Hedge Funds Prioritize Technical Compliance Over a Culture of Governance, According to Corgentum Consulting’s Investor Survey

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Insider trading and increased on-site regulatory exams pose most prevalent risks to investors

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The post Dodd-Frank environment has brought increasingly complex technical requirements for hedge funds, such as the recent SEC registration requirements and Form PF filings

Corgentum Consulting, the leading provider of the industry’s most comprehensive hedge fund operational due diligence reviews, today announced the results of a survey that shows the majority of investors (72%) feel hedge funds are focused on achieving only the technical compliance, versus pursuing a culture of governance, when it comes to regulatory preparedness.

“The post Dodd-Frank environment has brought increasingly complex technical requirements for hedge funds, such as the recent SEC registration requirements and Form PF filings,” said Jason Scharfman, Managing Partner of Corgentum Consulting. “Investors are increasingly observing that fund managers have become strapped for resources by complying with these new technical rules and have moved away from instilling best practices.”

In addition, 87% of respondents feel that a firm with a dedicated Chief Compliance Officer or General Counsel is less likely to have compliance violations.

“There seems to be a disconnect between the general investor perception that well-resourced hedge funds have better compliance environments versus the reality that hedge funds are more focused on bare technical compliance,” Scharfman added.

Additional survey findings include:

  •     The biggest hedge fund compliance risks investors worry about are ongoing concerns of insider trading violations (35%) and the perceived risks related to increased frequency of regulatory on-site visits (28%). Investors also expect a greater number of technical violations spurred by regulators’ increasing interaction with funds.
  •     The majority of investors (78%) felt that hedge funds do not provide enough transparency with regards to the work of legal counsel and the fees associated with such work.
  •     Investors are increasingly uncomfortable with the ability of hedge funds to advance litigation expenses to fund partners or board members, with 62% stating such provisions are unfair. This suggests that investors are increasingly focused on such technical terms contained in fund offering memorandums as the scope of due diligence processes broadens.

The survey respondents represent a wide variety of hedge fund investors ranging from ultra-high net worth individuals and family offices to fund of hedge funds, pensions and endowments.    

For further information on the survey results and the various issues associated with operational due diligence, listen to a recording of Corgentum’s recent Webinar on the topic titled, “Techniques for Analyzing Hedge Fund Compliance and Legal Risks During Operational Due Diligence.”

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Notes to Editors

About Corgentum Consulting
Corgentum Consulting is a specialist consulting firm which performs operational due diligence reviews of fund managers. The firm works with investors including fund of funds, pensions, endowments, banks and family offices to conduct the industry's most comprehensive operational due diligence reviews. Corgentum's work covers all fund strategies globally including hedge funds, private equity, real estate funds, and traditional funds. The firm's sole focus on operational due diligence, veteran experience, innovative original research and fundamental bottom up approach to due diligence allows Corgentum to ensure that the firm's clients avoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005 in Jersey City, New Jersey, 07306. For more information visit, http://www.corgentum.com.

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