GAIM Ops Paris 2012: A Summary
An industry conference veteran once joked he never failed to see the irony of hedge fund managers and investment bankers moaning about their ever-growing expense ratios from the confines of five star hotels. It is perhaps for this reason GAIM Ops Paris 2012 organisers opted for the low-key, four star Crowne Plaza in Republique as opposed to the more opulent surroundings of the Shangri-La or Le Meurice for this year’s event. Such extravagance was permissible during the boom years but with pressure on revenues and margins mounting, coupled with growing operational , infrastructural and regulatory costs, this profligacy can no longer be justified , much to the chagrin of some of the more old-fashioned attendees.
Several delegates noted the less-than-ritzy location of the hotel and its ambience (it was directly opposite a construction site). “It sums up the state of the industry,” moaned one, and there were plenty of gloomy exchanges about how hard fund managers are finding it to retain their prime brokers, let alone stay in business, if they cannot lift AuM above $150 million. Republique itself was until recently in a state of similar vulnerability. Its disrepair was not dissimilar to New York’s Lower East Side in the bad old days. In a hopeful extension of the metaphor for the hedge fund industry, things have changed now. The area has been gentrified by incoming residents, and new businesses have sprung up, making Republique a successful example of urban regeneration policy. The main square (the aforementioned construction site) is being completely renovated and Parisians are undoubtedly excited about what lies ahead. The potentially brighter future for Republique was not lost on some of the more thoughtful GAIM Ops attendees, who saw it as the perfect metaphor for the hedge fund industry. Times are exceptionally difficult, but those firms that survive will thrive, was their view. Nonetheless, GAIM Ops 2012 was well attended, with numbers roughly comparable to Geneva last year. The attendee quality was high – a number of large pension funds were present, as were some funds of funds. Notably absent though were single managers and consultants (bar Albourne Partners).The key issues were equally familiar.
Corporate governance continues to dominate. An entire pre-conference workshop was dedicated to the issue, while it cropped up sporadically throughout the main event. The same arguments (directors sitting on too many boards, directors lacking investment management experience, etc.) are still being put forward. But investors’ expectations have become more realistic. In Geneva last year, tempers frayed at the corporate governance panel. A Carne survey of institutional investors was still fresh in peoples’ minds, as was the Weavering Capital judgement. One year on, investors still want improvements but the arguments (for and against) have become less confrontational. Shareholder activism may be growing as a way of attracting and retaining capital as well as an investment strategy – a survey published by Schulte Roth & Zabel confirmed so much – but investors’ passions were not as inflamed as in Geneva. Whether this is due to more pressing issues – eurozone woes and the US “fiscal cliff” – is hard to ascertain. One delegate complained that investors were always ready to talk about corporate governance but rarely translated words into action. With investor fatigue setting in on this issue, the pace of change – if any – will be slow. An astute audience member asked whether investors should sit on the boards of hedge funds. A family office and several funds of funds rejected this as a potential conflict of interest. There was also concern it could lead to litigation from other investors, particularly in the event of liquidation.
Regulation, unsurprisingly, was high on the conference agenda. Interestingly, the yet-to-be-finalised AIFMD was barely mentioned. The directive, due to come into force in July 2013, has been a regular topic of conversation at industry panels since its inception in 2009. Nevertheless, with uncertainty still remaining about the final rules, most of these panel debates tend to reach one conclusion: “We are not 100% sure about what will happen but we think it will be expensive.” Congratulations to the GAIM Ops organisers for not suggesting the event re-visit this tired topic. Discussions on regulation were lively. A Singapore-based executive at PAAMCO, the fund of funds, discussed CFTC registration and warned that many Asian managers were behind the international pacer on this necessity. Jerome Lussan, CEO at Laven Partners, alerted the audience to the changes being undertaken in Singapore, a jurisdiction that is now home to a $53 billion hedge fund industry. This was a refreshing change from the usual conference agonising about AIFMD, Form PF although FATCA did crop up once. One delegate added he would like to hear about regulatory changes in other emerging markets, namely Brazil, India, China and South Africa. Regulation, it is increasingly obvious, is now part of the mental furniture of the industry. GAIM Ops even hosted a presentation by the UK Financial Services Authority, which outlined its vision of how it will operate as the Financial Conduct Authority (FCA). The framers of the new body promised to focus on pre-emptive action, conceding it had got some its enforcement provisions wrong in the past.
The Eurozone crisis occupied just one session. Charles Proctor, partner at Edwards Wildman Palmer, assessed the operational risks of a country exiting the eurozone. The speed and terms of redenomination and the almost inevitable imposition of capital controls by existing member-states were the chief concerns. Another anxiety is the realisation that any fund managers and banks with exposure to an exiting country would find themselves subject to local bankruptcy and other laws, when it came to calculating losses (although the Greek government has famously re-written its bond documentation in English law). If anything, the practical implications of the eurozone crisis warranted more time in the crowded agenda, since the operational implications are immense. But European bankers are, of course, forbidden to talk about the subject, lest anyone start to focus on their exposure to Greece, Italy, Portugal and Spain. While several law firms have published reports on the operational implications of a eurozone exit by one country or several, the investment bankers have shied away from the topic for the most part (an honourable exception is Credit Suisse).
Counterparty risk cannot, in current circumstances, be left off any conference agenda. This does not mean that the issues in measuring and mitigating counterparty risk ever fundamentally mutate. But one area needs to be developed further, namely that of the risks associated with prime custody. BNY Mellon has said roughly $684 billon of hedge fund AuM is in prime custody yet many prime custodians are coy about what will happen to client assets in the event of a default, and tens of trillions of dollars of assets suddenly had to start looking for a new home. In theory, the assets are held off the balance sheet. In practice, clients fund the liability side of the balance sheet with their cash deposits. Stock loan indemnities, and cash collateral reinvestment vehicles, also have a nasty habit of smashing holes in even the most scrupulous fiduciary agent. If custodians start lending to hedge funds directly – and certain custodians already assume massive intra-day risk in funding broker-dealers - the risk of a major disaster is not remote. These are issues operational leaders in the hedge fund industry need to urgently address.
Overall GAIM Ops 2012 was a triumph. Instead of being located in an oversized, impersonal conference centre, the Crowne Plaza was an intimate venue which facilitated networking among delegates. There is debate about where to hold GAIM Ops 2013. One delegate suggested London, although this was rejected by most who argued it would lead to a decline in attendance. Organisers are currently mulling Paris (again), Geneva, Dublin (which in 2010 proved exceptionally popular) and Amsterdam. GAIM Ops Cayman will be held at the Ritz Carlton in Grand Cayman on April 21 – 24