Operational due diligence gets real at GAIM Ops Europe

11/2/2010 12:00:00 AM

This year’s GAIM Europe was a great success. The three day conference was marked by candid conversations between senior professionals on a wide range of timely topics. The focus of the conference was on operational due diligence. The topics spanned everything from best practices in fund governance to trends in leverage, pros and cons of gating and a whole lot more.

One of the themes that emerged from the conference that was noteworthy included the increased focus on fund governance. Several investors and independent directors expressed increased concern about how boards are constructed, what powers they have, how they operate and who control them. We consistently found UCITS organised funds to have higher levels of governance and standardised roles relative to their peers in Cayman and to US stand-alone LPs

Another theme that got attention was leverage. The market is slowly getting back to normal and leverage is increasing again. However, the terms in 2010 are very different from the terms that preceded them in 2007. So are the rates. Counterparty credit and the ability to negotiate agreements also got attention. It seems you need some size and scale in order to deviate from standard prime brokerage terms. Smaller funds have a lot less power and may suffer inferior terms relative to the bigger funds. This was an area that caught some attendees off guard a bit and may be the next focus for enhancement of operational due diligence reviews.

The use of independent administrators seems bedded down in best practices today. This is a far cry from last year and pre-crisis practices. Everyone seemed to require that their managers use quality administrators and only a few managers appeared to be hold-outs in this space.

There was a lot learn about UCITS regulations and the ever-changing state of the Alternative Investment Fund Managers Directive. It certainly seems like distribution into Europe is changing permanently. Is it for better or worse? Only time and performance will ultimately tell.

Seeding came up quite a bit, as did changes in US regulation. It appears that a small handful of seeders are controlling new capital allocations to launch hedge funds. Expectations for a fresh crop of disenfranchised investment bank proprietary traders hitting the streets are high following the implementation of the Volker Rule, although few other than Goldman Sachs have made a splash thus far.

There was a bit of a buzz around gates. Everyone seemed shocked to find out there have been some exceptions made to the principle that gated funds were treating all investors the same. A few panellists even indicated that under the pressure of litigation, some gates were relaxed and investors made whole.

Dinner at the Irish Stock Exchange was a huge success and a highlight of the conference. The closing afternoon lecture from a former high school principal on the virtues of learning and building adaptive organisations was interesting and fun.

All in all it was a good conference. It was educational and thought-provoking. A good experience all around!

Kevin R. Mirabile is Chief Operating Officer at Larch Lane Advisors. Larch Lane Advisors is a fund of hedge funds and a subsidiary of Old Mutual Asset Management. It manages approximately $1.4 billion in hedge fund investments.

Although he is COO at Larch Lane Advisors, Mr Mirabile writes here in a personal capacity, and the views expressed are his own and not those of Larch Lane Advisors.

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