GAIM Ops Cayman 2013: A Summary
Here is a summary of some of the key points discussed at GAIM Ops Cayman, which took place at the Ritz Carlton Hotel in Grand Cayman between April 21 and April 24.
Divisions about OPERA
OPERA (Open Protocol Enabling Risk Aggregation), the Albourne Partners-led risk reporting initiative, continues to divide opinion. Established in August 2011, OPERA aims to standardise how hedge funds collect, collate and convey their risk data. Institutional investors have broadly welcomed the initiative, arguing the system will help hedge funds consolidate multiple data reporting points such as Form PF, AIFMD reporting and the Commodity Futures Trading Commission’s (CFTC) CPO PQR form into a single reference point. This should make life easier theoretically for investors, although one expert argues the contrary. OPERA risk reporting measures are based on methodology developed by Albourne, and this unsurprisingly differs from the methodology employed by the Financial Services Authority (FSA), the European Securities and Markets Authority (ESMA), CFTC and the Securities and Exchange Commission (SEC). If investors are going to ask for risk reports, they are likely to demand all of these reports, which are going to contain subtle – or indeed significant variances –in their risk reporting methodology - and this could ultimately confuse investors. The delegate warned investors could find themselves looking at conflicting data, and even suffer information overload. The no-nonsense stance by Albourne whereby their CEO advised hedge funds to sign up to OPERA or face relegation from its approved list of hedge funds has also irked managers. This ultimatum, some argued, stemmed in part from the low hedge fund take-up of OPERA. Whether or not this threat will serve its purpose is open to debate although Albourne’s clout ($300 billion in Assets under Advisement) in the hedge fund market should never been underestimated. Some reckoned the low uptick could be attributable to the sheer volume of regulatory reporting managers have done or are preparing to do. Nonetheless, news that the Australian pension market is likely to embrace OPERA following regulatory backing, will give Albourne a boost. “The news that Australia adopted the standards is big. If institutions like CalPERS or CalSTRS follow suit, then the ball will get rolling,” said one operational due diligence expert.
Corporate governance continues to be a familiar theme on the conference circuit. Panellists broadly welcomed the Cayman Islands Monetary Authority’s (CIMA) proposed albeit yet-to-be-published reforms of its corporate governance industry. Most experts predict the reforms will be meaningful, although they are facing predictable challenges. In January 2013, CIMA announced a consultation, to be conducted by Ernst & Young and distributed to institutional investors. According to corporate governance insiders, approximately 180 investors participated in the consultation – a not too unimpressive feat. The big news, however, at GAIM Ops Cayman, was that a subsidiary of DMS, a Cayman-based professional services firm, had sought a judicial review in the Grand Court of Cayman challenging CIMA’s reform consultation. The DMS subsidiary – Cayman Private Manager II Limited – argued CIMA’s proposals would undermine the company’s ability to compete, and has sought an injunction or prohibition that would prevent CIMA from acting upon the findings of its recent consultation. DMS claimed the consultation did not give detailed proposals on any changes, adding any reform had to be in the best economic interests of Cayman. Furthermore, it argued CIMA had not demonstrated why reforms needed to be enacted in the first place. The Grand Court has yet to determine whether a judicial review will be forthcoming, although DMS refused to comment on the case. Institutional investors describe the judicial review as a delaying tactic, while one said CIMA was unlikely to backtrack on its reform agenda. Others find the challenge bizarre given that CIMA has not published finalised rules.
Regulators getting tough
The assistant US attorney at the US Attorney’s office warned hedge funds that political intelligence firms could face a level of scrutiny on par with that of expert networks. Political intelligence firms, which pride themselves on their excellent networks of politicians and government insiders, have proliferated in recent years as lawmakers’ actions increasingly play a major role in market movements. A growing number of Wall Street firms, including hedge funds, pay for their information and political gloss. The assistant US attorney’s comments follow SEC subpoenas for emails and documents from Marwood, a political intelligence firm earlier in 2013 following allegations the company may have warned its Wall Street clientele, including several hedge funds that the Food and Drug Administration was going to delay approval of a diabetes drug. One hedge fund is reported to have taken a substantial short position in the drug company following this advice. Meanwhile, Sinclair added there was political pressure on these organisations. The US Government Accountability Office recently issued a report, which acknowledged it could not quantify how much political intelligence was sold to clients, or how these organisations were compensated. Some Congressional figures have urged political intelligence firms be forced to register with Federal authorities so as to minimise the risk of material, non-public information being leaked.
Furthermore, regulators are likely to review hedge fund compliance with the SEC’s Rule 10b5-1, an ancillary to Rule 10b5, which prohibits insider trading. Rule 10b5-1 states that if an individual is aware of material, non-public information when buying or selling shares, regulators can assume that person is trading on the basis of insider information. This presents a challenge if an individual working at a hedge fund has a directorship and is therefore privy to sensitive information, and that hedge fund has a position in the company.
Meanwhile, David Kirk, chief criminal counsel at the newly-formed Financial Conduct Authority (FCA) said the UK regulator's tough stance on insider trading at asset management firms had facilitated a 50% fall in dubious trading activity around earnings announcements. He cited the $11.1 million fine doled out to Einhorn and his hedge fund Greenlight Capital following allegations of market abuse surrounding trading of shares in Punch Taverns, as an example of the agency’s clampdown.
Overall awareness about the implications of AIFMD remains low in the US and Cayman Islands. A number of managers seem to believe that they will not be impacted by the rules, although several speakers promptly set them straight. The implications for US managers now is whether the costs associated with complying with AIFMD as of July 22, 2013, outweigh the benefits of marketing to European investors. One delegate said managers will swallow the pain because the European investor base, despite its recent aversion to alternatives, cannot be ignored.
FATCA was discussed with the global tax leader on FATCA at Deloitte warning hedge fund administrators will struggle with the reporting requirements due to the multiple intergovernmental agreements (IGAs) which have proliferated in the last year. Reports suggest the US is negotiating IGAs with up to 60 countries although only the UK, Norway, Mexico, Switzerland and Ireland have signed up. There are currently two IGA models in circulation. IGA Model one, put simply, allows the foreign financial institution (FFI) to report directly details of US accountholders to its national authority, which will then pass the information onto the IRS. IGA Model two requires the FFI to report directly to the IRS details of US accountholders although information on recalcitrant accountholders will be passed to national authorities who will then hand it over to the IRS. Despite the well-meaning intentions of the IGAs, they have unwittingly complicated the FATCA implementation process. The Deloitte executive warned attendees that some fund administrators will struggle to get on top of this.
One delegate complained about the multi-jurisdictional reporting requirements, adding he reckoned his company spent 85% more man-hours dealing with regulation today than it did in 2008. He urged regulators to bunch together and create a simplified, standardised reporting document, although conceded this was unlikely to materialise.
GAIM Ops Cayman saw record attendance this year, and many delegates commented the event surpassed the standards set in 2012. GAIM Ops Paris will take place in Autumn 2013.