Anthony Malakian: ‘Wait and See’ No More

In the US, the hedge fund industry made a rather substantial bet on the presidential election as it largely backed Republican nominee Mitt Romney, who promised to repeal as much of the Dodd–Frank Act as possible. Obviously, their money was not well spent, as President Barack Obama easily won a second term.

So Dodd–Frank marches on.

The industry has been in something of a holding position as it waited to see if there would be a change of the political landscape. Or, as David Kubersky, managing director of software provider SimCorp in North America, notes: “It was a little bit less wait-and-see and a whole lot more procrastination.”

While the election’s finality is not likely to mean a wave of new contracts signed and partnerships made in the near-term, it does mean that the air of uncertainty around Dodd–Frank has been lifted, so in the first quarter of 2013 buy-side firms can no longer use the election as a reason to wait and hope. Now the only hindrance to IT spend is the economy and decreased revenues—which, no doubt, is no small obstacle.

In With the New
This year marked the first time that large hedge funds—those managing at least $5 billion—had to submit their Form PF filings. Almost every other hedge fund will join them as they begin filing in the first quarter of 2013. So clearly, this pesky regulation will still be a new and time-intensive experience, especially for those first-timers. Additionally, the US Securities and Exchange Commission (SEC) is still making tweaks as to what’s required.

Hopefully a lesson has been learned by the industry: Waiting and hoping is not a viable business strategy.

In addition to Form PF, 2013 will be marked by several other evolving regulations and protocols that will have a significant effect on the buy side. One example is the Open Protocol Enabling Risk Aggregation (Opera), which, as the name might suggest, is an open protocol that aims to “standardize reporting procedures for collection, collation and conveying hedge fund risk information,” according to the Opera group.

It’s an idea that was developed in conjunction with a working group of hedge funds and London-based due diligence firm Albourne, which directs hundreds of billions of dollars into hedge funds. If a firm wants Albourne to allocate money its way, it must submit this information. “I’ve got a lot of clients asking about the Opera report,” says Marshall Saffer, COO at hedge fund software provider MIK Fund Solutions.

There’s also the Foreign Account Tax Compliance Act (Fatca), the oft-postponed US anti-tax evasion law. Financial solutions provider Linedata recently rolled out Fatca-compliant functionality to its Mshare investor accounting solution to get ahead of the curve, says Noreen Crowe, vice president of Mshare product management. The regulation has proved to be daunting enough that its deadline for compliance has been pushed from January 2013 all the way back to 2014. “That’s all due to lobbying efforts by the industry and by foreign governments saying that they don’t have enough time to implement,” she says.

Lesson Learned?
But hopefully a lesson has been learned by the industry: Waiting and hoping is not a viable business strategy.

“Fundamentally, behind all these regulations, it’s the same data, the same structure, so hedge funds really need to focus on automating this stuff,” Saffer says. “No matter what regulation comes out, and no matter what report compliance requires, if you’ve got your data stored and staged in the right manner, producing the reports that are required is academic.”

SimCorp’s Kubersky says this wave of regulation is not going to slow down. Those who view beefing up to meet these standards as an opportunity will be the winners. “More regulation can be expected, as opposed to less,” Kubersky says. “And the market leaders are going to be those that determine on a much broader basis about what needs they have and do less about just complying with the rules, and really prepare themselves for an increased regulatory environment.”

Or, you can wait.