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Alternative Market Briefing

Other Voices: Risks to hedge funds from Panama Papers

Thursday, April 14, 2016

From Finomial Corporation: While the media focus to date has been on the law firm’s role (Mossack Fonseca) in creating shell entities (which in many cases are legal), Finomial protects hedge funds from the risk of unwitting acceptance by the investment management community of money from entities with unknown beneficial owners.

Hedge funds are vulnerable to unintentionally accepting investments from entities with anodyne names and obscured beneficial owners. A shell entity’s capital can be accepted by a hedge fund, theoretically, only once it has undergone a rigorous - yet entirely manual - process. Unfortunately, the value of a rigorous review of investment funds is entirely in conflict with the reality of the ground - manual, opaque investment processing, which is difficult to manage, monitor and audit.

Much of the burden for uncovering potential unlawful investment activity falls on the asset servicers - the fund administrators. They are tasked with an almost impossible responsibility for scrutinizing the documents that are required from hedge fund investors. The fund administrators who are processing money from these entities on behalf of hedge funds have difficulty looking through to these beneficial owners. It is only through rigorous review of paper documentation and a series of offline requests that they might have the opportunity to discover a true beneficial owner, or an inconsistency or a red flag.

The intensely manual nature of investing in hedge funds......................

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