Top 5 Headaches for Hedge Fund CFOs Per Latest Back-office Accounting Software Survey

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According to a recent client survey by TKS Solutions, alternative investment CFOs are confronting an array of new challenges: regulations, transparency, complexity, investor timidity, and efficiency.

In the past, new clients have waited until year end to get onboard, and existing clients have postponed updates until year end. But this year we've, signed up a record number of funds in the second quarter, and seen an increase in multiple intra-year updates

While funds are beginning to regain their investment performance footing, the changing landscape for the hedge fund industry has given rise to a number of new operational challenges. According to a recent client survey by TKS Solutions, the 5 most vexing aspects of this new climate for fund CFOs are: regulations, transparency, complexity, investor timidity, and efficiency.

1. Evolving Regulatory Requirements

A complex regulatory framework has long been a facet of fund life, but this year's abrupt changes have created new challenges for even the most sophisticated shops. Take, for instance, US Form 90.22 (or FBAR). Courtesy of a recent ruling by the IRS, practically all U.S. investors must now file an FBAR report covering both taxable and non-taxable ownership of foreign funds. This accounting also encompasses feeder funds (to determine any ownership in foreign masters). The ruling includes even tax exempt entities, which typically have limited resources for reporting. The filing was originally due within weeks of the new ruling. Although the deadline was recently extended to the Fall, funds without sophisticated accounting systems are going to be hard-pressed to provide partners with the required filing information.

2. Investor Demands for Greater Transparency

New reporting requirements dovetail with a second major issue facing funds: requirements for enhanced transparency. Investors have long pushed for insight into a fund's portfolio. What makes 2009 different is that the reporting requests are now coming from the capital side, as well as the portfolio front. Investors need to know not only their stake in a given fund, but also their ownership percentages in any underlying funds (in the case of fund of funds) or managed accounts (in the case of Madoff concerns). While most investor accounting software presents ownership percentages, few programs can readily provide this kind of "look-through" ownership.

3. Managing Asset Complexity

Dealing with non-performing 2008 investments has added to fund complexity. Many funds have decided to segregate the non-performing assets into side-pockets. This facilitates performance reporting on the rest of the portfolio, without mudding the results with a few non-performing investments. But this practice has created operational headaches. Whereas funds used to maintain a single ownership percentage for each investor, the back-office must now cope with ownership in not only the main fund, but also the side-pockets (many of which have a total net negative value). Managing these sorts of side-pockets almost necessitates upgrading from spreadsheet-based tracking to more robust investor accounting software.

4. Investor Timidity

While hedge fund performance has dramatically improved in the first half of 2009, investors are still skittish. To balance this investor sentiment with their need for reliable, long-term capital, funds have recently begun offering creative liquidity gates. Gone are the days of simply locking up investor capital for 5 years. Investors, while willing to take a longer-term outlook, are unwilling to be wholly at a manager's mercy with regard to suspending redemptions. New offerings now include such options as: early redemptions with a fee; periodic ability to withdraw partial capital; and/or splitting a single contribution into multiple lock-up schedules.

5. Operational Efficiency

In addition to driving creative new fund structures, the 2008 crash has led to belt-tightening for everyone; hedge funds are no exception. In order to be more nimble, a number of financial organizations realigned their cost structure and many shops reduced staff. While this certainly has helped the bottom line of many management companies, it has also caused a large strain on CFOs and their staff. Operational efficiency, once a nicety, has become a necessity.

Brute force deployments of small armies of staff armed with spreadsheets are no longer an option for handling the many complexities of investment partnership and shareholder accounting. Instead, many CFOs are turning to sophisticated investor accounting systems and are updating their systems more frequently.

"In the past, new clients have waited until year end to get onboard, and existing clients have postponed updates until year end. But this year we've, signed up a record number of funds in the second quarter, and seen an increase in multiple intra-year updates," says Ron Kashden, president of TKS Solutions. "Because we only focus on the issues of the back-office, we address investor accounting challenges as they emerge, and quickly develop and deploy solutions. From FBAR reporting, through look-through ownership, to sophisticated liquidity gates, our Penny software has been able to provide clients with the rapid response tools they need to operate in this unprecedented climate."    

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:


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