PwC: Hedge fund infrastructure critical to addressing regulatory and business requirements

• The crisis has been game changing for the way the sector will evolve, particularly in terms of infrastructure requirements
• Having the right people, repeatable processes and scalable technology is more critical than ever
• Growth and compliance benefits of investing in infrastructure will outweigh the costs
• The sector’s talent needs are broadening; technology will enable transparency

Having the right people, processes and technology is fast becoming a prerequisite for hedge fund growth, according to a PwC paper published today. ‘Infrastructure: from cost to benefit – hedge funds 2.0’ examines the impact of the crisis on the industry and outlines what all parts of the hedge fund value chain need to do to satisfy regulatory demands and capitalise on growth opportunities.

Regulatory impetus includes the SEC registration requirements in the US (Dodd Frank), the Alternative Investment Fund Managers Directive (AIMFD) and the Foreign Account Tax Compliance Act (FATCA). These pressures, combined with greater investor due diligence and demands for transparency, are forcing hedge funds to change the way they operate.

Investors and regulators want to see reliable policies and controls in place across the hedge fund value chain. Areas of scrutiny include: valuation policies and procedures; safekeeping and controls surrounding funds’ assets; trading policies and procedures, including ethical guidelines; and compliance policies supporting multiple regulatory demands. Valuations are a particular concern for regulators in Europe and the US. PwC research* shows while most US alternatives funds have a valuation committee in place, there is a lack of consistency in materials and almost one third do not supply information to the boards of their offshore funds.

Mike Greenstein, global alternatives leader, PwC, said:

“Investors look for the ‘right’ kind of risk in their portfolios; they’re not looking to expose themselves to reputational or operational threats. Senior management want to insulate their organisations from damage to credibility and brand so things that may not have been the focus of a firm’s infrastructure a few years ago have become critical in the face of the double threat of investor activism and regulatory change.”

Beyond improving processes and formalising controls, hedge funds are finding that their talent needs are broadening while many technology platforms are not fit for purpose. For example, in the UK, 90% of asset managers categorise their compliance recruitment activity as active or very active.**

Mike Greenstein, global alternatives leader, PwC, said:

“The industry has always been resource constrained but we’re now seeing top performers with compliance, tax and valuation skills in ever greater demand. Those with credible risk, legal, finance and investor relations expertise are also highly sought after. In Europe, base salaries for experienced compliance staff have doubled in recent years as hedge funds compete for resources in a limited talent pool. Investing now and ring-fencing key talent will pay off.

“Technology platforms have often been developed on a piecemeal basis - pulling data from multiple systems is inefficient and not scalable. Addressing data requirements and the right technology infrastructure should be part of any firm’s future growth strategy.”

*PwC US 2010 Asset Management Valuation Survey

**PwC UK Asset Management Reward Survey