The idea that everyone would be working from home for an extended period of time was never truly contemplated in business continuity plans. But this is now expected to change in reaction to the current crisis. The experience over the past two months has taught the investment management business that, with the right tools, working from home can be an essential, and perhaps more practical and cost effective, element of BCPs going forward.
Historically, a key element of a BCP involved an alternate location, due to be used in case a firm’s primary office is inaccessible. The abrupt and extensive shift to working from home as a result of the Covid-19 crisis could see a reassessment of those arrangements.
Jack Seibald, Managing Director and Global Co-Head of Prime Brokerage & Outsourced Trading comments: “BCPs need to be updated to reflect this work from home capability. The notion that firms have to rent redundant locations, keep them fully functioning, yet empty until an event warrants it, now almost seems ridiculous. Yet this is how most firms are set up.
“Our clients are reevaluating their BCPs and the capabilities they will require to maintain a credible business operation in the event of another crises. This is being motivated by a need to ensure continuity, and perhaps as importantly, to be able to pass a thorough ODD exam by prospective investors.
“The primary issues they need to solve for are location and connectivity, though much more so the latter than the former. With the technology solutions available, fund managers can have access to their files and their portfolio management tools from anywhere, so long as they have the proper equipment and connectivity in place.”
In Cowen’s own case for example, the firm was able to maintain all of the services clients expect by adopting early implementation of its BCP and adapting its strategy as conditions evolved. “We achieved this while transitioning almost all of our employees across the globe to BCP sites and quickly thereafter to their respective homes – to ensure that we did everything possible to keep them safe – just as market volatility and trading volumes were beginning to surge,” Seibald explains.
A new reality
As rules around social distancing look like an inherent part of the future reality, Seibald notes firms will most likely have to re-deploy personnel to multiple locations to distribute capabilities and so mitigate the risks associated with crowding. “Firms could use their disaster recovery/business continuity sites to house portions of their teams, and ultimately perhaps save on the cost of supporting expensive real estate in large metropolitan areas,” he says.
Having everyone working from home on an ongoing basis is not feasible for investment management and brokerage businesses, according to Seibald. Rather, firms can and should make the proper investments and plans to minimise potential risks to their organisations. “I don’t think remote working is a viable, steady state solution for our industry. That said, how we work will change, and that will be particularly visible in large offices where trading desk layouts are employed. We’ll have to get used to not having a person sitting next to or across from another,” he muses.
Seibald adds: “We need to try to anticipate the way we can effectively conduct our business and adapt our organisations accordingly. I am a firm believer in the idea that collaborative work – whether it’s portfolio managers and analysts working on investment ideas, traders working together to more effectively serve portfolio managers – is at its best when colleagues can interact in person.”
ODD adaptation
Regardless of whether the world reverts to meeting face to face, the crisis has undoubtedly sharpened the need for firms to invest in the most up to date technology solutions with the appropriate cyber security protections, and redistribute computers used as trading terminals, for portfolio and risk monitoring to employees’ homes. “In doing so, it’s also important that firms assess the connectivity capabilities from employees’ homes, and where necessary, encourage or assist with upgrades,” Seibald advises.
However, although operational concerns such as these are challenges firms are having to overcome, Seibald believes dealing with prospective investors in this new environment presents a more significant obstacle.
Allocators’ Operational Due Diligence (ODD) processes have had to change and adapt to the remote working environment. In particular because the staple of the ODD process – the in person meeting – is not possible for the foreseeable future. Most allocators believe face-to-face meetings will not take place through 2020.
“This has forced ODD Groups to conduct diligence remotely as well as focus on new types of questions geared toward hedge funds’ abilities to deal with the disruptions caused by the virus and market volatility,” explains Bill Bassin, Managing Director, Capital Introduction, Cowen.
Due to the lack of in-person contact, hedge funds must have robust responses to questions on several factors allocators are focusing on during this crisis. Bassin identifies several common themes when it comes to positioning a hedge fund for an ODD examination during this unsettled period. He says the issues ODD Groups are focused on are based primarily on the remote work environments everyone is engaged in and on how the increased market volatility and potential lower liquidity of securities during the crisis has impacted hedge funds.
More specifically, these include factors like key man clauses, securities valuation, NAV and AUM triggers, cyber security, redemptions, liquidity and cash movements.
Bassin recommends: “Having strong answers to these questions and topics will be key to passing an ODD exam and securing an allocation in the new paradigm. If there is one theme that resonated through each ODD group conversation, it is the importance of continued communication and transparency with existing and new investors. The fewer surprises the better. Generally speaking, ODD Groups and allocators are understanding of the new issues arising from the virus but want to hear of any issues directly from the manager, as opposed to from some other source.”
Jack Seibald
Managing Director, Global Co-Head of Prime Brokerage and Outsourced Trading, Cowen Prime Services
Jack Seibald is Global Co-Head of Prime Brokerage and Outsourced Trading, Cowen Inc. He was a co-founder and managing member of Concept Capital Markets, LLC until its acquisition by Cowen Group, Inc. in September 2015. He has been affiliated with the firm and its predecessors since 1995, and has extensive experience in prime brokerage, outsourced trading, investment management, and research dating back to 1983.
