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Hedge Fund Industry Survey Finds Most Are Registered

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CHICAGO (–Horizon Cash Management has released results of its first comprehensive survey on best practices in the hedge fund industry.

Hot-topic areas of side letters, valuation, registration and compliance were covered in addition to cash management, prime brokerage, administration and risk management. Of the 2,000 hedge fund firms invited to participate in Horizon’s online survey earlier this year, roughly 200 responded, representing 800 funds worldwide.

Respondents were twice as likely to be registered investment advisers per the Securities and Exchange Commission’s hedge fund rule that went into effect in February. Only 31% had not registered, and of that group 75% said they planned on doing so. These answers were given on May 20, one month before a U.S. Circuit Court of Appeals decision declared the rule “arbitrary.”

Of the registered and non-registered advisers surveyed, 65% said they didn’t find the process to be onerous, while only 24% suggested that the regulatory burden is heavy. Personnel and the time it takes to comply were cited as the most troublesome aspects of registration, with financial considerations coming in a distant third.

Even though hedge fund adviser registration may be in limbo, compliance measures are firmly in place. Most (85%) maintain a policies and procedure manual, and many (80%) say that investors see operational controls soundness and effectiveness as “important or very important.”

Perhaps what some service providers will find interesting is that only one-third of the hedge funds surveyed reported outsourcing control of the compliance process, meaning that compliance is primarily an internal function.

Besides compliance, investors may become concerned over the growing use of side letters. Their use is evenly split, with 40% of the managers saying they rely on side letters, while 43% said they do not. The remaining 13% claim “not to know.” Of the hedge fund managers that use side letters, 63% said they don’t disclose them to all investors and more than half communication to side letter investors tends to be separate from the offering document.

Side pockets are often criticized for their lack of transparency, but for the most part investments that end up within these portfolios are the most difficult to liquidate and to value, experts say. Overall, the fund administrator’s role in portfolio valuation continues to rise, with almost 80% of responding funds handing-off pricing and valuation duties to third-party administrators.

The survey’s 100 questions were developed by Horizon with the help of the Alternative Investment Management Association, the Managed Funds Association, Custom House Administration, FIMAT, IMS and Walek & Associates.

For Horizon, this was the most ambitious survey yet, in that it focuses beyond issues of cash management.

“We are just beginning to scratch the surface in terms of analyzing the data and will be able to share more important findings throughout the year,” said Diane Mix, president and principal of Horizon in a statement. “It is encouraging to see so many of the best practices recommended by industry trade associations and leading experts being broadly implemented.”

Horizon officials plan to release a follow-up report later in the year on sales and marketing best practices.

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