US EAST COAST 2012 - HFMWeek

HFMWEEK 

S P E C I A L R E P O R T 

US EAST COAST 2012 

REGULATION 

Form PF and Fatca headline the influx of 

regulatory changes facing US managers 

INFRASTRUCTURE 

Planning for the future by exploring new 

uses of technology and back-office setups 

DUE DILIGENCE 

Working hard to meet the investor 

community’s demands for transparency 

FEATURING ALPS // Admiral Administration LLC // Concept Capital 

Markets LLC // Conifer // EisnerAmper // EvenWheel Solutions – 

Hedge Op Compliance // HedgeServ // HSBC // Investor Analytics // 

Matheson Ormsby Practice // Marcum LLP // Northern Trust // Sadis 

& Goldberg LLP // Viteos

Until you have the 

competitive 

edge you deserve. 

It’s not our leading-edge technology platforms that will give you the edge. 

(Although obviously they’ll help.) 

Nor is it our fifty years of experience. 

(Although that too is pretty important.) 

So is it our extensive expertise in asset servicing 

No. It’s none of these things. 

It’s one thing. 

Our commitment to relationships. 

At UBS, we listen. 

And we listen hard. 

You may manage traditional or alternative investments. 

Your needs may be simple or complex. 

But no one will work harder, shoulder to shoulder, to find a solution. 

No one will give you a more competitive edge. 

Enough of our words. We want to hear yours. 

E-mail us at fundservices@ubs.com 

or go to www.ubs.com/fundservices 

Top rated 2009–2011 in 

Global Custodian Hedge 

Fund Administration Survey 

We will not rest 

© UBS 2012. All rights reserved.


I 

t is no wonder that nine of the top 10 largest hedge funds 

in the US are based on the East Coast. With estimated 

cumulative assets under management of $1.3trn, the 

country as a whole has seen unprecedented growth in 

hedge funds. But the East Coast is particularly strong, 

with more than $1trn of those assets distributed in 

Connecticut, Massachusetts and New York. 

The brains behind these hedge funds are themselves 

under the spotlight. John Paulson, whose predictions 

during the US housing bubble made him a star; Ray Dalio, founder of Bridgewater 

Associates, the world’s largest hedge fund manager; and James Chanos, the Greek- 

American president of Kynikos Associates considered one of the greatest shortsellers: 

all East Coast hedge fund managers. 

The trade, size and reputation of the region’s managers, however, are not the 

only things making headlines on the East Coast. The challenges are significant 

too. Waves of regulation require greater compliance and exhausting reporting 

measures; investor confidence has been hit by lukewarm industry performance, 

with increasing demands for transparency; while the market becomes more and 

more cramped as competition increases. The start-up community is also struggling. 

All are global phenomena. And all are felt keenest on the East Coast. 

But it isn’t all gloom. The introduction of the JOBS Act will see the lifting of 

the ban on advertising by hedge funds. This means private fund managers will be 

able to publicly advertise services and solicit investors, assisting with efforts to gain 

capital. Smaller funds, which have been at a competitive disadvantage against larger 

funds, will particularly benefit. Also, technology solutions are developing at a fast 

and furious pace. Hedge funds face greater pressure on IT costs and need to keep 

on top of efficient data storage and reporting requirements. 

Regaining investor trust through transparency, riding the waves of regulation 

without getting lost in the complexity of reporting requirements, and getting to 

grips with technology are just some of the topics covered by the array of industry 

experts featured in the 2012 HFMWeek US East Coast report. 

In many ways, the East Coast faces the same challenges as all the industry’s 

managers. Widely considered the global sector’s preeminent force and innovator, 

how it as a region approaches such hurdles will be watched with interest. Read on 

for insight into the progress on show. 

Roberto Barros 

REPORT EDITOR 

Published by Pageant Media Ltd 

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REPORT EDITOR Roberto Barros T: +44 (0)20 7029 4069 r.barros@pageantmedia.com STAFF WRITER Jon 

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HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group 

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permission from the publisher 

HFMWEEK.COM 3


CONTENTS 

06 

09 

12 

15 

18 

21 

COMPLIANCE 

COMPLYING WITH THE 1940 ACT IN THE 21ST 

CENTURY 

With higher regulatory barriers than ever before for US fi rms, Brandon 

Lemesh and Julia Lee of EvenWheel Solutions (the software arm of 

HedgeOp Compliance) discuss the use of technology to effi ciently 

manage a fi rm’s Code of Ethics compliance processes 

ADMINISTRATION 

CHANGE IS GREAT, BUT CONSISTENCY IS BETTER … 

As the fund administration space has become more crowded and 

competitive in recent years, Ted Jasinski of Admiral Administration LLC 

explains how a dedicated, high-quality and consistent service has 

created success for both the fi rm and the clients 

FINANCIAL SERVICES 

FORM PF: WHERE DO YOU FIT IN 

Nicholas Tsafos of EisnerAmper talks to HFMWeek about the 

requirements of Form PF and gives an overview of the reporting 

process as well as how best to approach it 

ACCOUNTANCY 

TAX ISSUES THAT FACE INVESTMENT MANAGERS 

Maury Cartine of Marcum LLP gives an example of the foreign and 

state tax issues management companies can face and the solutions 

that can be employed to avoid paying more than their fair share of 

tax 

ANALYTICS 

THE REAL RISK OF FAKING IT 

Did the industry learn from the 2008 crisis Are risks being properly 

monitored or are we destined to head into the same storm again 

Damian Handzy, of Investor Analytics, talks to HFMWeek about the 

real costs of not anticipating and managing risk 

FUND SERVICES 

IN THE CLOUD 

Jack McDonald of Conifer talks to HFMWeek about the advantages 

of embracing cloud computing and how his company’s clients have 

benefi tted from the iCon dashboard 

24 

27 

31 

35 

38 

41 

LEGAL 

JOBS ACT: HOW CAN PRIVATE FUND MANAGERS 

RAISE CAPITAL 

Daniel G. Viola, Lance Friedler and Ron S. Geffner of Sadis and 

Goldberg LLP assess how the JOBS Act will impact private funds 


WHEN FAILURE IS NOT AN OPTION 

As regulatory requirements are heightened, Jonathan White of 

Viteos talks to HFMWeek about the importance of combining 

outsourcing and technology solutions to resolve challenges 

FUND SERVICES 

DUE DILIGENCE – WINNING OVER THE INVESTOR 

Capital is hard to come by for funds, especially with the uncertainty 

surrounding hedge funds still resting heavy on investors’ minds. 

Jason Cholewa, of ALPS, discusses the qualifi cations a fund needs 

to meet to pass the all-important due diligence stage 


INSTITUTIONAL INFRASTRUCTURE 

As the alternative investment industry continues its march towards 

institutionalisation, Leo LaForce of HedgeServ talks to HFMWeek 

about the challenges facing fund managers and how fund 

administration can help by delivering a wide range of services 

underpinned by high-quality infrastructure 

FUND SERVICES 

SEEING INSIDE THE BLACK BOX 

Don Muller of Northern Trust talks to HFMWeek about the 

importance of independent valuation services in the face of a 

growing demand for transparency across the hedge fund industry 

FUND SERVICES 

CONVERGENCE OF ALTERNATIVE INVESTMENTS 

AND TRADITIONAL PRODUCTS 

Frank Napolitani of Concept Capital Markets, LLC explains the 

recent convergence trend in the hedge fund industry of traditional 

products and alternative investments, providing an overview of the 

benefi ts to both investors and fund sponsors 

4 HFMWEEK.COM

Outstanding Global Fund 

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US EAS T COAS T 2012 

COMPLYING WITH THE 1940 

ACT IN THE 21ST CENTURY 

WITH HIGHER REGULATORY BARRIERS THAN EVER BEFORE FOR US FIRMS, BRANDON LEMESH AND JULIA LEE OF EVENWHEEL SOLUTIONS 

(THE SOFTWARE ARM OF HEDGEOP COMPLIANCE) DISCUSS THE USE OF TECHNOLOGY TO EFFICIENTLY MANAGE A FIRM’S CODE OF ETHICS 

COMPLIANCE PROCESSES 

Brandon Lemesh 

is a senior client services 

associate for EvenWheel 

Solutions implementing 

compliance technology 

solutions for hedge funds, 

private equity firms and 

other private funds. 

Julia Lee 

is a client services associate 

for EvenWheel Solutions, 

implementing compliance 

technology solutions for 

hedge funds, private equity 

firms and other private 

funds. 

“ 

Now what” Since registering with the SEC, 

many investment advisors that have created 

their compliance policies and trained 

their employees have asked that same 

question. Monitoring employee Code 

of Ethics compliance is one of the more 

difficult aspects of an investment adviser’s compliance 

programme because of the sheer volume of information 

required to be reported and reviewed. 

Rule 204A 1 under the Investment Advisers Act requires 

that all investment advisers establish, maintain 

and enforce a written Code of Ethics, which includes 

provisions that require all access persons to report (and 

the CCO to review) their personal securities transactions 

and holdings. This must be done by submitting Initial and 

Annual Holdings Reports and Quarterly Transactions 

Reports of their reportable securities. Other required and 

best practice reporting includes political contribution, gift, 

entertainment and outside activity disclosures. 

The process of reviewing employee personal trading 

using paper broker statements has traditionally been tedious, 

inefficient and distracting from focusing on other 

business areas. The traditional review process of personal 

trading information can be broken down into three main 

parts: 

1. Collection: Access persons have to request duplicate 

broker statements to be sent to the CCO using 

a ‘407 Letter’ and disclose any additional reportable 

securities, such as private placement investments, 

via paper forms. There can be a substantial 

delay from sending the letter to actually receiving 

the statements. The statements often sit in a large 

unopened pile and are not reviewed until a month 

or two after each quarter end, making it much more 

difficult to catch any Code of Ethics violations in a 

timely manner. In some cases, employees may not 

even realise that they are committing a violation and 

will inadvertently continue the violation for months 

until uncovered by the CCO. 

2. Sifting: Broker statements contain much more information 

than is necessary and can be very confusing 

to read. A vice-president at a compliance consulting 

firm with approximately 10 years of experience described 

sifting through paper filings and brokerage 

statements as a “very manual and time-intensive 

process that includes physically sorting the personal 

trading information that has come in by access person 

and account” and “compiling a list of transactions 

in reportable securities”. Just sifting through 

the statements and preparing a spreadsheet took approximately 

80 hours for a hedge fund with AuM of 

$10.8bn and 73 employees. 

3. Review: Once all of the raw data is collected and 

transcribed into a more readable format, it must be 

reviewed to ensure compliance with the firm’s trading 

and pre-clearance policies. Although firms have 

different policies depending on the funds’ strategies, 

CCOs generally need to ensure that all transactions 

requiring pre-clearance were pre-approved and that 

employees did not trade in any of the securities on 

any restricted lists. This took two full working weeks 

for the $10.8bn AuM hedge fund mentioned above. 

In a paper world, every single transaction must be 

checked! 

Whereas the old method of sifting through paper statements 

was laborious and time-intensive, using a technology 

solution can help you track, monitor and document 

your Code of Ethics responsibilities efficiently. Products 

on the market, such as EvenWheel Solutions’ ELF Platform, 

include functionality that allows you to perform all 

of your employee-related compliance tasks, including personal 

trading, electronically. 

One of the major benefits of using software to manage 

your firm’s Code of Ethics programme is eliminating 

the number of paper brokerage statements that need 

to be reviewed manually. Many Code of Ethics software 

providers, through either a direct relationship with the 

financial institutions or through an account aggregator, 

have electronic links to brokerage firms. Having the raw 

data from a broker feed in electronic format allows the 

system to show only information that is relevant to the 

CCO in a clean format. This might include “filtering out” 

cash transactions, dividend reinvestments and other 

non-reportable securities from transactions reports before 

they hit the CCO’s eyes. 

EASY ACCESS 

Depending on how often these feeds are updated, you will 

have access to employee transactions and holdings information 

for review soon after a trade has been made, as early 

as the next day. This way, you can address any potential 

violations within days instead of months. In addition, if the 

6 HFMWEEK.COM

COMPLIANCE 

system allows it, you can set up lists of securities 

(restricted lists, watch lists, holdings lists, and so 

forth) against which securities data is checked. As 

transactions and holdings data is downloaded and 

as trade pre-approvals are submitted, that data is 

automatically checked and compared against 

those internal lists, automating the approval and 

review processes. The use of software, in this case, 

can help an investment adviser transition to more 

of an exception-based system. 

The most obvious advantage of using a technology 

solution to help manage your firm’s Code of 

Ethics compliance program is electronically centralised 

and organised record-keeping of all your 

firm’s compliance-related documents. The use of 

software not only eliminates the need for physical 

storage space, but also allows you to respond 

to audit requests much more easily. The VP of a 

$2.5bn AuM private equity firm recently went 

through an SEC audit and noted that the SEC 

“came and went without much drama”, attributing the 

firm’s ability to respond to document requests quickly to 

its use of a technology product. 

Whether or not you choose to adopt a technology solution, 

it is important to note that while all products are 

designed around the same regulations, not all available 

products in the market are created equally. If you are considering 

implementing Code of Ethics software, here are 

four factors to consider before making a final decision, 

based on a sample of CCOs currently using technology. 

1. Automation: The number of broker links a product 

has and how much automated review is performed 

on the raw data are crucial. If a product doesn’t have 

an electronic link to a broker, then most of the benefits 

of using technology won’t 

be realised. A product should be 

able to automatically reconcile 

pre-clearance requests against 

transactions, compare transactions 

to any restricted lists and 

perform other additional processes. 

Additionally, make sure 

to check whether or not you 

need to pay for each broker individually 

or if you get access to 

the entire world of brokers. 

2. Security: Employees are generally 

rightfully concerned about 

how their personal financial 

information is being stored 

and used. It is extremely important 

to perform thorough 

due diligence on a prospective 

vendor’s IT infrastructure. This 

review should include evaluating 

the vendor’s data storage 

facilities, third party certifications 

(SSL, SSAE 16/SAS 70, 

penetration testing reports and 

so forth) and internal data handling 

policies. 

JUST SIFTING THROUGH 

THE STATEMENTS AND 

PREPARING A SPREADSHEET 

TOOK APPROXIMATELY 

80 HOURS FOR A 

HEDGE FUND WITH AUM 

OF $10.8BN AND 73 

EMPLOYEES 

” 

3. Ease of use: Realising the full benefits of using 

technology depends on an employee’s ability 

to use the software quickly and easily. You should 

consider the overall usability, look and feel of 

software during your evaluation. Ease of use is 

especially important for setting up new hires. The 

CCO at a $2.5bn AuM hedge fund described the 

onboarding process as, “extraordinarily efficient” 

since implementing software. The CCO also added: 

“We have a great relationship with our reps at 

the vendor, and they are happy to help [our employees], 

as necessary.” 

4. Cost efficiency: Utilising software should obviously 

provide good value. Be sure to consider the 

full costs of implementing a solution for your firm, 

as some vendor costs might depend on your firm’s 

structure. 

Society has always progressed towards technology 

adoption for increased efficiency, and the private 

fund industry is no different. The investor relations team 

uses CRM software, traders and portfolio managers use 

OMS and compliance is next. In the words of a CCO who 

swears by technology:“The days of paper statements are 

old news.” 

ABOUT EVENWHEEL SOLUTIONS 

EvenWheel Solutions is the software arm of HedgeOp 

Compliance, LLC, which is part of The IMS Group, the 

leading global provider of regulatory compliance consulting 

services to the asset management and securities 

industry. EvenWheel produces world-class compliance 

software applications for investment advisers, hedge fund 

managers, private equity managers and other financial 

firms. n 

In a paper world, every single transaction must 

be checked 

HFMWEEK.COM 7

WE PRACTICE LAW 

BUT WE LIVE BUSINESS 

Sadis & Goldberg represents over 600 hedge and private 

equity funds. Above all else, we value our client relationships. 

Our attorneys strive to provide excellent, consistent, practical and 

efficient legal services. We distinguish ourselves from other law firms by 

assisting our clients in the development of their businesses. This 

comprehensive approach has often earned us recognition as one of the top 

five law firms in the U.S. for our hedge fund practice. Invest a few minutes to 

learn what our attorneys can do for your business. 

Best Law Firm 

Hedgeweek USA 

Awards 2011 

Best Hedge Fund & Private 

Equity Law Firm USA 

InterContinental Finance 2011 

Lawyers World 

Leading Lawyer Award 2012/ 

Lawyers World Global 

Awards 2011 and 2012 

Private Funds 

Law Firm of the Year 

ACQ Law Award 2011 

Investment Funds’ 

Law Firm of the Year 

Finance Monthly, 

2010, 2011, 2012 

Private Funds Law Firm 

of the Year – USA, 

Lawyers Monthly Legal 

Awards 2011, 2012 

Law Firm of the Year – Private 

Funds, DealMaker Law Awards, 

2011, 2012 / Deal Maker Global 

Awards 2012 

Top Private Equity 

Fund Formation Law Firm 

2011 USA 

InterContinental Finance 

Hedge and Private Equity Fund Formation | Transactional Counseling 

Compliance Services | Regulatory Representation | Litigation | Derivatives 

Tax, ERISA and Estate Planning | Real Estate 

551 Fifth Avenue, 21st Floor 

New York, NY 10176 

212.947.3793 

www.sglawyers.com



CHANGE IS GREAT, BUT 

CONSISTENCY IS BETTER … 

AS THE FUND ADMINISTRATION SPACE HAS BECOME MORE CROWDED AND COMPETITIVE IN RECENT YEARS, TED JASINSKI OF ADMIRAL 

ADMINISTRATION LLC EXPLAINS HOW A DEDICATED, HIGH-QUALITY AND CONSISTENT SERVICE HAS CREATED SUCCESS FOR BOTH 

THE FIRM AND THE CLIENTS 

Ted Jasinski, general 

manager of Admiral 

Administration (US) LLC, 

established its US office 

in 2007, which has since 

grown from five clients to 

more than 50, covering 

a range of investment 

structures and asset classes. 

He has 23 years’ experience 

in the hedge fund and 

alternative investment 

industry. 

Alot has changed and evolved in the hedge 

fund industry since Autumn of 2008. In 

this post-Madoff era, the need for transparency, 

state of the art technology, stronger 

controls, and straight through processing 

has never been more evident with 

hedge fund managers and their service providers. The role 

of the third-party hedge fund administrator has expanded 

immensely and is constantly transforming. While we witness 

the continual low cost pressures 

for large and small administrators, 

as well as the consolidation 

that is taking place between the 

industry giants (State Street and 

Goldman Sachs, as well as SS&C 

and GlobeOp), we wonder what is 

in store for the future of this business. 

This much is true: change has 

been in play for close to four years, 

and there is no end in sight as the 

demands to become more efficient 

and cost effective for the investment 

manager (IM) continue to 

be the name of the game. 

Admiral Administration is certainly 

no stranger to the game. As 

one of the older administration 

THE ROLE OF THE THIRD- 

PARTY HEDGE FUND 

ADMINISTRATOR HAS 

EXPANDED IMMENSELY 

AND IS CONSTANTLY 

TRANSFORMING 

” 

firms in the business, we have leveraged off our 16-year 

existence and experience and have made radical improvements 

to our technology offering. With what we believe to 

be best of breed technology, we continue to develop and 

make enhancements to our technology platform of Avatar 

(proprietary contact management system), Advent Geneva 

and Partner, and Paladyne (middle-office analytics 

and data management). We rolled out Avatar FM earlier 

in 2012, which gives IMs full transparency of their investors’ 

contact and transaction data. 

It also connects and integrates with 

our web reporting and Paladyne 

Report Manager portal in a seamless 

fashion. While we feel that we 

can compete with the larger firms 

in the space, we are confident we 

have a complete understanding of 

our identity and what separates us 

from the pack. 

IT’S ALWAYS ABOUT SERVICE 

Admiral has always maintained a 

core belief and emphasis on strong 

client and investor services. In 

fact, the business had never had 

a dedicated salesman until early 

2011. That’s 15 years of building a 

business and reputation as a recognised brand by simply 

getting the job done well and expanding the client base 

through referrals. As a relationship model, we pride ourselves 

on responsiveness, accessibility and reliability at all 

levels. From top to bottom within the organisation, there 

is an emphasis on exceptional ‘soft skills’. With our single 

point of contact model, we assign qualified account managers 

to know their client and their products with a ‘cradle 

to grave’ approach. Additionally, we surround these relationship 

managers with teammates that exemplify professionalism, 

high integrity and strong character. As part of 

the team, fund administrators and fund accountants do a 

lot of the behind the scenes back-office responsibilities; as 

they gain experience with each daily and monthly NAV, 

they provide valuable depth and coverage in the overall 

process. 

DON’T JUST SAY IT, DISPLAY IT 

I’ve always been a big believer in results. Benjamin Franklin 

once said: “Well done is better than well said.” We believe 

in this philosophy at Admiral and strive to meet our 

clients’ needs on a day-to-day basis. Listening is critical, 

HFMWEEK.COM 9



A lot has changed and evolved in the hedge 

fund industry since Autumn of 2008 

and then adapting a game plan that provides customisation 

and flexibility brings a ‘value added’ component to 

the engagement. While we feel that we have a unique institutional 

product at Admiral with our technology, professional 

staffing, and SSAE 16 Type II accreditation, we 

pride ourselves on going the extra mile. As one of the top 

mid-tier shops, we accomplish this task by providing a 

deep bench of highly talented and experienced personnel, 

whereby many IMs would or could be lost in the shuffle 

within the big shops. In short, our professionals will look 

to answer every question and solve every problem to the 

best of their ability. Our global managing director, country 

managers and senior staff are accessible for every client as 

a resource. Whether it is catering to emerging managers 

looking for high touch service or picking up established 

hedge fund groups who are dissatisfied with the larger 

firms and looking for more bang for their buck. To demonstrate 

the level of service we strive to maintain, there is 

one personal example I would like to share. In an unsuccessful 

effort to reach me at our US office, an IM once said: 

“I don’t care if he’s in the rainforest, he needs to be accessible!” 

While we believe there are boundaries within our 

relationships (I happened to be in Myrtle Beach on vacation 

with my family) this is the level of service we demonstrate 

– I contacted the IM shortly thereafter. We’re acutely 

aware that being on par with price and quality simply 

gets you ‘in the game’; our belief is that strong service wins 

the game. Another example I recall was on Christmas Eve; 

an up-and-coming hybrid private equity group authorised 

a capital call transaction at a time whereby many service 

providers would have shut down early and possibly looked 

the other way during the holiday season. Our staff handled 

the transaction with pride and efficiency. In fact, they did 

it with a smile and never complained with the assignment, 

despite sacrificing some very important family time. It is to 

this degree that we feel we separate ourselves from the rest 

when it comes to client service. 

THE ALTERNATIVE INVESTMENT SPACE IS DIVERSE AS MAN- 

AGERS LOOK TO DIFFERENTIATE… 

Growth in the US hedge fund administration industry 

has been evident since 2008. Whereas self-administration 

was once a common practice on the domestic front, any 

hedge fund outfit looking to raise capital today (especially 

in the institutional arena) has to outsource to an independent 

administrator. While maybe six to seven out of 10 

sales calls are for the traditional long/short equity structure, 

Admiral US has seen many unique trading strategies 

come to the table. It is this ability to adapt and be flexible 

with our offering and service models that has enabled us 

to broaden our depth of experience and expertise across 

many asset classes and products. While our technology 

can robustly handle the exchange traded instruments, our 

ability to work on RMBS, ABL, OTC, and esoteric instruments 

like royalties, patents and leases has given us a very 

well rounded and diverse client base. 

SERVICE IS NOT WHAT YOU DO BUT WHO YOU ARE 

We strive to bring excellent service to each and every one 

of our clients, their investors and any associated parties 

or service providers through a unique relationship driven 

model; we do recognise that we cannot always be perfect. 

Having said this, we take tremendous pride in our work 

and are accountable and responsible for our actions. In 

short, we take ownership in our role of maintaining the 

official books and records for a hedge fund manager and 

their team. It is this partnership approach combined with 

cutting edge technology that sets us apart in today’s environment. 

We truly believe that knowing our identity and 

role during arguably one of the most difficult financial 

periods is an important trait and recipe for long-term success. 

If we build a great relationship and experience with 

our clients, they, in turn, talk to each other – and word 

of mouth is a very powerful source for growing our business. 

While client satisfaction is important, client loyalty is 

paramount. To many of us at Admiral, it goes well beyond 

this philosophy though; we simply enjoy producing an 

excellent product for the right price on a day-to-day basis. 

Conducting ourselves with high integrity and respect, 

and genuinely caring about our clients no matter what the 

asset size, is a standard we will always strive to maintain 

within the culture of our firm. n 

10 HFMWEEK.COM

Leading-edge technology 

and unparalleled client 

service are no longer 

mutually exclusive. 

With the creation of Northern Trust Hedge Fund Services, hedge fund administration has been 

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Alternative Fund Administration | Operations Outsourcing | Investor Services | Custody 

© 2012 Northern Trust Corporation. Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. The Northern Trust Company, London 

Branch (reg. no. BR001960) and Northern Trust Global Services Limited (reg. no. 04795756) are authorised and regulated by the Financial Services Authority. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary 

Services (Guernsey) Limited and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators 

(Jersey) Limited and Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited, Northern Trust 

Securities Services (Ireland) Limited and Northern Trust Fiduciary Services (Ireland) Limited are regulated by the Central Bank of Ireland. Northern Trust Global Services Limited has a Luxembourg Branch, which is authorised 

and regulated by the Commission de Surveillance du Secteur Financier (CSSF). Northern Trust Luxembourg Management Company S.A. is regulated by the Commission de Surveillance du Secteur Financier (CSSF). 

Northern Trust Global Services Limited has a Netherlands Branch, which is authorised and regulated in the Netherlands by De Nederlandsche Bank. Northern Trust Global Services Ltd (UK) Sweden Filial is authorised 

by the Financial Services Authority and subject to regulation by the Finansinspektionen. Northern Trust Global Services Limited operates in Abu Dhabi as a Representative Office. Our registered office is authorised and 

regulated by the Central Bank of the United Arab Emirates. The Northern Trust Company operates in Australia as a foreign authorised deposit-taking institution (foreign ADI) and is regulated by the Australian Prudential 

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FORM PF: WHERE DO YOU 

FIT IN 

NICHOLAS TSAFOS OF EISNERAMPER TALKS TO HFMWEEK ABOUT THE REQUIREMENTS OF FORM PF AND GIVES AN OVERVIEW OF THE 

REPORTING PROCESS AS WELL AS HOW BEST TO APPROACH IT 

Nicholas Tsafos 

is an audit partner at 

EisnerAmper with more 

than 20 years of diversified 

accounting and auditing 

experience. He works 

with hedge funds, private 

equity funds and registered 

investment advisers. 

Reporting requirements from the Securities 

and Exchange Commission (SEC) 

are mounting for US firms, with fund 

managers expected to spend a considerable 

amount of time, energy and resources 

providing data about their investment 

portfolios. HFMWeek talks to Nicolas Tsafos, audit partner 

at EisnerAmper, about Form PF and the best way to 

approach the new reporting procedures. 

HFMWeek (HFM): How does an adviser make the determination 

as to which sections of Form PF apply to 

its operations 

Nicholas Tsafos (NT): To make an accurate assessment 

as to which sections of Form PF apply to the adviser’s operations, 

the adviser must become familiar with the definitions 

and terms used in Form PF. 

To accomplish this, the adviser must determine the following: 

• Large adviser determination 

• Qualifying hedge fund determination 

To make the above determinations, the adviser must be 

familiar with the definitions of the following terms: 

• Control 

• Controlled portfolio company 

• Dependent parallel managed accounts 

• Hedge fund 

• Hedge fund assets under management 

• Large private fund adviser 

• Liquidity fund 

• Parallel managed accounts 

• Private equity fund assets under management 

• Private equity fund 

• Private fund advisor 

• Qualifying hedge fund 

• Real estate fund 

• Regulatory assets under management 

• Related person 

• Reporting fund 

• Separately operated 

The above terms are defined in Form PF. However, an 

adviser should consult their outside counsel to verify their 

understanding of the definitions and get assistance in making 

the proper determinations. For advisers who are quarterly 

filers, the determination needs to be made at the end 

of any month during the preceding fiscal quarter. 

One of the determinations that should be tested on 

a monthly basis is the aggregation of parallel funds. Robust 

policies and procedures should be developed so 

these tests can be completed accurately and in a timely 

manner. 

This determination should be well documented, as the 

SEC, upon examination, will want to determine if the adviser 

has fulfilled its filing requirements under Form PF. 

Proper documentation will provide evidence in the future 

that an attempt was made to address the requirements of 

Form PF. 

HFM: What are the information requirements for each 

section 

NT: Once the adviser has determined which sections of 

Form PF apply to its operations, it must provide information 

to answer the questions in each section. 

The adviser level information required by Section 1a is 

as follows: 

• Identification and contact information. 

• Breakdown by type of funds managed and the regulatory 

and net assets under management. 

• Assumptions made in regards to the responses on 

Form PF. 

The information required for each reporting fund in 

Section 1b is as follows: 

• Fund identification and structure information. 

• Gross asset value and net asset value of the fund. 

• Value of investments in parallel managed accounts 

related to the fund and investments in equity of other 

private funds. 

• Borrowing information, including a breakdown by 

percentage of borrowings from foreign and US financial 

institutions and non-financial institutions. 

The fund must also provide the identity of creditors 

whose borrowings exceed the fund’s NAV by 5%. 

• A breakdown of fund assets and liabilities by fair value 

price levels and the value of derivative positions. 

• Investor information for the fund, breakdown of beneficial 

ownership for the fund by investor type and 

the percentage of ownership held by the five beneficial 

owners with the largest ownership. 

• Monthly or quarterly gross and net performance information 

for the fund. 

Section 1c applies to advisers that manage hedge funds. 

The requirements for Section 1c are as follows: 

• The fund’s investment strategy or strategies. For a 

fund that uses multiple strategies, provide the estimated 

percentage of the fund’s NAV represented by 

each strategy. 

12 HFMWEEK.COM

FINANCIAL SERVICES 

• If the fund’s strategy uses computer-driven algorithms, 

give the percentage of NAV that is managed 

by such computer-driven algorithms. 

• Counterparty credit exposure information. 

• Trading and clearing information. This response requires 

estimates by asset class and whether trades 

took place on a regulated exchange vs. over the 

counter. 

Section 2a applies to large advisers and requires the following 

aggregate information for the funds managed by 

the adviser: 

• The value of investments by type, both long and 

short. 

• Duration of fixed income investment types. 

• Turnover rate of the funds’ investment portfolios 

• Geographic breakdown of investments by the issuer’s 

jurisdiction. 

Large advisers who manage funds that meet the definition 

of qualifying fund must complete Section 2b. 

The information required by Section 2b is as follows: 

• Portfolio positions by investment type as 

well as bond duration, weighted average life 

or 10-year bond equivalent for fixed income 

investments. 

• Liquidity of portfolio investments, based on 

the estimated shortest period in which such 

positions can be liquidated without fire sale 

discounts. 

• Disclose information regarding collateral 

such as the types, counterparties and the percentage 

of collateral that can be rehypothecated. 

• Risk information (provide detailed information 

in regards to risk assumptions, methodologies 

and calculations). 

• Information regarding financing (include 

types of financing, collateral posted, creditors and 

liquidity terms). 

• Derivatives values including collateral and central 

clearing counterparties. 

• Information regarding investor liquidity (the adviser 

must provide the funds redemption terms, side pockets 

and gates). 

Section 4 applies to large advisers who manage private 

equity funds. The information required by Section 4 is as 

follows: 

• Fund level obligations or guarantees to satisfy portfolio 

company obligations. 

• For investee companies that are controlled by the 

fund (companies where that fund owns more than 

25% of the voting securities) provide financial information, 

including debt-to-equity ratios and the 

nature and maturity of debt. 

• Group investments in portfolio companies by industry. 

• Provide geographic information of portfolio companies. 

• If related persons have invested in portfolio companies, 

provide aggregate value of co-investments. 

• If the fund has made investments in controlled portfolio 

companies in the financial services industry, the 

PROPER DOCUMENTATION 

WILL PROVIDE EVIDENCE 

IN THE FUTURE THAT 

AN ATTEMPT WAS 

MADE TO ADDRESS THE 

REQUIREMENTS OF 

FORM PF 

” 

adviser must provide the legal name of the portfolio 

companies, addresses, percentage of the fund’s gross 

assets invested in each portfolio company, gross asset 

value of each portfolio company, and percentage 

of each portfolio company beneficially owned by the 

fund. 

HFM: How should an adviser prepare to meet the requirements 

of Form PF 

NT: By assessing which sections of Form PF an adviser 

needs to complete, the adviser can determine the policies, 

procedures, processes, people and technology required to 

meet requirements of Form PF. 

The adviser should take an inventory of its current processes, 

information provided by its service providers and 

the expertise of its employees to provide information to 

complete Form PF. 

The adviser should then complete a mock Form PF to 

determine the information that it does not have, or 

is difficult to obtain. The adviser should then prepare 

a list of processes and procedures that need 

to be implemented to obtain the information in a 

timely manner. 

The adviser should also develop policies and 

procedures to verify that information disclosed 

in Form PF is accurate and does not contradict 

information provided to investors and other third 

parties. 

The biggest concern in the Form PF process 

may not be the process itself; the concern is in 

budgeting enough time to correctly and effectively 

complete Form PF. This is not a weekend project. 

HFM: When are the rules for Form PF effective 

and when does the fund adviser have to file 

Form PF 

NT: The effective date for the new rules is 31 

March 2012, with compliance dates of 15 June 2012 for 

some large advisers and 15 December 2012 for others. 

If an adviser has a fiscal year that ends on 31 December, 

its filing deadlines would be as follows: 

• Large advisers to hedge funds with at least $5bn in 

assets under management are required to make an 

initial filing within 60 days after the 30 June 2012 

quarter end (29 August 2012). 

• Large advisers to private equity funds with at least 

$5bn in assets under management are required to 

make an initial filing within 120 days after the 31 December 

2012 year end (30 April 2013). 

• Large advisers to liquidity funds and registered 

money market funds with at least $5bn under management 

are required to make an initial filing within 

15 days after the 30 June 2012 quarter end (16 July 

2012). n 

Still have questions Join HFMWeek and EisnerAmper in 

New York City on 11 October 2012 for a panel discussion on 

Form PF. Look for the details in your email alerts or contact 

Shona Lynch, publishing account manager, HFMWeek (T: 

+44 (0) 207 029 4047, M: +44 (0) 7879774805, email: 

s.lynch@hfmweek.com) for more information. 

HFMWEEK.COM 13


ACCOUNTANCY 

TAX ISSUES THAT FACE 

INVESTMENT MANAGERS 

MAURY CARTINE OF MARCUM LLP GIVES AN EXAMPLE OF THE FOREIGN AND STATE TAX ISSUES MANAGEMENT COMPANIES CAN FACE AND THE 

SOLUTIONS THAT CAN BE EMPLOYED TO AVOID PAYING MORE THAN THEIR FAIR SHARE OF TAX 

Maury Cartine, 

JD, CPA of Marcum is the 

partner-in-charge of the 

firm’s National Alternative 

Investment Industry Group 

Tax department and a 

member of its International 

Tax Services Practice group. 

He specialises in consulting 

hedge fund and investment 

advisors with complex tax 

and regulatory matters. 

Mr Cartine advises clients 

beginning with the start-up 

phase and continuing 

throughout the life of a fund. 

In the good old days, an investment manager was 

content to merely sign managed account agreements 

with clients located only within the borders 

of its state of registration. During the past decade, 

investment managers have faced the challenges of 

a global economy and a dwindling US client base 

due to increased competition and catastrophic market collapses. 

Evolution waits for no one including investment 

managers. Those investment managers that have chosen to 

restrict themselves to the states in which their offices are 

located face the brutal reality of inevitable extinction. The 

survivors will, by necessity, offer their investment advisory 

skills to clients located throughout the US and beyond. 

The concept seems simple enough, but there are a number 

of obscure tax rules, both old and new that can diminish 

the rewards for even the best investment managers. The 

simple hypothetical discussion between a company and a 

tax partner at Marcum, LLP, throughout this article, can 

illustrate a number of tax issues confronting those investment 

managers who are the survivors. 

SCENARIO 

Kick Investment Advisers, LLC (Kick) is an investment 

manager located in New York City. It has aggressively 

courted new clients in virtually every state in the country. 

Kick now claims to have clients located within 40 states 

and recently expanded its operations by opening an office 

in London, where personnel will market the investment 

advisory services to potential clients throughout Europe. 

Kick formed a separate entity, Kick UK Ltd (Kick UK), a 

UK corporation to operate the London office. It has entered 

into a cost plus 5% contract with Kick UK in consideration 

of the marketing and related services provided 

by Kick UK. Kick personnel occasionally accompany Kick 

UK personnel on visits to clients and prospective clients 

in Europe. In addition, Kick personnel occasionally visit 

clients and prospective clients in approximately 20 states. 

Business is great and Kick has survived. However, the 

company has recently received a tax inquiry from France 

and other tax inquiries from various states. The CFO of 

Kick calls his favorite tax partner at Marcum, LLP, and asks 

a number of questions that should have been asked several 

months earlier: 

Does Kick or its partners have any exposure to state income 

taxation outside New York 

The tax partner informs the CFO that states are desperate 

for revenue and many have adopted a new revenueenhancing 

approach to the taxation of businesses located 

outside their borders. Instead of limiting income taxation 

to businesses with sales, offices, property and/or payroll 

within their borders, many states (approximately 39 at last 

count), have adopted an economic nexus standard for taxing 

non-resident businesses. Under the economic nexus 

standard, the mere provision of services to a resident of a 

state will subject the service provider to income taxation, 

regardless of the location of the service provider. 

Thus, Kick and its partners will generally be subject to 

income tax in the states that have adopted the economic 

nexus standard, even if Kick does nothing more than provide 

investment advisory services to the clients located 

within those states. The income tax will generally be determined 

by a fractions allocation formula that may be 

based on service income received from clients within the 

state to total service income firm-wide; or a more gentlybased 

fractions allocation formula that also takes into account 

the proportion of property and payroll within the 

state to total property and payroll firm-wide in addition to 

service income. However, the tax partner also notes that 

many states adopting the economic nexus standard are 

also revising their allocation formulae to the more onerous 

one factor formula of service income received from clients 

within the state to service income everywhere. 

Is the cost plus 5% contract satisfactory remuneration 

to Kick UK for tax purposes or could Her Majesty’s Revenue 

and Customs assess additional income tax 

The tax partner explains that the cost plus methodology 

has been employed by many investment managers utilising 

entities organised abroad. However, he cautions the CFO 

that the cost plus arrangement should be analysed by an expert 

to determine if the arrangement fairly apportions the 

income and expense between Kick and Kick UK. Assuming 

the expert’s report concludes the remuneration paid 

to Kick UK is fair (it is neither excessive nor inadequate), 

the CFO can be relatively comfortable that neither the US 

nor the UK will challenge the arrangement in an effort to 

collect additional tax revenue. If, on the other hand, the 

arrangement is woefully inadequate in either direction, the 

CFO can expect a challenge by the country that is harmed. 

Does Kick UK have exposure to foreign income taxes in 

other European countries 

The CFO is instinctively concerned about the trips by Kick 

HFMWEEK.COM 15


ACCOUNTANCY 

UK to visit clients and prospective clients throughout Europe. 

He is concerned that the visits could create a taxable 

nexus within the countries being visited. The tax partner 

explains that just like the US, the UK enters into many tax 

treaties with other foreign countries and just like the US 

tax treaties, UK tax treaties generally include a permanent 

establishment clause that limits the imposition of income 

tax to those UK taxpayers that maintain an office or other 

habitual presence within the foreign country. Fortunately, 

the occasional visit does not generally constitute a habitual 

presence, but the tax partner advises the CFO to keep very 

accurate records to demonstrate visits to foreign countries 

by UK personnel are in fact just occasional. 

Does Kick have exposure to income tax in the UK 

The CFO knows that the investment management team 

is located within the NYC office and the members of the 

investment management team will likely join the UK personnel 

in visits to clients and prospective clients 

located in the UK. The tax partner informs the 

CFO that the same type of permanent establishment 

clause referred to above provides similar protection 

to Kick under the US Tax Treaty with the 

UK. However in this case, the tax partner carefully 

warns the CFO that because the office of Kick UK 

is located in London, the visits by the Kick investment 

management team to the UK office may simply 

become too frequent to be less than habitual. 

Does Kick have exposure to income tax in other 

European countries 

Again, Kick is saved by the permanent establishment 

clause. But this time, it is the permanent establishment 

clause contained in the US tax treaty 

with each of the foreign countries and not the UK 

tax treaty that provides the necessary relief from 

the imposition of income tax on Kick. 

DURING THE PAST 

DECADE, INVESTMENT 

MANAGERS HAVE FACED 

THE CHALLENGES OF A 

GLOBAL ECONOMY AND 

A DWINDLING US CLIENT 

BASE. EVOLUTION WAITS 

FOR NO ONE INCLUDING 

INVESTMENT MANAGERS 

” 

If the Kick financial statements are audited in accordance 

with US GAAP, does Kick have to worry about 

FIN 48 

The tax partner has been down this road many times before. 

He explains to the CFO that any uncertainty with 

respect to the possible imposition of a state income tax at 

the management company (partnership) level is subject to 

a FIN 48 Analysis. 

Thus, he warns the CFO that investment advisory 

services income from clients located in Illinois, New 

Hampshire and Washington will likely trigger income tax 

liability at the partnership level that cannot be explained 

through a more likely than not conclusion that Kick will 

receive the benefit of not having to pay an income tax in 

these states. However, it is possible that the amount of income 

tax could be immaterial to the financial statements. 

In the absence of immateriality, the audited financial statements 

must disclose an additional income tax liability for 

state income taxes. 

CONCLUSION 

Today’s investment managers compete in a global 

economy searching for investors in the four corners 

of the world. They have survived through 

the worst of economic times by exercising initiative 

and ingenuity. They are survivors and they are 

a financial resource. The taxing authorities, both 

foreign and domestic, are looking for them every 

day hoping to share in their success by imposing 

taxes in new and more aggressive ways. 

In planning for expansion, investment managers 

must exercise that same initiative and ingenuity 

to avoid paying more than their fair share of taxes. 

They must recognise the myriad tax issues that 

come with expansion and they must obtain the 

right professional advice to accomplish their tax 

objectives. n 

16 HFMWEEK.COM

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THE REAL RISK OF 

FAKING IT 

DID THE INDUSTRY LEARN FROM THE 2008 CRISIS ARE RISKS BEING PROPERLY MONITORED OR ARE WE DESTINED TO HEAD INTO 

THE SAME STORM AGAIN DAMIAN HANDZY, OF INVESTOR ANALYTICS, TALKS TO HFMWEEK ABOUT THE REAL COSTS OF NOT 

ANTICIPATING AND MANAGING RISK 

Damian Handzy, 

CEO, co-founded Investor 

Analytics in 1999 to provide 

risk management services 

to the alternatives industry. 

He was named chairman 

and CEO in 2006 and has 

grown Investor Analytics into 

one of the global leaders 

in risk analysis and risk 

management solutions. 

18 HFMWEEK.COM 

Damian Handzy, the CEO of Investor Analytics, 

observed in a recent white paper 

that the financial crisis served to remind 

us that a free market provides the means 

to win and to lose – but he added that not 

all financial managers followed the major 

markets into free fall in the aftermath of 2008. The managers 

who successfully navigated the crisis, said Handzy, 

understood and acted on the three tenets of risk management: 

(1) all risk models have built-in assumptions that 

are not applicable in every circumstance; (2) correctly 

analysing the data takes real expertise; and (3) model 

limitations can only be ignored at great peril. HFMWeek 

spoke to Handzy recently to get his views on the current 

state of risk management – have managers reset their approach 

to risk management or is there still over-dependence 

on models as a substitute 

HFMWeek (HFM): Given the number of financial 

events that have happened, even since 2008, do you 

think managers learned some real risk management 

lessons 

Damian Handzy (DH): The real question is, did we learn 

any lasting lessons I hope we did, but as a student of human 

behaviour, I know that we all have selective memories, 

which is why we often have to repeat our mistakes to 

learn from them. When times are good, it’s our nature to 

want to believe that what goes up will keep going up even 

though we have a mountain of evidence to contradict 

that notion. In 2008, we were reminded once again of 

the very high cost of ignoring history, a mistake that still 

haunts the industry. However, the 

events did open up a healthy and, I 

believe, lasting dialogue about the 

importance of real risk analytics 

and management versus just having 

models that measure various 

statistical outputs. 

IN 2008, WE WERE 

REMINDED ONCE AGAIN 

OF THE VERY HIGH COST 

OF IGNORING HISTORY, 

A MISTAKE THAT STILL 

HAUNTS THE INDUSTRY 

” 

HFM: Was ‘don’t put all your 

eggs in one basket’ better risk 

management 

DH: The multiple basket approach 

only works to a degree. 

The idea behind it is, of course, 

diversification, which requires uncorrelated 

investments. But during 

a market event like 2008, almost every investment 

became very highly correlated with everything else. As 

a lot of assets become contaminated, the opportunity to 

diversify was reduced. 

That’s where hedging strategies and stress testing 

come into play. In this case, what you’re stressing is 

model assumptions – like correlations – to measure the 

portfolio’s risks in highly correlated markets. Stressing 

correlations is key to understanding how well diversified 

the portfolio really is. At Investor Analytics, we’ve been 

providing stress testing as part of our system for years. 

The ‘correlation goes to one’ stress is simple to understand 

and provides a lot of useful information. 

HFM: What is the highest barrier to companies adopting 

a risk management culture 

DH: There are both cost and human factors at play in 

the decision to integrate more robust risk controls. First, 

we are in a challenging economy where everyone is being 

asked to contribute more with less and where resources 

are scarce. An existing risk system, whether built inhouse 

or purchased in the past, may seem like a low-cost 

approach if the direct expenditure is low. But that lowcost 

system is probably not scalable or capable of handling 

today’s portfolios or markets. 

Possibly even more important is the human factor – 

who is going to control the risks taken by the portfolio 

managers Who is going to have the authority to tell a 

portfolio manager to de-lever or reduce risk if they are 

exceeding thresholds A risk management culture starts 

with – or dies from – the top. If the head trader or CEO 

doesn’t buy into a risk management 

culture, it’s difficult to implement 

such a system effectively. 

HFM: What are the biggest challenges 

facing your clients 

DH: Certainly there has been a 

significant change in the number 

of stress tests being conducted 

and the depth of detail that investors 

and regulators alike are now 

demanding. For example, the 

SEC-mandated Form PF now requires 

certain hedge funds to submit 

on a regular basis analytics for 

a variety of stress tests in addition

ANALYTICS 

to their Value-at-Risk (VaR). At the same time, 

we have seen the funds looking to perform more 

stress tests and sharing the results with investors. 

So the regulators and the industry are now tracking 

one another – the impetus may have been 

different but the end result will lead to more accountability 

and transparency. 

Our clients are also taking a closer look at how 

to effectively measure the financial risk posed by 

the interaction of diverse investments. Risk aggregation 

– properly executed – can show how a 

portfolio’s constituent parts interact in both regular 

markets and in highly stressed markets. It’s 

not just a matter of adding up a fund’s exposure 

to different industries, asset classes or currencies 

and assigning a value to that, which would be 

meaningless. In order to understand risks at the 

summary level, you have to perform the analysis 

at each level. Investor Analytics measures all the 

relevant information from each investment, traditional 

and alternative alike, and distils the data 

into an understandable form that does more than 

just broadly summarise: it reveals aspects of risk 

that would otherwise remain hidden. 

HFM: How do you test your own tools 

DH: At Investor Analytics, we spend a good deal of 

time questioning our own logic. You need to be able to 

question yourself, continually, otherwise you become 

complacent. In addition to our Quality Assurance (QA) 

team’s testing of our software, the system itself provides 

diagnostics on how well various models are doing in different 

markets. There are a number of different ‘goodness 

of fit’ analyses that can help a risk manager evaluate 

different models, and we provide access to exactly that 

sort of self-assessment. 

As many people have quoted recently: “All models are 

wrong, but some models are useful.” Making a model 

useful requires self-assessment of its applicability and 

that functionality is built into the fabric of our tools. 

HFM: Are investors seeking a greater degree of strategic 

comfort 

DH: Unquestionably, investors have had to become savvier 

and take greater ownership of strategic outcomes. 

They are asking for more transparency, and we have seen 

a spike in the number of firms asking for more detailed 

risk reporting. Investor Analytics’ clients are asking for 

more in-depth stress testing and what-if scenarios – and 

our flash reports provide that information at a glance. 

HFM: We can’t all be quants – is there a danger that 

the data itself will become too much to deal with 

DH: Investor Analytics takes that point to heart and 

that’s precisely why we invest heavily in the presentation 

of risk results. We work hard to provide an understandable 

picture of the investing landscape and how portfolios 

will respond to shifts in the market. It gives our clients 

a great degree of confidence because they can obtain the 

most comprehensive view of their portfolios and answer 

questions such as, “What would happen if the euro 

breaks up” or “What if agriculture prices spike” Our 

A RISK MANAGEMENT 

CULTURE STARTS WITH – 

OR DIES FROM – THE TOP. 

IF THE HEAD TRADER OR 

CEO DOESN’T BUY INTO 

A RISK MANAGEMENT 

CULTURE, IT’S DIFFICULT 

TO IMPLEMENT SUCH A 

SYSTEM EFFECTIVELY 

” 

clients like to be prepared – and their investors 

are demanding it. 

HFM: Are companies looking for à la carte 

pricing or the full analytics spectrum 

DH: Some companies don’t need the full spectrum, 

and Investor Analytics is happy to work 

with specific needs. Interestingly, the trend we 

are seeing now is companies realising that this 

is not a ‘moment-in-time’ thing that is going to 

go away in a couple of years. Given the long-term 

need to provide robust analytics, many are deciding 

to do it well. The competitive spirit that is at 

the heart of the financial industry is alive and well 

and vying for league table risk supremacy. 

HFM: Where is the big opportunity in risk 

management 

DH: At the end of the day, it’s not about what 

risk management system you use, it’s about using 

the system to help prevent losses. If a manager 

navigates through downward markets better than 

others, then the market will reward that manager 

with larger allocations. Lots of managers can make money 

when markets are rising. Only the best managers can 

prevent loses when markets are falling. We work with the 

best managers to help them minimise their risks when it 

matters most – before it’s too late. n 

HFMWEEK.COM 19

What penalty are you 

prepared to pay 

Significant yet avoidable withholding taxes are around the corner. 

In a recent poll of more than 240 Fund Managers 

and CFOs, only 19% had started working on 

a plan to become FATCA compliant. 

Will you be ready 

Did you know domestic funds are 

subject to FATCA, not just off-shore entities 

Have you appointed a responsible officer 

Is the officer aware of the responsibilities 

of the role 

Are you aware of the recently issued 

intergovernmental agreements 

and how they affect compliance 

Let’s get down to business. TM 

www.eisneramper.com 

Christian Bekmessian, CPA 

Co-Chair, Financial Services 

212.891.4062 

christian.bekmessian@eisneramper.com 

Peter J. Cogan, CPA 

Co-Chair, Financial Services 

212.891.4047 

peter.cogan@eisneramper.com 

EisnerAmper LLP 

Accountants & Advisors 

Independent Member of PKF International 

NEW YORK | NEW JERSEY | PENNSYLVANIA | CALIFORNIA | ILLINOIS | CAYMAN ISLANDS


FUND SERVICES 

IN THE CLOUD 

JACK MCDONALD OF CONIFER TALKS TO HFMWEEK ABOUT THE ADVANTAGES OF EMBRACING CLOUD COMPUTING AND HOW HIS COMPANY’S 

CLIENTS HAVE BENEFITTED FROM THE ICON DASHBOARD 

Jack McDonald 

is the president and CEO 

of The Conifer Group and 

has more than 20 years of 

industry experience. Conifer 

is a 24-year-old outsourced 

service provider for middle 

and back office, global fund 

administration, outsourced 

buyside execution and 

prime brokerage. 

With hedge funds facing greater pressure 

on IT costs – as well as increasing 

demand for greater transparency, 

efficient data storage and risk reporting 

since the financial crisis of 2008 

– cloud computing is transforming 

the way fund administrators, managers and investors store 

and manage data. HFMWeek talks to Jack McDonald 

about how using the cloud has facilitated and improved 

his company’s asset services offering. 

HFMWEEK (HFM): How do you define the cloud and 

what are the benefits of using a cloud solution 

Jack McDonald (JM): Cloud computing is a broad industry 

term that refers to the hosting of hardware and software 

offsite, in a shared facility that offers benefits to the 

end users. The benefits include the ability to scale hardware 

and software in a much more efficient, intelligent and 

secure manner. For example, having a cloud solution allows 

for additional server space without it being installed 

in your server room. Upgrades and maintenance can then 

be made on the various systems in a much more stable environment. 

From a security standpoint, the ability to host these systems 

in multiple locations significantly mitigates the risk 

of losing data as cloud providers have multiple facilities 

and redundant systems. 

Replicating this quality infrastructure is generally far 

too expensive and complex for most asset managers to 

build internally. 

Moreover, the nimble nature of cloud technology offers 

the ability to gain better access from a mobility standpoint. 

In our case, all you need to access iCon is a web browser. 

Whether in an airport, hotel room, through a smart phone 

or tablet, you can access the cloud without going through 

the cumbersome task of loading software onto devices or 

going through other software applications to get to the actual 

product portal. 

Lastly, the ability to customise the product is much 

greater when you can utilise technology that does not rely 

on writing code, as traditional enterprise software-based 

applications would normally require. 

HFM: What motivated you to think of moving to the 

cloud What were you looking to accomplish 

JM: As an asset service provider for the past 23 years, 

HFMWEEK.COM 21


FUND SERVICES 

Conifer has been at the nexus of operational change facing 

managers and investors. We were motivated to do 

something unique given the increasing demands our clients 

and their investors were putting on Conifer 

as a middle office and fund administration provider. 

Increasingly since the credit crisis of 2008, 

more and more demands are being placed for 

greater transparency on portfolio performance, 

risk reporting at the portfolio level, and the 

ability to store and manage data efficiently. We 

chose to respond to those demands by providing 

a better reporting dashboard for our clients and 

their investors. 

HFM: Why did you choose to partner with InvestCloud 

JM: Looking at the myriad third-party options 

available in the marketplace, we were struck by 

the lack of any one integrated platform that could 

achieve our customers’ demands. Rather than 

trying to assemble multiple systems together, we 

decided to build our own via our joint venture partner, InvestCloud 

Solutions. InvestCloud was founded by a team 

of industry veterans who have distinguished themselves in 

building industry-leading data warehouse and reporting 

platforms. 

InvestCloud’s technology expertise and Conifer’s leading 

reputation for client-centric asset services is a powerful 

combination that doesn’t exist elsewhere in the marketplace. 

InvestCloud Solution’s first product was iCon, built 

for the Conifer Group. Through Conifer iCon we are 

IT IS ONLY A MATTER 

OF TIME BEFORE THE 

ENTIRE MARKET MOVES 

TO ADOPT CLOUD-BASED 

COMPUTING 

” 

now providing our clients with an integrated dashboard 

that encompasses trading, portfolio and risk reporting, operations 

and investor reports all in one place. 

HFM: What are the various component engines 

in your cloud platform 

JM: We strive to use the industry standard, or best 

in class processing engines and then tie them together 

using our proprietary technology. We have 

been able to focus exclusively on the core capabilities 

of the various engines that we chose and 

use them to build our product. The InvestCloud 

product is a component-based platform, so we can 

work with any processing engine that a client partner 

would want to utilise and incorporate that into 

the overall platform. 

HFM: How are you marrying your middle and 

back office processing expertise with this cloudbased 

solution 

JM: We continue to provide, on a daily basis, middle 

and back office support to our managers by handling 

portfolio accounting, daily reconciliation, and independent 

pricing. What we are now able to do is complement 

that asset service by offering a better view into the portfolio 

performance through the iCon dashboard. We have 

developed a powerful and elegant software as a service 

(SaaS) solution whereby iCon has been developed to be 

a ‘wrapper’ around our core services. 

Fund administrators have become increasingly important 

to managers and investors alike. To deliver the value 

that people are seeking from administrators today, one 

needs to have powerful technology for portfolio & risk 

reporting, overall data management and investor communications. 

We now have that via a customisable and accessible 

dashboard. 

HFM: What value does this provide your customers 

JM: Our customers now have an all-in-one dashboard that 

incorporates a portfolio accounting engine, a risk engine, a 

trading engine, a pricing engine and an investor reporting 

engine. The dashboard can also pull in other systems that 

one might want integrated with the reconciliation work 

we do on our clients’ behalf with respective prime brokers 

and custodians. It brings all of those different systems into 

one location and then renders the data in a very customisable 

and valuable way. 

HFM: What are the hurdles/benefits facing hedge 

funds looking to move to the cloud 

JM: Adopting new technologies can often prove to be a 

hurdle for some, as change (of any sort) can, by definition, 

challenge the status quo. Where firms are set in their ways 

with people and processes, our solution can appear quite 

revolutionary. Cloud security also comes up as a concern, 

though as people get used to paying bills and doing their 

banking on-line, acceptance is growing. Part of embracing 

a cloud solution depends upon a firm’s cultural approach 

towards adopting new technology. It is only a matter of 

time before the entire market moves to adopt cloud-based 

computing. The world is much closer to cloud computing 

than most people realise. Watch this space! n 

22 HFMWEEK.COM

www.conceptcapital.com 

NEW YORK, NY | GARDEN CITY, NY | GREENWICH, CT | CHICAGO, IL | BERNARDSVILLE, NJ 

ONE COMPLETE MULTI-PRIME 

SERVICE PLATFORM 

DESIGNED TO LET YOU FOCUS 

ON WHAT’S IMPORTANT 

Concept Capital Markets, LLC offers a comprehensive suite of brokerage services that provide 

global investment managers with solutions that are customizable and scalable. The firm was built by 

former investment managers to serve traditional institutional customers, hedge funds and 

registered investment advisors with turn-key solutions and a full range of fund services designed 

to free investment managers to focus on their core competencies. Our multi-asset trading, 

clearing, financing and reporting capabilities combined with our dynamic, relationship driven 

culture differentiates us in an ever changing market. The company was established in 2010 

following the spin-off of the Concept Capital division of Sanders Morris Harris Inc., whose origins 

date back to 1995. Concept Capital Markets, LLC is headquartered in Garden City, NY and operates 

branch offices in New York City, NY, Greenwich, CT, Chicago, IL, and Bernardsville, NJ. Concept Capital 

Markets, LLC is a member of FINRA and SIPC. 

Prime Brokerage | Risk Management | Fund Administration | RIA Service | Family Office Services 

Michael S. Rosen 

Senior Managing Director 

516.746.5723 

mrosen@conceptcapital.com 

Frank L. Napolitani 

Managing Director 

646.747.5228 

fnapolitani@conceptcapital.com 


























































































































































































































































































































































































NEW YORK, NY | GARDEN CITY, NY | GREENWICH, CT | CHICAGO, IL | BERNARDSVILLE, NJ


JOBS ACT: HOW CAN PRIVATE 

FUND MANAGERS RAISE 

CAPITAL 

DANIEL G. VIOLA, LANCE FRIEDLER AND RON S. GEFFNER OF SADIS AND GOLDBERG LLP GIVE AN OVERVIEW OF HOW THE JOBS ACT WILL IMPACT 

PRIVATE FUNDS AND EXPLAIN THE OPPORTUNITIES AVAILABLE TO MANAGERS WITH THE LIFTING OF THE BAN ON HEDGE FUND ADVERTISING 

Daniel G. Viola 

is a partner and head of 

the Regulatory Defense and 

Compliance Group. Viola 

structures and organises 

broker-dealer and investment 

advisers and regularly 

counsels investment 

professionals in connection 

with regulatory matters. Viola 

previously served as a senior 

compliance examiner for 

the SEC. 

Lance Friedler 

is a partner in the Corporate 

and Financial Services 

Groups. Friedler counsels 

clients on structuring and 

forming US and non-US 

private investment funds, 

including the investment 

manager and general 

partner entities to such 

funds. 

The Jumpstart Our Business Startups Act 

(JOBS Act) may assist private fund managers 

with their efforts to raise capital. Most 

notably, the JOBS Act eliminates the prohibition 

on private fund managers from 

publicly advertising and generally soliciting 

investors for private funds (such as hedge funds, private 

equity funds and venture capital funds). For example, 

prior to the JOBS Act, advertising or solicitations through 

television, newspapers, radio and publicly available websites 

were all precluded. In exchange for the ability to advertise 

and generally solicit, private fund managers may 

only accept accredited investors into their private funds. 

In the majority of circumstances, this is not an issue because 

almost all investors in private funds are accredited 

investors. In the event that a private 

fund accepts non-accredited 

investors, the private fund must 

provide financial and other disclosures 

materially greater than the 

disclosure customarily provided in 

private funds’ offering documents. 

PRIVATE FUND MANAGERS, 

PRIOR TO THE JOBS ACT, 

WERE ALLOWED TO SELL 

THEIR INTERESTS IN THEIR 

PRIVATE FUNDS TO AN 

UNRESTRICTED NUMBER 

OF ACCREDITED INVESTORS 

” 

RULE 506 AND THE JOBS ACT 

Private fund managers, prior to 

the JOBS Act, were allowed to 

sell their interests in their private 

funds to an unrestricted number 

of accredited investors, along with 

up to 35 non-accredited investors. 

However, under the Securities 

Act of 1933 (Act), private fund 

managers were not permitted to 

engage in general solicitation or 

advertising on behalf of a private fund. The definition 

of an “accredited investor” under the Act is defined as 

(1) an individual with income in excess of $200,000 in 

each of the two most recent years or joint income with 

a spouse in excess of $300,000 in each of those years, or 

(2) at least $1m in net worth, excluding the value of a 

principal residence. 

The prohibition on general solicitation and advertising 

prevented private fund managers from marketing to, or soliciting, 

investors they did not already know (for example, 

a private fund manager needed to have a “substantive preexisting 

relationship” with the investor prior to such marketing 

or solicitation). A “substantive preexisting relationship” 

was generally defined as a relationship whereby the 

private fund manager understood the investor’s financial 

circumstances and level of sophistication in financial matters 

prior to the marketing or solicitation. Merely knowing 

that an investor was wealthy or otherwise qualified as 

an accredited investor (for example, by reviewing a list of 

Fortune 500 CEOs) did not suffice, in the absence of a further 

relationship with such investor. The door appears to 

be open for private fund managers to use general solicitation 

and advertising in marketing private funds with the 

passage of the JOBS Act, as long as such private funds only 

accept accredited investors. 

IMPACT OF THE JOBS ACT ON 

PRIVATE FUNDS 

With the ban on advertising eliminated, 

the degree of impact will 

vary based on a private fund manager’s 

size. Managers of smaller 

funds have been operating their 

businesses at a competitive disadvantage 

against managers of 

larger funds with mature distribution 

channels or investor relations 

teams. Managers of private funds 

of all sizes will be more vocal with 

media than in the past. Examples 

could include smaller managers 

utilising social media and websites, 

while larger managers might take 

advantage of media opportunities 

by giving interviews. 

While the JOBS Act will lift restrictions on general advertising 

and solicitation, the US Securities and Exchange 

Commission (SEC) will likely put restrictions on how a 

private fund manager may market its private funds. For 

example, many in the industry believe that the SEC will 

broaden the rules and regulations that apply to marketing 

materials of private funds in a manner that is similar to the 

restrictions currently applicable to registered investment 

companies (for example, mutual funds). For instance, this 

may include a pre-filing obligation of marketing materials 

with the SEC or a self-regulatory agency. Further, various 

24 HFMWEEK.COM

LEGAL 

WITH THE BAN ON ADVERTISING 

ELIMINATED, THE DEGREE OF 

IMPACT WILL VARY BASED ON A 

PRIVATE FUND MANAGER’S SIZE 

” 

Ron S. Geffner 

oversees the Financial 

Services Group. Geffner 

regularly structures, 

organises and counsels 

private investment vehicles, 

investment adviser 

organisations, broker-dealers 

and commodity pool 

operations, and provides 

legal services to hundreds of 

various funds. Geffner began 

his legal career with the 

SEC, where he investigated 

and prosecuted violations 

of the federal securities 

laws with an emphasis on 

enforcement. 

associations, such as the Investment Company Institute, 

have suggested that, (i) private funds be required to display 

a legend on advertisements in order to differentiate 

themselves from registered funds, (ii) the qualification of 

accredited investors be increased, in order to further reduce 

the number of prospective and suitable investors and 

(iii) accredited investors send their financial information 

to third parties for verification prior to making an investment 

in a private fund. 

In addition, the JOBS Act does not eliminate the antifraud 

provisions of the federal securities laws and Financial 

Industry Regulatory Authority (Finra) rules. Likewise, 

the JOBS Act does not (i) modify a private fund manager’s 

fiduciary obligations, (ii) relax investor suitability requirements 

or (iii) reduce the threshold required to achieve 

accredited investor status. It is also a logical step for the 

SEC to consider significantly increasing enforcement activity. 

In the SEC’s February 2012 Report on “Examinations 

by the Securities and Exchange Commission’s Office 

of Compliance Inspections and Examinations”, the SEC 

stressed that they have created a working group to focus 

on marketing and sales practices, focusing in part on the 

aggressive marketing of investment products as “safe”, advertising 

aberrational performance compared to relevant 

market indexes, and the use of third-party solicitors. In addition, 

enforcement actions against investment advisers 

jumped 92% from 2009 to 2011. 

REMAINING UNCERTAINTY PENDING SEC RULEMAKING 

The JOBS Act directed the SEC to implement a rule 

within 90 days from its enactment on 5 April 2012 that 

provides that issuers that sell securities only to accredited 

investors may engage in general advertising or general 

solicitations. Although a draft of the rule was expected to 

be published by the SEC by 4 July 2012, as of the date 

of this article, the SEC has not issued such rule. In addition, 

the US Commodity Futures Trading Commission 

(CFTC) has not provided guidance. For example, both 

CFTC Regulations 4.13(a)(3) and 4.7 generally require 

the operators of private funds relying on such exemptions 

to offer and sell the private fund interests without 

marketing to the public in the United States. Therefore, 

operators of private funds relying on these exemptions 

continue to be subject to restrictions on marketing unless 

and until the CFTC or its staff clarifies the effect of 

the JOBS Act. As a result, private fund managers should 

refrain from publicly advertising and performing any 

type of general solicitation until the final SEC rules are 

published and analysed. n 

HFMWEEK.COM 25

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WHEN FAILURE IS NOT 

AN OPTION 

AS REGULATORY REQUIREMENTS ARE HEIGHTENED, JONATHAN WHITE OF VITEOS TALKS TO HFMWEEK ABOUT THE IMPORTANCE OF COMBINING 

OUTSOURCING AND TECHNOLOGY SOLUTIONS TO RESOLVE COMPLEX FUND CHALLENGES 

Jonathan White 

heads strategic business 

development for Viteos in 

North America and is based 

in New York. His experience 

includes business and 

software technology 

consulting to hedge funds, 

and previously as managing 

principal at a global thirdparty 

marketing firm. 

As more regulation is introduced to shore 

up the US hedge fund industry, investors 

can be at peace, safe in the knowledge 

that the Wild West days of reckless and 

negligent investing are largely over. However, 

on the flipside, many fund managers 

have not found peace and have instead encountered 

complex, expensive and significant regulatory requirements 

to navigate. Can technology help appease the situation 

Jonathan White of Viteos sets out the argument 

for technology, especially in the shadow of regulatory 

requirements such as Form PF. 

HFMWeek (HFM): In speaking with your clients, what 

are the larger issues facing investment managers today 

Jonathan White (JW): Of immediate concern is the 

amount of effort required to fully understand and support 

the ever-changing regulatory environment. Time that 

should be devoted to focusing on client needs and generating 

alpha is now spent on operations and compliance 

reporting. 

For each of the current regulatory requirements, there 

are underlying drivers that affect reporting, operations 

and cost. Investors are demanding more thorough due 

diligence processes, shadow accounting, internal transparency 

and daily as well as month-end reporting with greater 

frequency. So, whether it is data collection and the reporting 

required under Form PF (or the standardisation we 

see regarding risk in OPERA) managers now face timing, 

cost and administrative overlays like never before. And, 

while some of this shift has been driven by external circumstances 

such as the financial meltdown, other requirements 

simply reflect the maturity of the industry itself – 

the days of the Wild West are over. 

HFM: How does this shift affect fund managers 

JW: Essentially, if fund managers are to succeed and grow 

in this demanding regulatory environment, they need to 

think of their firms as businesses rather than just trading 

floors. Developing an efficient operations strategy is an 

integral part of running a business. When it comes to operations, 

the question most firms struggle with is effective 

cost management. What is the best allocation of human 

and financial capital 

It’s no secret that investors are looking to invest in 

strong, well-run businesses. If the manager is confident 

the business is well organised operationally, he or she can 

focus on increasing returns and generating alpha. 

HFM: How does Viteos help reduce what they call ‘operational 

drag’ 

JW: We refer to the metaphor of ‘operational drag’ as it 

relates to aerodynamics, which assumes any cost, system 

or function taken on by the manager – even a necessary 

one – causes a certain amount of drag on the organisation 

and its performance. Managers are always challenged with 

balancing the amount of drag taken on versus the trade-off 

in performance. 

At Viteos, we believe there is significant operational 

drag generated by antiquated, cumbersome, multi-level 

procedures. Viteos’ extensive global experience with outsourced 

operations and accounting provides a streamlined, 

agile alternative to fund accounting and compliance 

reporting. 

It doesn’t matter if it improves operational performance 

or the overall performance of the firm; to be successful, 

managers need to understand the benefits of efficient resource 

management as it relates to reducing operational 

drag. 

HFM: How does the concept of operational drag impact 

operational performance 

JW: These days there is a tremendous focus on the relationship 

between cost and results. Therefore, many firms 

seek creative approaches to the operational challenges we 

have been discussing. 

One solution that consistently addresses cost, performance 

and operational drag simultaneously is technology. 

And while technology has the advantage of providing accuracy, 

reliability, and timeliness, it also adds the burden 

of evaluation, implementation and day-to-day management, 

which in effect recreates operational drag. 

HFM: Can you cite an example of operational drag in 

the current financial environment 

JW: Let’s take Form PF. Form PF is very complicated as 

it includes interpretive data, compiled from various data 

sources across multiple counterparties. Traditionally 

managers used already over extended in-house resources 

and a collection of complex spreadsheets that naturally increase 

operational drag. 

In support of Form PF compliance specifically, Viteos 

uses a blend of technology and consulting services, leveraging 

our global staff, financial expertise and innovative 

technology to provide a solution that suits each individual 

client. Viteos’ veriPFy is the technological engine providing 

a simplified approach to data collection and reporting. 

HFMWEEK.COM 27



Our experienced global consultancy serves as financial 

experts to our clients addressing the strategic and tactical 

aspects of the Form PF filing. 

HFM: How is technology the answer 

JW: Today’s technology is easier to manage and includes 

many levels of enhanced functionality. Customised, 

turnkey solutions are cost effective when compared 

to legacy, manual methods. 

Our clients not only leverage Viteos’ advanced technology 

but also elect to implement our ‘platform-as-aservice’ 

model, which reduces the operational drag in 

their organisation while enabling them to gain access 

to advanced functionality and reporting. 

Viteos continues to focus on and develop innovation 

that streamlines the processes related 

to OPERA and the Alternative Investment 

Fund Managers Directive (AIFMD). We now 

deploy technologies across a range of interests, 

including classic fund administration, middle 

office and shadow accounting. 

HFM: I understand how technology goes a 

long way to improving processes, but how 

does veriPFy specifically ease the burden of 

filing Form PF 

JW: Viteos was one of the first firms to deliver 

a fully developed Form PF solution to clients 

and we are actively engaging and working with 

2012 filers. 

veriPFy is an application-based platform addressing 

the challenges associated with the data handling and 

interpretation of Form PF. veriPFy efficiently handles 

the entire aggregation and reporting process for Form 

PF compliance including XML filing. Clients may elect 

to use veriPFy as an internal premise based solution or 

access veriPFy through the web. 

Viteos’ current and future development is driven by 

ONE SOLUTION THAT 

CONSISTENTLY ADDRESSES 

COST, PERFORMANCE 

AND OPERATIONAL DRAG 

SIMULTANEOUSLY IS 

TECHNOLOGY 

” 

client preferences and needs. There are no all-encompassing 

solutions for Form PF, which mandates data 

aggregation and reporting based on assumptions that 

are subject to interpretation. veriPFy automatically 

accounts for these assumptions and technologically 

incorporates all the interpretive exercises required to 

suit each individual firm. 

HFM: Why a partnered approach 

JW: Fund managers are in the investment business, 

not the operations business. Do they have time to 

build these applications in-house and meet regulatory 

and investor demands Most likely. But the cost, time 

and expertise required will at some point absolutely 

distract even the most organised investment 

manager. 

This is where Viteos comes in. We understand 

their challenges and can address them 

quickly and efficiently, with minimal impact to 

the ongoing operations of the firm. For Viteos, 

our clients’ business objectives are our business 

objectives. 

So an approach that is managed by experts, 

minimises operational drag and is cost effective 

is likely to optimise performance for fund managers 

both in the near and long term. Firms that 

embrace such an approach consider themselves 

at a competitive advantage relative to those that 

do not. 

HFM: What new strategies besides what we’ve discussed 

is Viteos implementing 

JW: Viteos has already taken the model into the family 

office space and sees significant opportunity in the 

more traditional asset managers. We have expanded 

in Europe and Asia, so the confidence our clients have 

placed in us has enabled us to expand and deliver to 

new segments and new regions. n 

28 HFMWEEK.COM

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Difference 

www.marcumllp.com 

International Member of Leading Edge Alliance 

ASSURANCE I TAX I ADVISORY

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www.marcumllp.com 

International Member of Leading Edge Alliance 

ASSURANCE I TAX I ADVISORY


F UND SERVICES 

DUE DILIGENCE – WINNING 

OVER THE INVESTOR 

CAPITAL IS INCREASINGLY HARD TO COME BY FOR FUNDS, ESPECIALLY WITH THE UNCERTAINTY SURROUNDING HEDGE FUNDS STILL RESTING HEAVY 

ON INVESTORS’ MINDS. JASON CHOLEWA, OF ALPS, DISCUSSES THE QUALIFICATIONS A FUND NEEDS TO MEET TO PASS THE ALL-IMPORTANT 

DUE DILIGENCE STAGE 

Jason Cholewa 

heads East Coast business 

development for ALPS’ 

Alternative Investment 

Services division. Prior to 

this, he was instrumental 

in opening ALPS’ Boston 

office and was responsible 

for building the staff and 

overseeing all administration 

services and operations on 

the East Coast. 

After the financial crisis, a vacuum of new 

capital investments in alternative products 

left the industry in a precarious state. 

Uncertainty in the market and economy 

combined with the shock of unexpected 

gates and lock-ups left investors weary 

of the seemingly infallible hedge fund product. New and 

emerging managers struggled to 

find any institution interested in 

placing capital in a pooled investment 

vehicle. 

Fortunately we’ve seen a reversal 

in this sentiment. As investors 

become more comfortable and 

find hedge funds to be invaluable 

parts of their portfolios, capital is 

once again returning to the industry. 

While the vast majority of that 

capital is being placed with large, 

established investment advisors, a 

growing amount is being allocated 

to emerging managers. Competition 

for that capital can be fierce 

and as a result, allocators have increased 

their scrutiny during the due diligence process. 

So the logical question arises: what key elements does an 

THE FIRST AND 

POTENTIALLY EASIEST 

PITFALL TO AVOID IS TO 

ENSURE EVERYONE IN THE 

FIRM HAS A CONSISTENT 

STORY 

” 

emerging manager need to abide by in order to attract this 

scarce capital 

The first and potentially easiest pitfall to avoid is to ensure 

everyone in the firm has a consistent story. Time and 

again we’ve heard tales of well-performing portfolio managers 

explaining the strategy, investment style, and even 

the structure and vision of the company in complete contrast 

to the chief financial officer, 

business development professional, 

or some other forward facing 

executive. This kind of inconsistent 

story is an immediate red flag for 

an allocator. It creates confusion 

for the investor and instills a sentiment 

that one or more key individuals 

are either incompetent, or 

that there is a general culture of 

miscommunication. Regardless of 

the cause, any one of these reasons 

will usually cause an investor to become 

uncomfortable with making 

an allocation. 

Another major concern for allocators 

is scalability. The investors 

have to ask themselves what will happen to the portfolio 

composition if a large allocation is placed. If the current 

positions and trades made within the portfolio would be 

different were the fund to be three, four or even five times 

the size, then there could be a problem. This is concerning 

for allocators because it indicates there may be style drift 

as the fund grows. If the allocator thinks they are making 

an investment in a small-cap equity fund, they don’t want 

this strategy to significantly drift to a mid-cap equity fund, 

since that may be the only place a fund of this larger size 

can find any opportunities to generate alpha. 

SERVICE PROVIDERS 

Engaging the appropriate service providers is crucial when 

presenting the investment vehicle to potential allocators. 

The fund’s service providers need to be reputable, have 

expertise in the investment strategy being used, and maintain 

independence. 

These firms should have reasonable name recognition. 

If the fund is being serviced by an unknown administrator 

or a relatively small accounting firm, allocators may have 

some concerns as to the expertise of the service provider 

and possibly the firm’s sustainability. With that said, be- 

HFMWEEK.COM 31


FUND SERVICES 

ing well known is not in itself sufficient for an allocator to 

‘check the box’ these days. Even if the firm is well known, 

lacking the expertise in the specific fund strategy could be 

equally harmful. A law firm that focuses on fund creation 

of fairly standard long/short equity funds may not be the 

best firm to engage with if the fund is going to be heavily 

investing in real estate. 

One area of focus during the due diligence process that 

has been consistent over the past few years is the mechanics 

of back office support. Allocators want to find a robust 

process in place, which has appropriate checks and balances. 

The relationship between the manager, administrator, 

and prime broker or custodian, and how the information 

is flowing is a key point of interest for the allocator. During 

the due diligence process, the investor wants to ensure 

there is a proper reconciliation between the broker’s 

execution of trades and what the manager 

thinks should have been executed. There tends to 

be a preference among allocators to have a third 

party (the administrator) conduct that reconciliation. 

In the past, or currently with much smaller 

funds, the chief financial officer (CFO) may conduct 

that reconciliation and the administrator may 

not be given access to the trade orders, instead 

only receiving trade information directly from the 

prime broker. This kind of setup may have been 

acceptable several years ago and may be suitable 

for small non-institutional funds today, but as 

those funds grow, the dynamics of this process 

need to change. 

In a similar vein, it is important for the manager 

to mirror or shadow the books of the administrator. 

Blindly accepting the NAV issued by the 

service provider is, for obvious reasons, frowned 

upon. The degree of the shadow accounting can 

greatly vary. Some managers choose to engage 

a second back office service provider to shadow 

the primary administrator. Other managers have 

teams in place that perform this function 

internally. Whatever method is selected, the 

outcome allocators want to see is a robust 

process where the manager can accurately 

and timely detect errors. A cursory review of 

the NAV by the CFO will not likely be found 

sufficient during the due diligence process. 

Allocators will look for the administrator 

to have a dedicated pricing team as well as a 

current SSAE 16 (formally SAS 70), which in 

short, attests the controls of the organisation 

are sufficient. These are easy ‘check the box’ 

qualifications the administrator should bear, 

which helps reduce back office questions during 

the due diligence process. 

Avoiding conflicts of interest and maintaining 

service provider independence is 

extremely important to allocators as well. 

Some examples of independence issues can 

be as blatant as a manager who makes a direct 

investment in their administrator, to something 

as seemingly harmless as a familial connection 

to the engaged accounting firm. It is 

critical that these conflicts be addressed in a 

IT IS IMPORTANT FOR THE 

MANAGER TO MIRROR 

OR SHADOW THE BOOKS 

OF THE ADMINISTRATOR. 

BLINDLY ACCEPTING THE 

NAV ISSUED BY THE 

SERVICE PROVIDER IS, 

FOR OBVIOUS REASONS, 

FROWNED UPON 

” 

reasonable manner. It may not be necessary to find a new 

accounting firm, but a simple solution where the family 

member avoids all assurance/tax work on the manager’s 

products could be an acceptable solution. 

Counterparty risk is a hot topic as well. With investment 

bank collapses like Lehman Brothers and continued 

uncertainty in the financial health of various firms around 

the globe, spreading the fund’s assets across multiple 

prime brokers/custodians is a sought after approach to 

mitigate this risk. Allocators may be uncomfortable with 

seeing all the fund’s eggs in one basket. Although it is appealing 

to some managers to concentrate assets in order 

to get better financing terms, this economic payoff is usually 

viewed as shortsighted by allocators. 

THE INVESTMENT MANAGEMENT COMPANY 

IS A BUSINESS 

The last point that tends to be missed by many 

managers is that the investment management 

company is a business that needs to be sustainable. 

Allocators want to ensure that the revenue raised 

through management fees can adequately cover 

daily company expenses including infrastructure, 

costs, and personnel. If the financials of the business 

are unhealthy, it can almost be a guarantee 

that institutional investors will have a hard time 

committing to an investment in any of the products. 

In summary, performance is not the only 

factor that will attract institutional money. The 

manager needs to have a concise and consistent 

message backed by a sound infrastructure with 

quality service providers. Both the investment 

strategy and the management company need to 

be sustainable entities that can be viewed from an 

allocator’s perspective as a long term investment. 

Following these principles will allow a manager to 

attract and retain institutional investment from a 

due diligence perspective. n 

32 HFMWEEK.COM

Think about 

Form PF 

Viteos has. 

Call us +1.646.861.3409 for more information on how Viteos Fund 

Services can create value for your business. Delivering customized 

middle and back office solutions, best thinking and best practices. 

VITEOS.COM 

VITEOS Fund Services, LLC.

THE FIRST RULE OF SUCCESS 

SURROUND YOURSELF WITH THE BEST 

The success of any law firm can be measured by the quality of its people 

and its clients. We have the best of both. 

The Asset Management and Investment Funds team comprises 9 partners 

and over 40 asset management professionals in total, based in our Dublin 

and New York offices. We are experts in alternative investment funds and 

UCITS using hedge fund strategies, and have one of the longest established 

and largest hedge fund practices in Ireland. 

Our client base includes leading global financial institutions, investment 

banks, fund managers and broker-dealers. We are recognised internationally 

for our depth of legal, regulatory and market knowledge and our ability to 

deliver innovative solutions for our clients. 

Matheson Ormsby Prentice. Lawyers of choice for international 

companies and financial institutions doing business in and 

through Ireland. 

driven by excellence 

Contact Michael Jackson, Head of our Asset Management and Investment 

Funds Group, at michael.jackson@mop.ie, Aiden Kelly in our New York office 

at +1 212 792 4151 or your usual contact at Matheson Ormsby Prentice. 

www.mop.ie 

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INSTITUTIONAL 

INFRASTRUCTURE 

AS THE ALTERNATIVE INVESTMENT INDUSTRY CONTINUES ITS MARCH TOWARDS INSTITUTIONALISATION, LEO LAFORCE OF HEDGESERV TALKS TO 

HFMWEEK ABOUT THE CHALLENGES FACING FUND MANAGERS AND HOW FUND ADMINISTRATION CAN HELP BY DELIVERING A WIDE RANGE OF 

SERVICES UNDERPINNED BY HIGH-QUALITY INFRASTRUCTURE. 

Leo LaForce is a 

managing director at 

HedgeServ, overseeing 

marketing and 

communications for the 

global fund administrator. 

HedgeServ currently 

services more than 

$150bn of assets under 

administration, supported 

by 500 professionals across 

five offices. 

Leveraging administrator technology platforms 

have always been a popular option 

for hedge fund managers to help them cut 

their overheads and banish worries over 

infrastructure and back-office setups to a 

certain degree. But with the industry constantly 

evolving, and increasingly rigorous regulatory requirements 

and investor demands – not to mention constant 

leaps in technology – hedge fund managers need 

to be sure they are getting value for their money when it 

comes to choosing the platform for them. Leo LaForce, 

of HedgeServ, discusses the challenges faced by administrators. 

HFMWeek (HFM): The findings of a recent study by 

a leading consultant firm highlighted the growing importance 

of administrators as a key service provider for 

managers. Beyond independent asset verification and 

portfolio pricing, how else are administrators adding 

value to managers 

Leo LaForce (LL): When delivered 

correctly, capable administration 

supports managers with 

institutional infrastructure, freeing 

managers to focus on growing assets. 

Managers can further leverage 

an administrator’s infrastructure to 

reduce costs, strengthen controls, 

and benefit from 24/7 access to 

actionable data for meeting their 

business, investor, and regulatory 

reporting requirements. 

I would stress the word ‘capable’ 

as the industry continues to see 

what I’d term a ‘flight to capability’. 

Managers are moving away from 

traditional single-provider models 

where administration is simultaneously performed by 

their prime broker or custodian. Institutional investors 

are viewing independence as best practice controls when 

evaluating a manager’s service provider relationships. A 

second significant factor driving this trend is the widening 

gap between the current needs of managers and the 

capabilities of the legacy technology underpinning many 

administrator platforms. 

Administration has to migrate from models focused on 

‘lowest-cost-of-production’. A factory-like approach can’t 

keep pace with rapidly changing industry requirements. 

The new industry landscape requires administrators to 

THE NEW INDUSTRY 

LANDSCAPE REQUIRES 

ADMINISTRATORS TO 

THINK DIFFERENTLY ABOUT 

PLATFORM DESIGN 

” 

think differently about platform design and to continuously 

invest in better technology. Administrators need to 

break the status quo if it is to provide new answers to the 

many new questions facing managers. 

HFM: HedgeServ has a reputation for innovative technology. 

What has the firm done to break the status quo 

LL: I would describe the HedgeServ platform as well 

thought out. Our technology is designed from the manager’s 

perspective, and aligned with what managers are 

looking to achieve; namely cost-effective operations, scale 

for new strategies and growth, flexibility to meet business 

needs, and maximum investor confidence. We were fortunate 

to have a green field advantage – no existing legacy 

systems to contend with – when initially designing the 

HedgeServ infrastructure. We also benefited from the collective 

insights of a HedgeServ management team with 

extensive prior experience building and supporting global 

administration models. 

Industry events and the lessons learned were also incorporated 

into our original platform 

design, and continue to be as the 

industry evolves. The credit crisis is 

a prime example. Managers needed 

critical portfolio information 

fast, in timeframes and formats traditional 

administration struggled 

to comply with due to technology 

limitations. Another example is 

that, post-Madoff, administrators 

must prove that infrastructure and 

controls can withstand forensic 

onsite due diligence by investors. 

Otherwise, the administrator risks 

presenting red flags that could 

hinder a manager’s capital raising 

efforts. Nowadays, increased cost 

pressures are raising the barriers of entry for newly launching 

managers and leading many managers, emerging and 

seasoned alike, to consider outsourcing functions such 

as middle office operations and Form PF preparation. As 

managers continue to face new challenges and uncertainties, 

they need the options to seamlessly increase or decrease 

administration service levels as needed. HedgeServ 

has responded by extending its platform to be both enterprise 

in scope and plug and play in nature. 

HFM: Managers are looking to administrators for an increasingly 

wider range of services. How are administra- 

HFMWEEK.COM 35



“A best-in-class risk and 

portfolio management 

system and powerful 

valuation engine underpins 

our single database model” 

tors adapting and extending their technology platforms 

to accommodate manager requirements 

LL: HedgeServ helps managers view and manage both 

their portfolio risk and operational risk from a single system. 

Achieving this capability required a non-traditional 

set of building blocks. The HedgeServ platform operates 

on a single database, which supports all asset classes. All 

trades enter the platform from a single point of capture. 

Data streams in real-time to power an integrated suite of 

front, middle, and back office applications across our platform. 

The single database model enforces accuracy and 

controls, while providing managers with a consistent data 

set supporting their firm-wide workflows. 

We uniquely chose a front office starting point when 

designing the HedgeServ platform. This enables us to 

communicate with, and report to, managers in the same 

language they use internally when talking about and managing 

their businesses. A best-in-class risk and portfolio 

management system and powerful valuation engine underpin 

our single database model. We’ve integrated into 

this core database a proprietary general ledger and suite 

of middle and back office tools. Positions, cash and accruals 

all reside within one system. Managers have the ability 

to slice and dice their NAV and profit and loss by any 

portfolio attribute and can drill down to the most granular 

level on positions, valuations, risk analytics, and underlying 

market data. 

Best practice has moved to T+0. The HedgeServ platform 

captures all trades in their native form, regardless of 

asset type. All HedgeServ applications accurately reflect 

the full attributes, terms and conditions of each unique security 

type, including complex OTC derivatives and bank 

debt instruments. Besides facilitating fully automated 

support of the post-trade investment lifecycle, this level 

of process integrity allows us to expose our workflows to 

managers and investors in a fully transparent manner. It 

also translates into more efficient month-end and yearend 

processes. 

HFM: Have administrators made progress in lifting the 

veil on their processes in response to increasingly rigorous 

operational due diligence by investors If so, has 

this increased transparency or created additional benefits 

for managers 

LL: Managers are increasingly tasked with demonstrating 

3600 transparency to investors – not only from a portfolio 

perspective, but also the operational processes underpinning 

NAV and performance calculations. HedgeServ operates 

on an open and shared platform with our clients, providing 

complete operational transparency and real-time 

views of all workflows and calculations we perform, including 

valuations. Managers can access full audit trails and 

drill into any relevant documentation for any process. An 

open environment enables real-time oversight and exception 

management, both critical when an administrator is 

performing front and middle office support for a manager. 

From a manager’s perspective, you could actually say we 

operate on a single server model. The HedgeServ platform 

is a fully hosted solution, with each manager in their own 

unique environment and with their own instance of applications 

and security master. Managers have full use of the 

entire suite of HedgeServ applications (including on-demand, 

read-only access to all their accounting data). There 

is only a single shared set of tools across our platform; both 

HedgeServ staff and our clients’ employees work off the 

same tool set on a daily basis. Everyone is on the same page, 

which increases accuracy and efficiency. 

A shared, open platform helps managers avoid the cost 

and inefficiency of shadowing their administrator. It is a 

powerful control in ensuring accurate accounting. HedgeServ 

provides managers the confidence of having total, 

on-demand transparency into all current and historical 

accounting data comprising their official books and records. 

A fully transparent environment, coupled with very 

experienced fund accounting professionals, has resulted in 

HedgeServ’s track record of calculating precise and timely 

NAVs. We’ve never re-stated an NAV due to an accounting 

error. 

The HedgeServ platform also delivers data convergence 

– a centralised, independently derived data set, fully 

reconciled to the fund NAV, which managers can use to 

meet their business, investor, compliance and regulatory 

reporting requirements. Managers have 24/7 access to 

the same dynamic reporting tools that HedgeServ professionals 

use to create customised portfolio, accounting, 

risk and investor reports. Several managers also stream 

data from the HedgeServ platform to feed their own internal 

systems. An open, shared platform gives managers 

the ability to touch their data and do their jobs even 

from outside the office, anywhere in the world, from any 

internet-enabled device. 

HFM: How does HedgeServ keep its technology current, 

and keep pace with manager needs 

LL: HedgeServ is committed to agile development. Automated, 

highly-controlled monthly release cycles keep 

our platform nimble and responsive to client requests 

and our own business needs. Our IT developers work 

closely alongside our business line owners and client 

service professionals. Most importantly, we apply this 

same collaborative approach with our clients. By generating 

a constant flow of ideas, HedgeServ has closed the 

innovation gaps often associated with traditional administration. 

The new generation of administration delivers 

capable, usable and continuously enhanced institutional 

infrastructure to managers. n 

36 HFMWEEK.COM


SEEING INSIDE THE 

BLACK BOX 

DON MULLER OF NORTHERN TRUST TALKS TO HFMWEEK ABOUT THE IMPORTANCE OF INDEPENDENT VALUATION SERVICES IN THE FACE OF A 

GROWING DEMAND FOR TRANSPARENCY ACROSS THE HEDGE FUND INDUSTRY 

Don Muller 

is the global head of middle 

office services at Northern 

Trust Hedge Fund Services. 

Prior to this, Don served as 

the head of product control 

and over-the-counter 

structured products for 

Omnium. He has more than 

10 years of experience in 

the client service, operations 

and valuation space. 

Comprehensive and independent valuation 

services have become increasingly important 

in recent years as hedge fund managers seek 

to better engage with market data and investors 

drive the demand for heightened transparency. 

HFMWeek talks to Don Muller of 

Northern Trust about how a good relationship between 

administrator and manager can be crucial in delivering efficient 

valuation services. 

HFMWeek (HFM): What trends are impacting the way 

that an administrator provides valuation services to 

hedge funds 

Don Muller (DM): Firstly, we are seeing a trend towards 

the independent sourcing of valuations, which has been 

the case for some time. As an extension 

of this, we are also seeing 

growing demand for transparency 

into the underlying market data 

and calculations that support valuations. 

In addition, many of our 

clients are trading higher volumes 

of more vanilla products, leading 

to increased expectations around 

speed and accuracy for trade capture, 

valuations, and profit and 

loss (P&L). Clients require this 

transparency for different reasons. 

Some managers want transparency 

as a means to test valuations, using 

it on an ad hoc basis, while others 

require transparency on market data for each valuation. 

In general, clients are looking to engage with the data to a 

greater degree and want to understand how their portfolio 

is being valued each day. 

We view this trend as an opportunity – it allows us to 

create stronger relationships with our clients. More significantly, 

though, it aligns with our philosophy: if you 

achieve best practice on a daily basis, the month-end 

simply becomes another trading day. There will always be 

some extra activity at the end of the month, but full engagement 

each day contributes to the type of relationship 

we strive to have with each of our clients. 

IF YOU ACHIEVE BEST 

PRACTICE ON A DAILY 

BASIS, THE MONTH-END 

SIMPLY BECOMES ANOTHER 

TRADING DAY 

” 

HFM: What do you mean by trade capture and how important 

a role does it play in an administrator’s valuation 

capability 

DM: Ultimately, trade capture and trade management is 

about how we obtain and represent a trade within our systems. 

While the industry tends to focus on reconciliations 

and valuation data output, we view accurate trade capture 

– the comprehensive representation of trade attributes in 

the books and records – as the foundation of any administrator’s 

valuation capabilities. In other words, accurate 

valuations start upstream of an administrator’s valuation 

team. Trade capture is where details of each trade are 

exchanged, recorded and validated to the client’s trading 

counterparties. This all contributes to building a ‘golden 

copy’ of books and records, which in turn feeds more accurate 

valuations, P&L and financial reporting. 

Regardless of an administrator’s valuation capabilities, 

the accuracy of those valuations will suffer if they are performed 

from sub-standard trade records or inaccurate trade 

details. We strive to capture comprehensive economic detail 

of every individual trade. That 

may sound obvious, but it’s not 

always the approach that is chosen 

within the industry. We believe that 

if we can get an accurate and complete 

representation of trade activity, 

this creates the foundation for 

us to deliver the type of valuation 

service we want for our clients. 

HFM: Transparency continues 

to be a trend impacting all areas 

of the hedge fund industry. What 

does it mean in the context of 

valuations 

DM: Clients want to understand 

and become comfortable with the valuation methodology 

being used. By reconciling to their administrator and gaining 

transparency to the market data used in valuations, managers 

are able to easily isolate any differences in modelling 

methodology, making valuations less of a ‘black box’. 

As an example, Northern Trust Hedge Fund Services 

provides clients with access to their valuation results 

through a portfolio monitor tool that enables them to 

take advantage of all our attribution functionality. They 

can then delve into varying levels of aggregation across 

the portfolio and also drill down to an individual security 

level. The tool sits on a client’s desktop, which empowers 

them to truly engage with the data, supporting the trend of 

gaining transparency within the book. 

HFM: Are there any challenges between the administrator 

and the manager when it comes to the exchange 

of data and how do you overcome these 

38 HFMWEEK.COM

F UND SERVICES 

DM: It is important to capture every economic detail of 

every individual trade so that we have the level of granularity 

required for strong valuations. As a result, accurate 

mapping and data normalisation are critical but can be one 

of the principal challenges in the exchange of this data. We 

therefore put a lot of effort up front into our implementation 

process to enable us to capture robust and granular 

trade details. We also want to make the process efficient 

for the client, so we work with them to default values to 

market standards and to auto-populate trade details derived 

from counterparty agreements. This helps reduce the 

burden on them to provide us with the necessary trade details. 

Through trade affirmation and reconciliation to prime 

brokers and custodians, we strive to identify and correct 

any trade errors, while at the same time seeking to address 

the root cause of the break, so we do not see the issue 

repeatedly. 

HFM: Has the increasing focus on transparency 

changed the relationship between managers and administrators 

DM: Yes. In our role as administrator we are increasingly 

being seen as an extension of the manager’s team which 

means that confidentiality and trust are of the utmost importance. 

When you have that relationship, we believe it is 

important that both administrator and client be open with 

one another. 

We strive to give clients as much transparency to their 

books as possible. It’s their portfolio and there is nothing 

we want to hold back on our side. Through our online 

tools, we provide clients with insight into independent 

valuation methods, which allows them to compare the 

independent valuation with their own assumptions and 

models. We want them to have access to all of their data 

and we try to do so in a way that doesn’t require them to 

request access to information on an ad hoc basis. Our goal 

is to empower the client to conduct 

these types of queries and drill downs 

on their own, within their own desktop. 

this type of data on their desktop, essentially giving them 

transparency at their fingertips. 

HFM: How does the Northern Trust offering differentiate 

itself from those of its competitors 

DM: We feel we differentiate ourselves in a couple of 

ways: firstly, through our people. We have a dedicated 

team for valuation and P&L distribution to our clients. 

This enables us to take a highly targeted approach focusing 

domain expertise on each step of the process. Upstream, 

we have teams dedicated to activities such as trade affirmation 

and event processing. Downstream, where fund 

accounting takes place, there is a group that concentrates 

on that function alone. 

Secondly, we also have what we feel is a best-in-class 

technology platform. This gives our clients the flexibility 

to access the same tools on their desktop that our teams 

are using on the administration. This supports a high degree 

of transparency into what we’re doing each day, and 

it also improves communication with the client – since 

both the client and our staff are using the same tools and 

viewing the same data. These interactive tools give clients 

transparency into how the portfolio is valued on a daily 

basis in accordance with their valuation policy. Key triggers 

such as stale pricing and large percentage movements 

are not just seen through reporting, but immediately 

through the technology on the client’s desktop as well. 

Data is available to view for current day and historically, 

and is available to easily interact with at an aggregate or 

individual security level. 

Everything we do – from trade capture all the way 

through – is focused on that end state, where clients are 

engaging and working with their data. We don’t want to 

start the process at month-end. We want this to be an everyday, 

ongoing dialogue – which makes us an extension 

of their team. n 

HFM: How is the growing importance 

of independent valuation 

sources manifesting itself in the way 

valuation services are being offered 

DM: The importance of independence 

has seen valuation shift from a monthly 

service to a daily offering. Clients that 

are most actively involved with the review 

and approval of their daily P&L 

have a smoother month-end process. 

Because they are focused on keeping 

a clean book of trade activity throughout 

the month, the month-end simply 

becomes just another day. Added to 

that, the service has become far more 

comprehensive. Today, we provide 

our clients with transparency around 

all of the key drivers of the valuation: 

the valuation methodology, when it 

was valued, and by whom. We are 

providing clients with direct access to 

HFMWEEK.COM 39


FUND SERVICES 

CONVERGENCE OF 

ALTERNATIVE INVESTMENTS 

AND TRADITIONAL PRODUCTS 

FRANK NAPOLITANI OF CONCEPT CAPITAL MARKETS, LLC, EXPLAINS THE RECENT CONVERGENCE TREND IN THE HEDGE FUND INDUSTRY OF 

TRADITIONAL PRODUCTS AND ALTERNATIVE INVESTMENTS, PROVIDING AN OVERVIEW OF THE BENEFITS TO BOTH INVESTORS AND FUND SPONSORS 

Frank L Napolitani 

is managing director, Prime 

Services Group, Concept 

Capital Markets, LLC 

The hedge fund industry began decades ago 

and was almost exclusively driven by investments 

from ultra-high-net-worth investors 

(UHNWIs) located primarily in Europe and 

the United States. The past 15 years has seen 

the institutionalisation of the hedge fund industry, 

which has caused hedge fund sponsors to make significant 

investments to enhance their business capabilities 

to keep up with the pace of requirements by institutional 

allocators. Even after the tumultuous events of the 2008 

credit crisis, this institutionalisation has allowed the industry 

to grow – both in the number of hedge funds, which is 

currently estimated at more than 10,000, and also in assets 

under management (AuM), which is estimated to be in 

excess of $2trn. 

Some industry professionals believe the hedge fund 

industry’s current AuM could surpass the $3trn mark by 

2016. Catalysts for this anticipated growth are believed 

to come from institutional investors making larger allocations 

to hedge funds and the convergence of alternative investments 

in traditional products such as Undertakings for 

Collective Investment in Transferable Securities (Ucits) 

and the US Investment Company Act of 1940 (40 Act) 

mutual funds. 

For the purposes of this article, we will concentrate 

on the convergence of alternative investments and traditional 

products as we at Concept Capital Markets, LLC 

have been witnessing a tremendous interest from our 

hedge fund clientele to meet the demand from affluent 

retail investors. 

TRADITIONAL HEDGE FUND STRUCTURE 

Structured often as private partnerships, hedge funds 

have employed a wide range of investment strategies 

while incorporating the use of leverage and short selling. 

Traditional hedge fund structures only allow for investment 

by accredited investors and/or qualified purchasers, 

which generally include UHNWIs, family offices, funds of 

funds (FoFs), pensions, endowments and corporations. 

Given the nature of the investment strategies employed, 

traditional hedge fund structures have more stringent liquidity 

terms including minimum lockup periods (of one 

to two years), redemption notice periods (45-90 day notice) 

and redemption terms (quarterly, bi-annually, annually) 

in addition to the large minimum initial investment 

of $1m-$10m required to become a partner in the fund. 

These constraints have limited a large number of affluent 

and sophisticated retail investors from being able to invest 

in hedge funds. 

ALTERNATIVE MUTUAL FUNDS 

According to Morningstar, at the end of 2011 there were 

approximately 300 mutual funds offering alternative investment 

strategies, with around $132bn in AuM. Mutual 

funds are created under the 40 Act. Although there are certain 

minimum criteria for managing a private partnership 

HFMWEEK.COM 41


FUND SERVICES 

and subsequent exemptions provided, to manage 

a 40 Act alternative mutual fund, a hedge fund 

sponsor is required to become an SEC-registered 

investment advisor. 

Launching an alternative mutual fund is traditionally 

accomplished by either joining an existing 

series trust offered by a larger custodian bank/administrator 

or by creating a standalone fund. 

Existing series trust: Creating a fund under 

the umbrella of an existing series trust could take 

approximately four to six months and the upfront 

costs are comparable to setting up a traditional 

hedge fund structure in the US. Ongoing annual 

operating expenses of the mutual fund may include 

fund administration, annual audit, shareholder 

reporting and support, transfer agent, corporate 

governance and compliance. The key benefits of 

joining an existing series trust are shared costs among the 

series trust participants, along with the distribution channels 

that the platforms maintain, often with hundreds of 

broker/dealer platforms or broker channels throughout 

the US. 

Standalone fund: Creating a standalone fund, especially 

for a hedge fund sponsor that has never set up a mutual fund 

before, could take six to 12 months and cost twice as much 

as joining an existing series trust. Ongoing annual operating 

expenses of the mutual fund may include fund administration, 

annual audit, shareholder reporting and support, transfer 

agent, corporate governance and compliance. The hedge 

fund sponsor would not have the benefit of cost savings or 

distribution agreements that are available to existing series 

trust participants. The sponsor would then be tasked with 

creating new relationships with broker/dealer platforms 

and/or brokerage channels on their own. 

Benefits to investors include the ability to diversify their 

asset allocation into alternative investment strategies, 

access to top investment talent, lower minimum investments 

and daily liquidity. 

ALTERNATIVE UCITS 

As of March 2012, there were approximately 

850 single manager alternative Ucits funds, 

managing approximately $158bn. The Ucits 

Directive is a set of European Union (EU) directives 

that aim to allow collective investment 

strategies to conceptually operate throughout 

the EU and be authorised from one member 

state and its regulatory body. 

Launching an alternative Ucits fund is traditionally 

accomplished by either joining an 

existing Ucits Platform or by creating a standalone 

fund. 

Ucits platform: Creating a Ucits under the 

umbrella of an existing series trust could take 

approximately six to nine months and the costs 

are comparable to setting up a traditional onshore/offshore 

hedge fund structure in the US/ 

Cayman. Ongoing annual operating expenses of 

the Ucits may include fund administration, annual 

audit, shareholder reporting and support, 

transfer agent, corporate governance and compliance. 

The key benefits of joining an existing 

WE CONTINUE TO 

CONSULT OUR CLIENTS 

ON BROADENING THEIR 

PRODUCT LINES BEYOND 

THE TRADITIONAL HEDGE 

FUND STRUCTURES 

” 

Ucits platform are the shared costs among all Ucits 

products along with the distribution channels that 

the platforms maintain, often with hundreds of brokerages 

throughout Europe. 

Standalone fund: Creating a standalone fund, 

especially for a hedge fund sponsor that has never 

set up an alternative Ucits, could take six to 12 

months and cost twice as much as joining an existing 

Ucits Platform. Ongoing annual operating 

expenses of the Ucits may include fund administration, 

annual audit, shareholder reporting and 

support, transfer agent, corporate governance and 

compliance. The hedge fund sponsor would then 

be tasked with creating new relationships with 

broker/dealer platforms and/or brokerage channels 

on their own. 

The benefit to investors and their advisors for incorporating 

alternative mutual fund and alternative Ucits products 

include the ability to diversify their asset allocation 

into alternative investment strategies, gain access to top 

investment talent with lower minimum investments and 

daily/weekly liquidity. 

At Concept Capital we continue to consult our clients 

on broadening their product lines beyond the traditional 

hedge fund structures and separately managed accounts. 

The benefits outlined above to both investors and fund 

sponsors continue to drive the demand for product evolution. 

We believe that the fund sponsors who take advantage 

of this evolution, along with a developed marketing plan, 

will benefit a great deal from the increased appetite from 

affluent retail investors who wish to invest in alternatives. 

DISCLAIMER 

Concept Capital Markets, LLC is a registered broker 

dealer and registered investment advisor with the Securities 

and Exchange Commission (SEC), a member of the 

Financial Industry Regulatory Authority (Finra), and a 

member of the National Futures Association (NFA). n 

42 HFMWEEK.COM

Denver 

1290 Broadway 

Suite 1100 

Denver, CO 80203 

303.623.2577 TEL 

303.623.7850 FAX 

Seattle 

11747 N.E. First Street 

Suite 202 

Bellevue, WA 98005 

425.454.3770 TEL 

425.646.3440 FAX 

Boston 

One Financial Center 

15th Floor 

Boston, MA 02111 

617.830.1993 TEL 

617.830.8908 FAX

US EAST COAST 2012 - HFMWeek

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