Operations for Alternatives (OFA) Conference: A Summary
Held in the opulent surroundings of the PGA National Resort & Spa in Palm Beach, Florida, the inaugural Operations for Alternatives (OFA) conference proved highly dynamic and well attended. Any temptation among delegates to play golf on the 19-hole course was swiftly averted by the tropical thunderstorms on the first day and a subsequent Tornado warning in Palm Beach on day two. But what were the key talking points at OFA?
The mood in the US compared to Europe is undeniably bullish and full of exuberance. Investor interest in both large and small hedge funds is likely to grow substantially in North America, according to delegates. A recent Barclays Prime Services survey confirmed as much, stating that 58% of hedge fund assets would derive from North America, followed by Europe (24%), Asia (12%) and the Middle East (6%). Panellists at OFA also highlighted investors were regaining their mojo and starting to reinvest in smaller hedge funds instead of putting their capital to work at the larger and by their reckoning safer managers. Again this was evidenced in a recent Preqin study which found investors were less inclined to allocate to hedge funds managing in excess of $5 billion although were seemingly more open to sub $100 million shops. Given the bullishness for hedge funds among US investors, it is unsurprising Deutsche Bank’s Global Prime Finance Alternative Investment Survey is predicting hedge fund Assets under Management (AuM) could reach $3 trillion by the end of 2014, up from $2.6 trillion in 2013.
Several panels discussed in depth the bright future that lies ahead for liquid or regulated alternatives such as ’40 Act hedge funds. Paul Roth, founder of Schulte Roth & Zabel, said mutual hedge funds saw higher inflows than private funds in 2013. He added the key investor target for regulated alternatives was the Defined Contribution (DC) pension plan market, which according to a report last year by SEI, controls roughly $5.1 trillion in assets. A study by PricewaterhouseCoopers (PwC) earlier this year estimated assets managed by alternative investment strategies could rise from $6.4 trillion in 2012 to $13 trillion by 2020, stating this growth would be driven by the emergence of regulated alternatives in both the US and Europe. However, there are sceptics who suspect liquid alternatives could meet a fate similar to that of 130/30 funds, which fell off the cliff during the financial crisis. COOConnect will be holding a webinar on regulated alternatives on March 31. For more information, please click here.
The JOBS Act
Previous conversations with hedge fund managers about the implications of the JOBS are usually met with indifference or worse disdain. The JOBS Act, which eases the historical ban on hedge funds publicly advertising or marketing their investment vehicles, has generally failed to excite. So it was something of a surprise to find managers at OFA talking positively about the reforms. The majority of the managers appear to taking a cautious approach, with most improving their websites, which have in the past been deliberately opaque to avoid falling foul of US securities laws. One public relations executive believes hedge funds will start advertising but not anytime soon although some panellists predict hedge funds will become more in tune with social media. Others were, however, fearful of being the first movers, understandably nervous about the lack of clarity from the Securities and Exchange Commission (SEC) on how they can disclose performance not to mention the added regulatory oversight and scrutiny they will likely face.
Cyber-security is rapidly becoming a major topic of interest for fund managers. One panellist said it was not a case of if a manager would fall victim to a cyber-threat but when. This comes as the SEC announced it would review the policies and safeguards asset managers have in place to protect themselves against cyber-attacks. The review, which is part of the SEC’s investment adviser examination program will also scrutinise whether managers are adequately protecting themselves against potential security breaches by IT vendors that have access to their technology systems. In addition, the SEC said it would be looking at firms’ policies on IT training, vendor access and vendor due diligence. The SEC also said it was considering a requirement that would force asset managers to report significant cyber-events to regulators. Several financial institutions have been subject to high-profile cyber-attacks of late with a survey of exchanges by CPSS-IOSCO and the World Federation of Exchanges discovering 53% of respondents had suffered a cyber-attack in the last 12 months. A paper published by the Depository Trust & Clearing Corporation (DTCC) identified cyber-crime as the biggest threat to market stability, even putting it ahead of counterparty risk and concentration risk at central counterparty clearing houses (CCPs). Given that most fund managers outsource their technology support to third party vendors, they were advised to conduct rigorous due diligence on those providers. Furthermore, managers were told to ensure they have quality and regularly tested business continuity plans in place to deal with any attacks. COOConnect held a webinar on cyber-security which can be viewed here.
Alternative Investment Fund Managers Directive (AIFMD)
Awareness about the implications of AIFMD on US hedge fund managers has been limited. Many had simply assumed it was a European problem until relatively recently. Delegates point out most US hedge funds hoping to solicit European capital believe they can rely on the yet-to-be-defined concept of reverse solicitation. A sizeable number of US firms are adopting a wait and see approach before pursuing European capital given the hassle that reporting under Annex IV will entail, not to mention the intrusive remuneration disclosure requirements. Some firms are talking openly of withdrawing from Europe altogether, particularly if there is little investor interest. Nonetheless, others are not deterred - a sample survey of audience members in one panel session revealed a handful have not written Europe off as a source of investor capital.
Regulatory reporting is something fund managers are fast becoming accustomed to. Hedge funds in the US are already submitting Forms PF and CPO-PQR to the SEC and Commodity Futures Trading Commission (CFTC) respectively. Now, they will be required to submit AIFMD reports and submit data on all of their over-the-counter and exchange traded derivatives to trade repositories as mandated under the European Markets Infrastructure Regulation (EMIR). FATCA, a piece of US legislation designed to clamp down on tax evasion, is also likely to be a reporting headache for managers although one expert said most hedge funds were making decent progress on readying their FATCA compliance. A panel session comprised of fund administrators told managers to gather the data in a timely and proper fashion, and urged them (unsurprisingly) to outsource some of the work to their fund administrators.
Despite this being an inaugural event, OFA was remarkably well-attended with roughly 200 delegates turning up. While the majority of attendants were from the sell-side, there were a number of managers, although slightly fewer investors than expected showed up. However, the overwhelming majority of delegates believe OFA will become a regular calendar event going forward.