Since 2008, investors have sought new investment strategies less affected by market downturns. At the same time, many hedge fund managers who survived the collapse with positive returns are looking to expand their offerings to the retail market. Adding budget cuts and new regulations to the mix creates a recipe for potential problems.
Addressing these issues requires the support of service partners, detailed communication, and systems flexibility to support the needs of the fund and ensure operational effectiveness--while reducing risk, limiting costs and addressing potential problems.
New Product Development/ New Investment Vehicles
Fund treasurers must get on the front end of product planning discussions to ensure there is adequate time to identify and vet any accounting, tax or regulatory issues.
Discussions should include:
- Product/investment overview.
- Portfolio manager - Explain what the product is designed to do. How does it trade? What is the source for key information? How is the product/vehicle structured? All areas need this information in order to establish systems and procedures.
- Marketing/distribution - How will it be marketed? What materials are needed? What are reasonable asset expectations?
- Risk/Compliance - Are any new tests necessary? New information sources to assist in analysis may be required. Where will this information be maintained?
- Accounting - How will the system process the new product/investment? Need to verify that data feeds, pricing and income recognition are in place.
- Administration - Establish/adjust expense accruals. Reporting regime may take additional time, and accounting disclosure may need to change.
- Tax - Many new products/investments present special tax challenges and reporting requirements.
- Service partners - You must work with service partners, including auditors, legal counsel, fund accountants and administrators. They may identify areas requiring additional review. Early conversations allow service partners to prepare to assist the fund when operations commence. A detailed product development checklist should identify all areas of focus. Service partners can help achieve better product design.
- Board - Education should be considered.
Operational Issues
Working smarter is a necessity to meet the challenges discussed above. Many newer products, investments and services require innovative working models, updated cost structures and additional resources.
Superstorm Sandy and other business interruptions also have triggered a new focus on business continuity plans.
Today's new challenges can be met only with solid communication. As services are distributed among third-party providers (such as ours) or among specialized units of the firm, good communication becomes increasingly critical.
Terrance P. Gallagher, CPA, JD is Executive Vice President, Director of Mutual Fund Accounting and Administration for UMB Fund Services.
To view the complete version of this Industry Commentary, visit the Mutual Fund Service Guide website at mmexecutive.com/mutual-fund-guide. Click on the Fund Accounting section.
