Regulations Forcing Hedge Funds to Turn-up Their Data Management Game

Ashley Kramer wrote this on April 15, 2016

Much to the chagrin of any “Hedgie”, it seems as though the SEC and other global regulators are enforcing more regulations and compliance requirements on hedge funds every year. Since the 2008 financial crisis, hedge funds have seen their average reporting level increase from 6 to around 60 required filings per year.1 

regulations forcing data management turn up

With every new regulatory requirement, more pressure is placed on a hedge fund’s ability to effectively manage data without breaking the bank. From AIFMD to Form PF to FATCA, effective and efficient data management is increasingly becoming a critical consideration when evaluating how best to scale the middle and back office functions within a hedge fund organization. Indeed, with this hyper growth in regulatory requirements, it’s no surprise that 30% of attendees at the recent 2016 Amsterdam Investor Forum noted that increased regulatory pressure is one of their top concerns for 2016.2

 One prime example of the newly introduced, regulatory data challenges discussed at the forum was AIFMD (the Alternative Investment Fund Managers Directive). This regulation was designed by EU policy makers as a comprehensive plan for the oversight of alternative investment fund managers (AIFMs) operating in the anywhere in the EU.  AIFDM requires all covered AIFMs to obtain authorization from the EU and submit to government regulation. Experts agree that this regulation (like many others) are having some unintended fallout:

“[AIFMD] makes new demands of managers around valuation, risk management and stress testing [and] in turn makes significant demands on firms’ data. Hundreds of data elements need to be reported, multiple data sources need to be managed, data needs to be enriched or transformed and interfaces need to be developed,” stated Alan McKenna in the article Hedge Funds Weather A Data Management Perfect Storm. In fact, 34% of attendees at the same Investor Forum stated that increased costs is the largest effect AIFMD has had on their organizations.2

Because of the complexity and high cost of complying with AIFMD some funds have chosen to avoid actively marketing in Europe altogether, thus limiting European investors’ options when it comes to alternative investments. This trend was also reflected at the forum, where 21% of attendees stated that they will not take advantage of an EU marketing passport but instead, will continue to rely on reverse solicitation for European investors to reach them. 2

While AIFMD only effects those funds marketing their products in Europe, the variety of new regulations globally ultimately translates into higher expenses for funds operating anywhere, especially for the more complex funds trading in multiple geographies and asset classes. In this environment, what is quickly becoming apparent is that spreadsheet-based systems can no longer handle the volume and complexity of the reports hedge funds are required to produce.  Consequently, funds are increasingly having to focus on nailing down their data management infrastructure and processes in order to effectively comply with regulatory reporting requirements and to support their long-term growth plans.

Whether a hedge fund builds data management solutions in house or looks to outsource to a third party, like an administrator or technology provider, it’s essential that the solutions deployed are able to handle the standardization required by various global regulatory bodies.  According to Forbes’ contributor, Judy Gross, “many hedge funds are now employing Customer Relationship Management (CRM) systems which do serve a compliance purpose by memorializing investor contacts” and will become essential as regulations on marketing practices increase.3 It’s no secret that powerful and intuitive CRM systems arm hedge fund managers with the infrastructure and tools they need to combat this influx of data and reporting.  

Managers who have already deployed an industry specific CRM, like Clienteer, are learning that in so doing they have the opportunity to not only create a centralized hub for all contact, account, and fund information, but also to take advantage of various built in reports that help them minimize the time and effort involved in mining data and standardizing their tracking and reporting process. To learn more about how a system like Clienteer can help ease the complex compliance reporting demanded by regulators and investors, please reach out

 

 

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Sampson, John. The Hedge Fund Law Report: Honing Regulatory Reporting for Hedge Fund Managers. Publication. Ernst & Young LLP, 13 Nov. 2014. Web. 15 Apr. 2016. http://www.ey.com/Publication/vwLUAssets/EY-honing-regulatory-reporting-for-hedge-fund-managers/$FILE/EY-honing-regulatory-reporting-for-hedge-fund-managers.pdf

2 “Chapter 4 – The Regulatory Cycle.” Hedgeweek. Global Fund Media, 2016. Web. 15 Apr. 2016. http://www.hedgeweek.com/2016/03/21/237658/chapter-4-regulatory-cycle

3 Gross, Judy. “Compliance Technology Now a Necessity for Hedge Funds.” Forbes. Forbes Magazine, 08 July 2013. Web. 15 Apr. 2016. http://www.forbes.com/sites/judygross/2013/07/08/compliance-technology-now-a-necessity-for-hedge-funds/#cab035058d14