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SEI’s Masterson shares some thoughts on the operational challenges for 2015

2015 will not be any easier for fund managers from an operational perspective. The raft of regulatory reporting under Annex IV and EMIR is set to increase, depending on the size of the manager, and the barriers to entry look set to remain high for new managers; both from a compliance perspective and investor expectations on operational infrastructure. 

After a lukewarm performance in 2014, where the average hedge fund returned less than 4 per cent, and large institutional investors such as CalPERS and Dutch health care sector pension fund PFZW divested their holdings, 2015 is, in many ways, a year of managing expectations. Hedge fund managers must walk the tightrope of focusing sufficient energy on strategy implementation and generating alpha and at the same time keeping their operational processes as lean and efficient as possible to cope with today’s regulations. 

“It remains a very tough asset raising environment for many managers, but that said, we have seen some quality start-ups over the last 12 months. One trend we do see post-AIFMD is a lot of firms who weren’t required to register and run regulated funds, for example family offices running real estate funds, are now getting caught in the regulatory rubric. We have seen some new funds launched by established managers under AIFMD and that is likely to continue throughout the year,” says Philip Masterson, Senior Vice President and Managing Director, Investment Manager Services at SEI.

It is quite conceivable that the AIFMD could encourage greater regulated fund formation, moving forward, even among start-ups, as European institutional investors take succour from regulated, more transparent fund vehicles. There are options such as outsourced AIFMs for managers to avail of and avoid the operational demands of complying in-house with the directive. 2015 is likely to see more AIF formation in all alternative assets, including real estate and private equity, as institutions pull out their chequebooks. 

“We have started to see European institutional investors requiring US managers to have an AIFMD-compliant fund, and we’re seeing launches being done on AIFMD platforms to make it more cost-effective and quicker to get to market for managers who may only have a limited number of European investors.

“So I’d say that AIFMD is definitely supporting new fund launches from a variety of sources: European managers, US managers who are receiving large allocations from European institutions. We think this trend will continue,” comments Masterson. 

Another trend Masterson expects to see this year is increased demand for the appointment of depositaries. Currently, EU managers running EU and non-EU AIFs need to have an independent depositary in place (a full depositary is needed for EU AIFs). Once ESMA finally gets around to approving Third Country managers to qualify for the fund passport under AIFMD, Masterson expects demand to increase substantially:

“We see that as a huge opportunity over the next couple of years. We are already receiving a lot of requests from EU managers for our full depositary service. We are seeing regulated real estate funds being launched in Ireland and Luxembourg, which will of course require them to appoint a full depositary. As more firms launch AIFMD-compliant funds in 2015, we expect to see further demand for our depositary services,” continues Masterson. 

At a broad level, the myriad reporting and transparency challenges that managers face revolve around a common issue: How are firms managing their data? Are they able to do it in a cost-effective, scalable fashion? In that regard, SEI has been quite fortunate, or rather well-planned, in the way it has built its reporting solutions. Indeed, it built a data warehouse before the term was widely adopted in the industry.   

“We’ve built three main reporting streams. One for managers (SEI Manager Dashboard) to help them manage their business with customised data sets based upon individual roles in the firm: e.g. the CFO will see a different summary of data to the portfolio manager or Chief Compliance Officer. 

“The second is for LPs. We are seeing significant uptake for our Investor Dashboard, especially among new firms. Some firms may not necessarily want to make changes to existing reporting if their investors are satisfied, but they can’t be complacent. Newer firms who hadn’t yet built the infrastructure really do like our LP reporting tool as they can establish a scalable, 24/7 mobile accessible platform on Day 1,” says Masterson. 

With the Investor Dashboard tool, all charts and graphs can be branded in the manager’s name, and all the graphics are resized depending on the device being used. Moreover, it can also be used as a communication platform which the manager can white label. 

“What we are noticing is firms using it for marketing purposes, whereby they provide temporary passwords, on a road-show for example, to access certain levels of a fund’s information. We can then show managers who downloaded what information, thereby giving them some useful metrics to utilise and have meaningful follow-up conversations with prospective investors,” confirms Masterson.   

The third reporting stream is the regulatory reporting platform. 

“We’ve built a backbone of data warehousing. We maintain broad accounting information but we also bring in third party data and enrich it. There are customisable fields so if someone doesn’t want to use standard GIC codes, for example, they can use their own; it’s all very flexible. We stream it to the Manager Dashboard, the Investor Dashboard and to our regulatory platform. We were very fortuitous when we built it. When Form PF came along, it was really straightforward to modify the platform to accommodate that reporting requirement, and the same now applies to Annex IV reporting,” says Masterson. 

Regardless of whether it’s Form PF or Annex IV, because of the flexibility of the platform it means that even if SEI doesn’t administer 100 per cent of a fund’s assets, they can still report for the manager across the full range of reporting requirements. “Obviously we’d like to be administering all the assets but in cases where we are not, we can still provide clients with quality reporting using third party data from other administrators, and we see that as an important differentiator,” stresses Masterson.

This is particularly important for managers who have now just started Annex IV filing, some of whom have just had to make their first filing at the end of January. From an operational standpoint, the complexity of the report – especially for private equity and real estate funds – is enough for most managers to break out into a cold sweat. Outsourcing the reporting obligation to a third party such as SEI is a trend that is likely to build momentum over the next 12 months. 

“We put out several notices towards the end of 2014 on Annex IV which basically said ‘If you need help with Annex IV reporting we need to know by such and such a date’. For obvious reasons, we wanted to make sure the first round of reporting went well. 

“In almost all cases we’ve been able to accommodate the client. What we definitely anticipate, based on prior experience with Form PF, is that once a lot of our clients who chose not to use our solution have gone through the first round of reporting, they will in all likelihood come to us. We anticipate a significant uptick in our Annex IV solution over the coming months where clients simply decide that they don’t want to go through the filing process internally again,” comments Masterson. 

SEI supported managers filing across a number of jurisdictions by taking a hands-on approach with these managers and in many cases, SEI provided the managers details on performance issues or delays with the various regulatory sites.  “We also assisted in any validation errors which were provided once they were able to file and provided managers feedback with issues that other managers had during their process. We were well prepared to support any challenges that came from this initial filing as we had experience providing Form PF and CPO-PQR services.”

Strategically, because of SEI’s flexibility to work with third party data, Masterson sees this as an opportunity to approach some firms “that may not be clients of ours today but for whom we think we can provide effective reporting solutions”.

Cyber Security 

Hedge funds are paying a lot more attention to cyber security. This comes on the back of the SEC’s Office of Compliance Inspections and Examinations (OCIE) commencing a review last year of more than 50 registered broker dealers and investment advisers. The focus of the examinations was on cyber security preparedness and comes at a time when banks and retailers as well as the US government have been the victim of hacking.  In these cases, gigabytes of data were misappropriated, and governments, in particular those of the US and the UK, are placing greater emphasis on data security. 

“I think this will be an important trend in the hedge fund space this year. Data security is a massive issue globally, across industries. I think it is something that will continue to attract appropriate attention,” says Masterson. “In a way I’m surprised it’s taken so long for this debate to play out. People have become more sensitive to the whole issue of data and potential breaches.”

Aside from Big Data continuing to be a big theme in 2015, Masterson thinks scalability will be another important trend as managers continue to come under fee pressure. “Performance over the last couple of years has done nothing to alleviate fee pressure so I think managers’ margins will continue to get squeezed,” says Masterson.

When pushed to make a final prediction for the year ahead, Masterson draws a breath, slowly exhales, and offers the following response: 

“Ireland will win the Six Nations and England will win the rugby World Cup.”

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