GAIM Operational due diligence conference in Cayman: Views from a COO

5/11/2011 12:00:00 AM

The GAIM operational due diligence conference held last week in the Grand Cayman was once again a great event. The conference was quite topical, timely and well run as usual. The weather was also terrific!

The agenda this year reflected the wide range of legal, compliance and regulatory challenges that the hedge fund industry is facing and the tremendous alignment of interests between institutional investors and service providers over the need for more infrastructure, process and controls around hedge fund investing.

In part, more help is needed to support upcoming regulatory requirements. It is also needed due to consistently increasing demands from institutional investors and intermediaries related to transparency, governance and asset verification.

The business of running a hedge fund is clearly becoming one with new barriers to entry, a changing cost structure, lower returns and one in desperate need of standards and scalability. The big winners appear to be the administrators and fund accounting organisations. They appear uniquely positioned to provide hedge funds with the transparency and reporting tools being demanded by investors and regulators. This domain of business partner and information agent was previously owned exclusively by the primes. Now that many funds use more than one prime and only one administrator per fund, the administrators have a chance to really develop a potentially unique value added relationship with the hedge fund community.

Those that can deliver risk tools, middle office services, counterparty reporting, collateral management and other scalable services to hedge funds can be part of the solution need to create scalability and lower fund costs or at least shift them from fixed to variable costs. It remains to be seen whether funds will be willing to pay for these increased services. Eventually they won’t have much choice. The losers may be some of the smaller funds who cannot afford to keep up and who are unable to demonstrate to their investors they have a truly unique value proposition and alpha generating strategy to warrant the increased business risk.

One winner, however, may be Cayman itself. The head of the stock exchange made a compelling case to the conference delegates for the island and its role in the international financial community. The conference had record attendance and by most other measures, while there are issues to be dealt with, the jurisdiction showed no sign of any slowdown in relevance or being regulated out of existence. At least for another year!

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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