Sarbanes-Oxley Comes to Hedge Funds
Leading alternative investment firm are adopting best practices from Sarbanes-Oxley. The catalyst for this trend is the convergence of looming regulation, and demands from clientele for greater transparency in the wake of a series of well-publicized investment frauds.
(PRWEB) May 20, 2009 -- Leading alternative investment firm are adopting best practices from Sarbanes-Oxley. The catalyst for this trend is the convergence of looming regulation, and demands from clientele for greater transparency in the wake of a series of well-publicized investment frauds.
Investors are Demanding Operational Best Practices
Take the mundane task of paying bills. In the past, hedge funds accounts payable typically operated more like a small business than an institution responsible for billions of investor dollars. It was not atypical for funds to leave themselves open to chicanery by having a single person handle bill paying using low-end software packages like Quicken.
Funds are now taking a page from Sarbanes-Oxley -- the operational best practices framework used by public companies -- and beginning to institute an automated approval process that requires disbursement review and sign-off by several people. This reduces the risk of irregularities and provides investors with the assurance that the organization has implemented the proper safeguards to manage their capital.
More Flexible Liquidity Terms Mean More Complicated Calculations
"New regulations are not the only issue funds have to deal with" says Ron Kashden, president of TKS Solutions. "With the tight capital market many investors are demanding more flexibility in their fee structure and liquidity terms."
The days of complacent investors willing to lock in their capital for years at a time may be over. Funds that have always allowed for annual and even quarterly redemptions are finding that they have to offer monthly liquidity to attract new capital. While this makes sense from a business stand-point, it introduces accounting complexities that are wreaking havoc in the back office. Simple tasks, such as accruing management fees, can quickly become an arduous calculation when funds that charge quarterly allow redemptions on a monthly basis.
Back of a Napkin Won't Cut it for Today's Fee and Loss-Recovery Provisions
Adding to the complexity, fund administrators are reporting new fee structures with innovative loss-recovery provisions. Contractual terms that include factors on prior loss carry-forwards and multiple hurdles have joined guaranteed return provisions as commonplace in new fund offerings.
While this adds pressure for portfolio performance, it also provides the fund with a revenue source to live off of in bad times. Managing these intricacies necessitates accounting tools and practices that funds may not have required historically. Yesterday's spreadsheets are giving way to sophisticated software packages specifically tailored for the back-office needs.
From an operational perspective, the hedge fund industry is finally growing up. Their ad-hoc practices, more appropriate to a "mom and pop" shop than a sophisticated financial enterprise, are being replaced with a regulatory best practices framework and the expert systems used by their institutional counter parts.
Penny®, an expert system specifically designed for hedge funds, private equity firms, and their administrators, is one such system for addressing these back-office complexities. The software's management company general ledger component features a multi-user approval workflow that addresses the SOX requirements; the system also includes an intuitive, yet flexible fee calculation module. The emergence of powerful systems for hedge fund back-office accounting is good news for the investor, who can now choose between the traditional and the alternative investment worlds based upon risk and return metrics rather than operational soundness.
About TKS Solutions:
TKS Solutions offers unified partnership and shareholder accounting solutions for the financial industry. Its flagship software, Penny®, helps firm better manage their investment partnerships and funds with a powerful, user-friendly system to handle investors, fees, G/L, A/P, and taxes. Penny's open architecture offers easy integration with portfolio accounting and customer relationship management systems, data warehouses and in-house proprietary solutions, creating a comprehensive view of all data, as well as greater transparency for investors. TKS Solutions works with partners worldwide to serve its customer base of leading hedge funds, fund of funds, private equity firms, administrators and management companies, ranging from $50 million up to $20 billion under management. For more information, please visit: http://www.pennyitworks.com.
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