In his latest monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, looks at how hedge fund managers can protect themselves and their investors from the impact of Covid-19…
In his latest monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, looks at how hedge fund managers can protect themselves and their investors from the impact of Covid-19…
There can be no escaping the global outbreak of Covid-19, as the number of cases outside of China continues to rise. This is a serious health situation, which no one can underestimate.
I believe this is a propitious time for all hedge fund managers to make sure they are protecting themselves and being proactive on behalf of their business and for their investors. My previous pieces have discussed pre-operational phases of investment fund operations.
Once operations start I encourage firms to create a Business Continuity Plan (BCP) which details de-lineated responsibilities to different people for the firm to continue operations in varying types of emergency scenarios. We do not know yet how Covid-19 will impact business operations over the next few weeks or months. It is critical at this time to take actions now in a BCP context to review your plan and determine if adjustments are required.
It starts by applying a personal fiduciary responsibility to our families and to our communities. We all need to stay safe during these uncertain times.
There are practical steps for managers to take in order to prepare for the potential reality of not being able to physically go to your office. My advice to clients right now is this: Close the office for at least three full days, starting now. Assume the virus is a direct threat and test your systems, so that if and when you get to a situation where it is not prudent for your employees to travel to your physical location that you will still be able to operate the business as usual. This is an opportunity today to apply your BCP in a different context. Find the kinks in your plans now. Don’t assume anything.
Closing partially or for only one day is not a real test. Every firm has had individual team members working out of the office on occasion and has tested their Disaster Recovery Process. Those were planned scenarios and situations where tech support was ready to jump in with solutions. In this instance the test needs to be as close to what may happen if your entire team needs to operate remotely without advance notice.
When you begin this assessment review both operational as well as practical issues:
Do team members have the ability to securely access the information they need in order to perform their duties? Some people will have dedicated space at home to work comfortably; others may live in small spaces. It is not as easy to work from home for an extended period of time as it is for a day or two.
Do team members have internet access at home? Do not presume everyone has internet access as some of your younger staff or administrative staff may utilise their telephones for all of their technology needs. If they have internet access, is the speed sufficient to support the technology required to connect to the office?
How will your teams interact when they are not physically in the same space? Has your IT team implemented and trained staff on remote access? Do you have the ability to roll external calls to team members’ mobile or home telephones? Are you already utilising video conference capability on team computers and mobile phones? Will support staff be able to assist remotely? Does everyone understand their roles and responsibilities?
Will any team members need to have the ability to print or scan documents? Do they have printers? Ink? Paper? Shredders?
Have each team member report back to IT and firm leadership any difficulties they are having
in performing their role remotely so that the issues can be remedied in advance of any crisis.
Your IT team should, in conjunction with any outsourced cyber services, evaluate how your cybersecurity processes are working, especially when your team members are not operating on-site. We should all be very aware that an economic or social crisis could create an environment where attempts to get into your systems increase. What steps is your cyber firm taking to handle the change in business operations at your firm and their own operations?
We often focus primarily on trading and fund operations, you also need to insure that the management company operations continue without interruption. Many firms utilise electronic payment methodologies and have implemented a process with proper levels of internal controls – prepare, review, release on mobile devices. Those operations should continue without any changes. If you are still a paper driven firm, time may be tight to make sure that accounts payable can be handled remotely. You do not want to sacrifice internal controls in order to keep your business operating. Where are your physical checks? How will the steps required to maintain controls be accomplished?
Touch base with your business insurance provider. Check to see how a medical emergency such as this is covered under your business continuation policy.
We are increasingly an outsourced industry. You need to reach out to your prime brokers, administrators and compliance specialists, to determine what their plans are and how the plans will be activated. In the worst case, we will need to plan as if everyone is working remotely.
With respect to PB, this can be a little complicated. From a trading point of view, equity trading should work well as equities have CUSIP numbers. But with respect to certain derivatives trading, there are no CUSIP numbers, and financing and clearing of trades is much more complex.
For those firms trading derivatives, the key question to ask your PB is how will clearing, finance and execution work in the event that brokerage staff are not physically present in the office? How will these and other risks be managed? Ask them to explain their plan in detail so that you can understand it and ultimately integrate it into your own BCP.
With respect to the administrator, most administrators’ staff should be able to work virtually. Managers need to be aware of their administrator’s contingency plan and feel that the administrator will be able to demonstrate that business is operating as usual. Striking a NAV is one of the direct communications to investors. A delayed NAV in this situation where investors are aware of the specific circumstances, although not optimal, might be acceptable if the delay is minimal and the delay is communicated to investors.
Documenting that firm capital is intact even if performance numbers are slightly delayed is integral to your fiduciary responsibility to your investors.
In times of stress, communication with investors becomes even more important. Over the coming weeks, managers need to make sure they keep their investors abreast of their actions and how the firm will continue to operate and protect the Fund’s capital.
Firms should anticipate the communications that might be necessary and draft letters to investors now so that they are approved and ready to go should the need arise. That will help to maintain confidence that the assets in the Fund are not at risk and will demonstrate how well your business can withstand a serious stress test. Imagine if Wall Street is empty for two weeks and ask yourself, ‘Can I still run my business and trade?
I don’t envisage the stock markets closing down…but one cannot rule out the possibility altogether. Key also, is to document all of your steps now so that when this event passes and the regulators come around you will be able to demonstrate that your organisation did everything possible to operate efficiently and exhibit best practices.
Ultimately, fund managers need to prepare for the fog of war, so that if and when it comes they have a plan of action to be able to see through the fog. We all hope that the worse case scenario does not play out.
Most importantly, stay safe and stay secure within your families and communities during this uncertain period.
