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July 17, 2006 at 08:00 PM
CHICAGO (HedgeWorld.com)–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.
