The role of managing operational risk for a hedge fund or fund of funds continues to pose a challenge - especially, as numerous exogenous factors (such as changes in regulation, taxation, structures etc.) continue to increase the level of uncertainty, complexity and costs. Carlos Ferreira is a Director at PAAMCO's Investment Operations Group and oversees PAAMCO's firm-wide Operational Due Diligence team. In this feature he shares his expertise on the subject, on how managers are coping and the key considerations.
Q1 - Key considerations that can make or break an investment
Appropriate corporate governance and legal framework.
Experienced CFO/COO.
Appropriate service providers, including administrator, PB/ custodian, auditor.
Q2 - What do you see as being the current issues?
Adequate programme of compliance to manage increased regulatory complexity and focus.
Back office leadership
Valuation challenges
Q3 - How do you believe one should address the issue of: in-sourcing versus out-sourcing of operations?
Not all businesses are the same.
Scope exists to tailor business according to where the manager is within its lifecycle.
However, critical is a business set up that demonstrates a good control environment, which cannot be out sourced.
Q4 - Looking ahead, what according to you is going to influence and impact the operational due diligence landscape?
Numerous exogenous factors are increasing uncertainty, complexity and costs.
Global hedge fund regulation (especially in the U.S. and Europe), OTC clearing regulation, tax regulation, etc.
At the moment, managers are trying to cope with all of these changes.
Investors are expecting more at the same time (global expectation of best practice).
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