This year’s hedgeweekLIVE European Emerging Managers Summit examined how start-up funds can best organise their approach to operational due diligence, with attendees hearing how cybersecurity and succession planning have emerged as key considerations as a result of the coronavirus pandemic.
This year’s hedgeweekLIVE European Emerging Managers Summit examined how start-up funds can best organise their approach to operational due diligence, with attendees hearing how cybersecurity and succession planning have emerged as key considerations as a result of the coronavirus pandemic.
Sarah-Jane O’Sullivan, director at Willis Towers Watson, set out a range of corporate governance and front-, middle-, and back-office functions which remain central to the ODD process. Along with IT and HR, there has also been an increased emphasis on controls around cybersecurity as a result of Covid-19 and homeworking, according to O’Sullivan and panel moderator Thomas Deinet, executive director at SBAI.
The session heard how the wholesale moves towards cloud-based tech have heralded sweeping changes to the operational due diligence process over the past decade, which had been further accelerated by Covid, in turn bringing added cybersecurity challenges.
James Orme-Smith, CEO of London-based global equity market neutral hedge fund Sandbar Asset Management, spoke of how cybersecurity now represents a “huge chunk” of what people want to talk about as a result of working from home during Covid-19.
“It’s all very well saying you have something in place – but you need evidence of it,” Orme-Smith said of post-Covid cyber processes.
With cybersecurity emerging as a “hot topic”, investors want to know their money is safe, added Oliver Goldsmith, director, SS&C Eze. “Having the right tech and service provides can set you up for success from the start,” he remarked, suggesting this will ultimately help emerging hedge fund firms attract institutional money.
Delving deeper, speakers grappled with the evolving use of data, and data-sharing electronically, as a result of remote working, with O’Sullivan – whose firm rated more than 100 managers and over 160 funds last year – observing an uptick in data rooms. She believes managers are now in a better position to now share data over email, whereas pre-Covid data sharing had typically been conducted via physical meetings.
O’Sullivan also told Wednesday morning’s discussion, which took place at the Reform Club in London, that the coronavirus pandemic has led to greater scrutiny of succession planning among smaller managers – an area which traditionally has been the preserve of larger hedge fund firms. “We now encourage managers of all sizes to think about succession planning,” she explained.
Panelists also touched on the challenges of smaller firms having fewer staff, who often do multiple roles – with a COO, for instance, often also acting as the designated compliance officer.
Orme-Smith, whose firm started trading in August 2018, said having policies in place saves time for those conducting due diligence. He said exhibiting a willingness to communicate transparency is vital in the start-up process, and warned that not answering questions clearly simply invites those doing the due diligence to dig deeper.
“Tone is important right from the outset,” Orme-Smith noted, adding that preparation remains key. “You won’t get many second chances – you need a policy for absolutely everything.”
Expanding further on this point, he said: “The more gaps you leave, the harder it is for someone to approve you or give you a higher rating. It’s counter-intuitive to me that you would want to keep things secret – raising money is very hard, so why make it harder?”
Panelists also reflected on certain elements that emerging managers often get wrong during the ODD phase. O’Sullivan flagged up three key areas – “people, process and policies” – and said smaller hedge funds often fall foul of the policies segment. On people, meanwhile, she urged start-up managers to ensure staff in key roles are appropriately qualified.
Orme-Smith highlighted some of the questions that investors should be asking of start-up hedge fund managers, and said scrutiny of lifestyle and temperament – too often ignored – is absolutely crucial.
“If someone’s 35, you will get very different answers from a 55-year-old. Do they like fast cars and motorcycles? How do they feel on good days and bad days?” he observed.
Building on this point, both Deinet and O’Sullivan indicated a key success for a star trader looking to set up a hedge fund is to bring in a strong senior member at CEO who will feel comfortable challenging those in senior positions.
“Empowering other functions in the firm is a key factor to ODD success,” Deinet added.
Elsewhere, the discussion reflected on the lasting legacy of the coronavirus pandemic on operational due diligence, and whether it is now possible to conduct ODD completely virtually. O’Sullivan believes it now requires a greater level of transparency, while Orme-Smith added that “it’s perfectly possible”, but stressed US investors remain more hesitant of virtual due diligence.
Goldsmith meanwhile encouraged start-up outfits to lean on vendors and service providers. “They will help you,” he noted.
