hedgeweekLIVE North America: Covid-19 crisis flags up operational challenges and cybersecurity risks, panelists say

Coronavirus

The impact of the Covid-19 crisis on cybersecurity, and the challenges of remote working on start-up hedge funds’ business operations, proved a key theme at this year’s hedgeweekLIVE North America event, ‘Managing a Start-up or Emerging Hedge Fund in 2020’.

Panel sessions on evolving operational challenges and cybersecurity heard how the current remote working environment is shining a light on operational risk challenges, with the ongoing coronavirus pandemic described as “the largest continuity test ever” for emerging hedge fund managers.

A digital poll held during day one’s operational challenges panel asked attendees which functions they were most likely to outsource or hire on a consulting basis.

Almost two-thirds of respondents (63 per cent) said they were most likely to outsource CCO and compliance functions, while over a fifth (22 per cent) picked their marketing and IR functions. Just 12 per cent said they would outsource trading, and 3 per cent said COO functions.

Commenting on the poll finding, panel moderator Christopher Bodden, director at Harbour, noted that across all outsourced roles in the industry, it remains vital for hedge fund managers to understand that ultimate responsibility lies in-house.

As the role of the CCO and COO evolve, and investors continue to push the barriers to growth, panelists noted the importance of developing a ‘culture of compliance’ at smaller start-up firms.

Barbara Ann Bernard, founder and CIO at Wincrest Capital, underlined the need for fledgling fund managers to strike a balance between budget and operational risk.

She said the Covid-19 crisis has accelerated disruption, adding the protection of client data remains key, with the risk of data breaches “unacceptable.”

Being nimble and tech-savvy can put emerging managers at an advantage, particularly in the current climate, said Alexis Kwon, director at the Alternative Investment Management Association. She highlighted how remote working can risk delays in manager-investor discussions, with the traditional operational due diligence process taking longer.

“So whatever you can do as a manager to speed up process will be helpful,” Kwon told the panel.

Jenny Kim DeSmyter, director, global sales strategy, SS&C Eze, described how firms are now outsourcing not just traditional middle- and back-office operations, but also are increasingly outsourcing certain trading desk functions.

“Now more than ever, with people working remotely and dealing with the challenges of starting a fund as an emerging manager, the tech choices you make are important in terms of the ODD process,” she added.

A deep-dive discussion into cybersecurity kicked off the second day’s panel sessions, with some 57 per cent of poll respondents indicating they now have modern up-to-date business continuity and incident response plans in place. 

Daniel Naccarella, senior advisor at Integrated Portfolio Intelligence, observed how the impact of 2012’s Hurricane Sandy on the tri-state area proved to be an impetus for firms to beef up their business continuity systems. He said the landscape has altered dramatically over the last 15-20 years, as firms have shifted from wholly in-house operations including personnel and hardware, to substantially outsourced functions.

The cybersecurity panel urged emerging hedge fund managers to behave as large, established SEC-registered firms from day one - even though that may mean an initial overspend on systems - since ad-hoc piecemeal spending can ultimately lead to spiralling cybersecurity costs further down the line.

Russell Safirstein, partner in charge, Anchin Digital Risk Solutions, described cybersecurity as a “journey”, adding it is “the number one risk we’re all dealing with”, while Michael Pusateri, CEO at Siepe, spoke of the need for firms to minimise risk and minimise change as they grow.

“Be secure from the start,” advised Michael Marrano, CISSP, CISM, CISA, Human Firewall Builder. He highlighted how both hackers and regulators are alive to the risks faced by emerging hedge fund firms in the current remote working environment.

“We need a roadmap which is futureproof, so that the things we do today will last a few years. You don’t want to go back to your COO to ask for more money because your systems are antiquated,” Marrano added.

“It’s about continuous efforts to remain secure. Constantly planning and futureproofing, so you get the biggest return on your investment.”

Panel discussion 2: Evolving Operational Changes


Panel discussion 3: Cybersecurity & Technology Infrastructure