and highlighted a broad range of legal and regulatory risks to be considered. Importantly, the speakers pointed out that “regulators other than the SEC and CFTC drive much of the regulation impacting hedge fund managers.” See, e.g., “Hedge Fund Managers May Be Required to File TIC Form SHC by March 2, 2012,” The Hedge Fund Law Report, Vol. 5, No. 6 (Feb. 9, 2012). This article summarizes key points from the webinar.
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From Vol. 6 No.5 (Feb. 1, 2013)
Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Three of Three)
The failure by a hedge fund manager to appropriately plan for, detect and address operational risks can lead to economic and other costs (e.g., the loss of valuable business or investor information and data) and reputational harm. Yet the challenges associated with a quickly evolving hedge fund industry, the proliferation of operational risks and resource and personnel constraints make it difficult for hedge fund managers to identify and effectively address operational risks. A recent guide published by SEI, entitled “Top 10 Operational Risks: A Survival Guide for Investment Management Firms” (Guide), speaks directly to the lacuna in best practices in this area. The Guide identifies some of the recurring operational risks in the hedge fund industry and offers practicable ideas for handling such risks. This is the third and final installment in a three part HFLR series summarizing the key takeaways from the Guide. The first installment discussed a hedge fund manager’s attitude and approach towards operational risk; the need for effective oversight of firm functions; and the imperative of appropriate training and staffing to minimize operational risks. See “Top Ten Operational Risks Facing Hedge fund managers and What to Do about Them (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012). The second installment addressed information hand-offs; pitfalls in automating processes; and workflow documentation. See “Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012). This installment discusses segregation of duties; reconciliation gaps; care in entering into agreements; and planning within the rapidly evolving regulatory and competitive landscape of the hedge fund industry.
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From Vol. 5 No.48 (Dec. 20, 2012)
State Street Report Describes an Evolution in the “Endowment Model” of Hedge Fund Investing
State Street recently released a report gathering investors’ thoughts concerning their approach to investing in alternatives, and their opinions on different investment models, including the endowment model. Based on analysis of the data collected, State Street found that asset owners are changing their approach to investing in light of lessons learned from the global financial crisis. Investors indicated that they are using the endowment model differently than they had before the financial crisis. Investors are also adopting new asset allocation tools and increasingly focusing on risk management in managing their portfolios. The report also included a list of best practices suggested by State Street that could be useful for successful hedge fund investing. This article summarizes the key takeaways from the report.
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From Vol. 5 No.42 (Nov. 9, 2012)
Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Two of Three)
This is the second installment in a three part series summarizing the key takeaways from SEI’s “Top 10 Operational Risks: A Survival Guide for Investment Management Firms.” The first installment discussed a hedge fund manager’s attitude and approach towards operational risk, the need for effective oversight of firm functions and the imperative of appropriate training and staffing to minimize operational risks. See “Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012). This installment addresses information hand-offs, pitfalls in automating processes and workflow documentation.
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From Vol. 5 No.40 (Oct. 18, 2012)
Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part One of Three)
Operational risk has become a centerpiece of investor due diligence and a focal point of regulatory interest. See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012). Operational excellence is more difficult to discern than good performance; performance can be quantified and compared across managers while operations are often unique to a manager’s business practices and investment strategies. At the same time, operational failures typically pose a greater threat than investment shortcomings. Everyone understands that generating returns requires assuming risk, but it is often difficult to articulate a coherent explanation for operational shortcomings. In short, in the area of hedge fund manager operations, best practices are critical, but challenging to identify. Recognizing that the supply of best practices information on hedge fund manager operations generally falls short of the demand for it, SEI recently published the first of a series of papers entitled “Top 10 Operational Risks: A Survival Guide for Investment Management Firms.” In a three-part series, The Hedge Fund Law Report is summarizing the key takeaways from the full Guide. This first installment addresses a hedge fund manager’s attitude and approach towards operational risk; the need for effective oversight of firm functions; and the imperative of appropriate training and staffing to minimize operational risks.
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From Vol. 5 No.37 (Sep. 27, 2012)
BNY Mellon Study Identifies Best Risk Management Practices for Hedge Fund Managers
In the last few years, hedge fund managers, investors and regulators have identified a growing roster of risks facing hedge fund investments and operations. See, “SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program Seminar,” The Hedge Fund Law Report, Vol. 5, No. 4 (Apr. 5, 2012). As a consequence, investors and regulators are increasingly demanding effective, appropriately tailored risk management systems, and managers are making an ongoing effort to divine best practices. Recognizing and reflecting this trend, BNY Mellon issued a research study in August 2012 that provides a roadmap of the state of risk management in the hedge fund industry, risk management trends and best practices. This article summarizes the key points from the study, with particular emphasis on tools and practices hedge fund managers can implement to identify, monitor, mitigate and report on risk. See also “Ernst & Young Survey Shows Risk Managers Possess Tremendous Influence and Face Substantial Challenges in the Asset Management Industry,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012).
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From Vol. 5 No.23 (Jun. 8, 2012)
Ernst & Young Survey Shows Risk Managers Possess Tremendous Influence and Face Substantial Challenges in the Asset Management Industry
Hedge fund investors and regulators are intensely focused on fund managers’ risk management functions. Investors conduct extensive due diligence to ascertain how managers are addressing various investment, operational and compliance risks confronting the managers’ businesses. Regulators are mandating that fund managers provide voluminous information about the risks their funds face through disclosures such as Form PF. See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012). As such, a firm grasp of risk management is imperative for hedge fund managers seeking institutional investment and credibility with regulators. In that vein, in May 2012, Ernst & Young released its 2012 survey report entitled, “A growing sphere of influence – survey of U.S. asset management risk managers” (Report). The Report provides market color with relevance to hedge fund managers on how the broader asset management industry is approaching risk management. The Report describes risk managers’ views on their level of influence within their firms; their mandates; their biggest challenges; the top risks they face; their risk monitoring responsibilities; the frequency of risk reporting they provide; future risk management initiatives; their awareness of budgets; use of key risk metrics; and hybrid risk management organizations. This article summarizes key findings contained in the Report. See also “What Is a Chief Risk Officer, and Should Hedge Fund Managers Have One?,” The Hedge Fund Law Report, Vol. 2, No. 31 (Aug. 5, 2009).
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From Vol. 5 No.14 (Apr. 5, 2012)
SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program National Seminar
While many hedge fund managers recognize the necessity of identifying, monitoring for and addressing risks confronting their businesses, few firms have developed institutional-quality programs that can systematically address operational, investment, strategic and compliance risks. Some of the challenges in adopting a risk management program include assigning responsibility for identifying and addressing risks; identifying key risks confronting the firm; and understanding what risk metrics to use in evaluating risks and how the firm has addressed such risks. From the investor perspective, it can be difficult to assess the quality of a manager’s risk management systems, and even more difficult to compare risk management systems across managers. (However, SSAE 16s can help facilitate single-manager risk assessments and comparisons across managers. See “Use of SSAE 16 (SAS 70) Internal Control Reports by Hedge Fund Managers to Credibly Convey the Quality of Internal Controls, Raise Capital and Prepare for Audits,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).) On January 31, 2012, the SEC addressed enterprise risk management for hedge fund managers and other investment advisers during the risk management session (Risk Management Session) of its annual “Compliance Outreach Program National Seminar” (Seminar). The Seminar also included sessions on enforcement issues relevant to hedge fund managers and hedge fund manager trading practices; prior articles in The Hedge Fund Law Report detailed the key lessons from both the enforcement and trading sessions. During the Risk Management Session, the panelists shared with industry participants recommendations on how to allocate resources to create a risk management program that will identify key risk areas and appropriately address compliance issues. This article discusses the key takeaways from the Risk Management Session.
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From Vol. 5 No.13 (Mar. 29, 2012)
Managing Risk in a Changing Environment: An Interview with Proskauer Partner Christopher Wells on Hedge Fund Governance, Liquidity Management, Transparency, Tax and Risk Management
The Hedge Fund Law Report recently interviewed Christopher M. Wells, a Partner at Proskauer Rose LLP and head of the firm’s Hedge Funds Group. Wells has decades of experience advising hedge funds and their managers, and a broad-based practice that touches on substantially every aspect of the hedge fund business. Our interview with Wells was similarly wide-ranging, covering topics including: hedge fund governance; investor demands for heightened transparency; co-investment opportunities; liquidity management issues; side pocketing policies and procedures; holdbacks of redemption proceeds; tax issues, including preparations for compliance with the Foreign Account Tax Compliance Act (FATCA) and the electronic delivery of Schedules K-1; and risk management, including practical steps to prevent style drift and unauthorized trading. This interview was conducted in conjunction with the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.) Wells is expected to participate in a session at that Symposium focusing on hedge fund governance and related issues.
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From Vol. 1 No.3 (Mar. 17, 2008)
Senior Supervisors Group Issues Observations on Risk Management Practices During the Recent Market Turbulence
- According to the Senior Supervisors Group, firms that dealt most successfully with the market turmoil of late 2007 demonstrated:
- Better flow of information across the firm and more rigorous internal valuation mechanisms.
- Effective management of funding liquidity, capital and the balance sheet.
- Informative and responsive risk management practices.
- In particular, three business lines where varying practices differentiated performance in response to the credit crunch were: CDO structuring, trading and warehousing; leveraged financing loans; and conduit and SIV businesses.