Compliance Yields Positive Externalities

Terry Flanagan

Financial regulation has spurred a sea change of hedge fund technology consumption.

As the financial markets change, the relationship between market participants and service providers have been enhanced especially by hedge funds.

“Technology is not the solution itself because it’s not a substitute for judgment, policies or procedures,” said Kevin Goldstein, co-founder and chief executive of Auxia Partners, a provider of hedge fund technology.

“There has been a sea change in how technology is utilized by hedge funds, and service providers know to step up their game. Compliance gives (the industry) the operational challenge of (new product development), increasing the reliance of hedge funds on vendors and the service provider community.”

One trend Goldstein noted was the move for hedge funds to utilize one prime broker to multiple prime brokers, for capital raising.

A main theme is that the “days of doing everything yourself are over,” he said, referring to hedge fund managers that perform all of the “back and middle office” duties from “launch to maturity.”

“Hedge funds are leveraging technology from fund administrators, prime brokers, increasingly. They’re not going to be able to do everything internally if they want to be conscious of compliance.”

The most recent need for fund compliance is the roll-out of the Dodd Frank Act, which solicits an entire “person of contact,” for Christine McGrath Kamrass, senior vice president of Prime Brokerage Services at Jeffries.

“(For hedge funds), the first thing you can do is assign someone in your office to be the point person on Dodd Frank, because there is a lot to read, and a lot of homework to do,” McGrath Kamrass said. “Even if it’s going to take you to a year to research it, you’ve got to get started.”

McGrath Kamrass recommends a designated point of contact on Dodd Frank to meet with the firm’s service providers, attorneys, and prime brokers to “get their perspective of what needs to get done, such a review of internal procedures and reporting requirements (to stay compliant).”

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