Hedge funds 'face increase' in fines

Hedge funds 'face increase' in fines

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Hedge funds in Europe are set to suffer a sharp increase in fines and rejection by investors as the vast majority fail to understand the fundamental changes in governance, reporting and operational requirements under the Alternative Investment Fund Managers (AIFM) directive, according to ViClarity.

US and European regulators have fined the banking sector a record $43bn in 2013 and this pressure is set to continue as the authorities drive to minimise risk in this sector. Hedge funds are firmly in their sights, the compliance software provider believes.

“Many hedge fund managers seem to think the directive just requires a change in reporting practices but in fact a much more fundamental overhaul of business operations is required,” says Ogie Sheehy, founder and CEO of ViClarity.

“While many fund managers traditionally outsource most non-core activities, the responsibility to ensure and demonstrate compliance with continuous monitoring now lies very much with the managers themselves. From what we are seeing in the industry, we would estimate that just one in 20 hedge funds appreciate that managers are now responsible for this”.

A failure to demonstrate a step up in monitoring levels will lead to punitive action by regulators and instil a lack of confidence in investors.

“It is not good enough for hedge fund managers just to say they are compliant; they must also demonstrate to their investors that they have the right processes and business structure in place,” said Sheehy.

“176 hedge funds in Europe have closed down during the last 12 months and we would say that in many cases these closures were not all due to poor performance but a failure to demonstrate unequivocally to investors that they had the right regulatory controls in place and a real, live governance process.”

A central requirement of the AIFM directive is that fund managers must submit an Annex IV report that includes detailed information on investment strategies, valuations, risk exposures, portfolio concentration, total AUM and instruments used. The next deadline to begin submitting Annex IV reports for FCA authorisations is December 31.

ViClarity has launched a compliance management software solution that enables alternative fund managers to meet AIFM directive obligations. It allows the firm to manage and demonstrate good governance and compliance with a comprehensive audit trail of accountability, highly visual reporting and “signature-ready” Annex IV reports.

ViClarity’s technology automates on-going compliance monitoring as well as Annex IV reporting, “significantly” reducing the burden on fund managers, according to the firm. To facilitate regulatory reporting ViClarity and partnering service providers will combine both qualitative and quantitative information, convert this into the regulators’ prescribed XML format and deliver it as a complete Annex IV report that is ready to sign.

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