This White Paper looks at some of the drivers for change taking place in the Hedge Fund Industry, before examing ways to manage this change effectively.

1. A Global Perspectives White Paper
`
Managing Change in the Hedge
Fund Industry
By Shane Brett,
Managing Director
st
Date 31 March 2012

2. Contents Introduction
Introduction 2 “It must be considered that there is nothing more
difficult to carry out nor more doubtful of success
Current status 2 nor more dangerous to handle than to initiate a
Main drivers of change 3 new order of things”.
Key steps for managing change 4 Niccolò Machiavelli (1446-1507), Italian
Conclusion 7 statesman and philosopher, in "The Prince".
Machiavelli got it right. Trying to successfully
manage the implementation of widespread
change is one of the most difficult tasks an
organisation in our industry can undertake.
Over the last 10 years the Hedge Fund has
experienced change on an enormous scale. The
first years of the new century were marked by
huge growth across the industry. Hedge Fund
Managers and their service providers struggled
to absorb massive asset growth, a high volume
of fund launches and an ever increasing number
of investors.
Then came the Post-Lehman/Madoff carnage
where funds instead had to manage a more
negative period of change, primarily driven by
funds reorganising, gates being imposed, irate
investors trying to redeem and difficult to price
illiquid securities.
All of this has made the last decade in the
Hedge Fund industry one of great change. The
evidence suggests this change has largely been
managed in an organic fashion (i.e. uncontrolled
and haphazard).
Whereas change ten years ago was primarily
driven by positive factors – AUM’s rising,
subscriptions into Hedge Funds increasing and
positive stock market returns – change in recent
years has been the result by more negative
trends – increased competition, an unstable
economic environment, a wave of new global
regulation and far more demanding investors.
Current status
Up to this point companies in the industry have
been either growing very quickly or trying to deal
with the consequences of the economic
meltdown. This meant few have had the chance
th
Date 15 Feb 2012

3. to put firm controls in place around the Funds to register is now upon us.
process of change management.
Change which is constant and on-going Similarly from July next year the
and needs to be project managed European AIFM directive will come into
effectively. Particularly as the Hedge force across the EU. This legislation is
Fund industry had moved from still in the process of been finalised.
adolescent into adulthood and is now What Hedge Fund Managers will have
becoming a mature industry in its own to do in respect of issues like
right. domiciliation or reporting is still unclear
and will make the process of applying
The result of the industry moving from these required changes internally very
adulthood to full maturity can be seen all difficult, given a relatively short
around us. More regulation, more timescale.
demanding client requirements and
more competition for existing Hedge Finally in the US the IRS has issued
Fund. requirements around foreign tax
compliance (FATCA) and this has
meant a wave of registration and
Main drivers of change documentation for many Hedge Fund
entities worldwide. Again the details
regarding compliance and operational
For this White Paper, firstly we’ll look at requirements are still being clarified.
the current main drivers of change in
Hedge Fund industry, before looking at Even if the changes projects proposed
some of the techniques we can use to in your organisation are not regulatory
manage this change more effectively. driven in nature, Hedge Funds need to
ensure that internally operational or
outsourcing projects are organised is
 Regulatory Change – This is such a way that their output will easily
currently the largest driver of satisfy both existing and future likely
change in our industry. legislative requirements like Dodd Frank
and the AIFMD.
Specifically the Hedge Fund
industry is in the early adoption
stage of a huge wall of legal and  Investor appetite – The launch of new
regulatory requirements, which funds, new fund structures (e.g.
will likely change the way the Managed Accounts) and the provision of
industry operates in the future. new operational requirements (e.g.
enhanced, flexible and far more granular
The Dodd Frank Act in particular investor reporting) is been largely driven
contains onerous regulatory by the rise of Institutional Investors
reporting requirements (by among many Hedge Fund’s shareholder
previous industry standards) base.
and even sometimes
contradictory requirements (as High Net Worth Investors will continue
pointed out by The Economist to be an important source of many
newspaper recently). There is Hedge Fund’s subscriptions, however
confusion across the industry the future will see large institutional
and yet the deadline for Hedge investors coming to dominate the
shareholder register and with that a
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Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
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4. demand for increased liquidity these are in place is an important driver
and transparency of many upscale projects across the
industry.
 Industry Growth - 2012 is
expected to be the most All of these crucial regulatory changes, as well
promising year for the as the demand from Institutional Investors for
Alternative Investment industry greater fee flexibility and enhanced reporting,
in 5 years. Growth in net has added the pressure on Hedge Fund
inflows is expected from Managers, their Administrators and Software
Institutional Investors and Vendors to meet this challenge.
particularly Pension Funds.
Hedge Funds are now an The importance of all the drivers of change
established part of the identified above illustrates how change in the
investment landscape and many industry must be managed in an ordered and
Institutional Managers are controlled manner. Global Perspectives has
increasing their allocation. This managed change programmes for some of the
means proposed changes to the largest Hedge Fund Managers, Administrators
operation and structure of your and Software Vendors in the world. This
organisation must be scalable exposure to many projects of different scale and
and able to accommodate size has enabled us to identify the key steps to
growth. managing change successfully in the industry.
 Financial, Operational,
Investment, Counterparty &
Liquidity Risk. Post- Lehman
Investors, Regulators, Hedge
Key steps for managing change
Funds and the wider world have
all become far more risk aware.
Risk management seems to be  Document the Business Need
at the centre of everyone’s
strategy and this is likely to As soon as the change need has been defined
continue in the near future. All the Project Manager must sit down with the
proposed changes to operations Project Sponsor and clearly document the
and strategy need to ensure business need. Perhaps it is a new fund launch
they at least maintain, if not or adopting regulatory change. This will give the
tighter your risk controls and project a clear reason for being and positions
processes. the change required more clearly in everyone’s
mind. Subsequently project buy-in is increased
 Due Diligence – Post-Madoff across the board, as everyone understands why
Operational Due Diligence had they are doing what they are doing. It’s also
increased massively in critically to emphasise to those affected by
importance for most Investors, forthcoming change that what they are doing is
Hedge Funds and particularly better than the alternative.
for the Fund of Hedge Fund
community. Investors do not
want to be told about your  Project Planning
processes - they want to see
them. They expect durable and Most projects fail because they have not been
transparent operational controls planned properly. It’s that simple.
and the process for ensuring
Global Perspectives Consulting
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

5. A Hedge Fund Manager may want to new situation will be an improvement and how
get a new product to market or a Hedge these business requirements will help achieve it.
Fund software vendor may be keen to It is important that change should be driven by
rush the latest release of their shadow satisfying your customer’s needs. If you are a
fund accounting software to market, but Hedge Fund unhappy with a particular software
if the project has not been planned vendor, the project must be focused on
extensively the project will be a failure. identifying the missing functionality required
Without a proper period of analysis, in from a replacement vendor that will increase
order to consider the best way to your customer satisfaction.
organise, proceed and manage the
proposed change project and Also, over time it is advisable to build up a series
associated risk the likelihood is the of change templates that work for different types
project will not succeed. of change projects. These can include Investor
On boarding, Fund launches and Fund
This is a particular problem in our reorganisations. They can come in particularly
industry if an investor is ready to write a useful on the sort of change project that only
cheque and the Hedge Fund Manager is occurs in an organisation every couple of years
keen to get a new fund launch in place. (e.g. upgrading existing software, launching a
The urgently can mean planning is new Fund umbrella). The optimum steps
overlooked and the project execution required can be easily forgotten by the time a
will be sloppy and haphazard. Similarly similar project next comes around.
if you are a Hedge Fund Administrator
there is no point in quickly onboarding a All of this sounds like basic common sense but it
large new hedge fund client if it is not is amazing, especially in the alternative
planned extensively. This will lead investment industry, how often ambitious
service to your existing clients change is embarked upon without it ever been
demonstrably suffering and damaging planned properly. This point needs to be
your industry reputation. emphasised. The old adage “Fail to plan, Plan to
fail” is as accurate as it ever was.
Part of the planning process should
include a definition of how the project’s
success will be measured. For example,  Project Execution
success could be defined as
successfully outsourcing all operational Once the change projects requirements are
reporting to a specialist provider by a defined the project moves to the execution
specific date, in a specific budget. This phase. This should be completed using clear
needs to be documented and widely and agreed goals, assigned work-packages for
circulated. Make it clear for both the each area of the project and use brief, frequent
Project Manager and team involved check-ins by all members of the Project team to
what will constitute a clear success. Too keep everyone updated (Software development
often projects muddle along without methodologies like Agile use regular brief
anyone having defining exactly what is updates and small ongoing deliverables to great
required and by when, be it on boarding effect) .
a new manager or launching a new
Hedge fund. Unclear priorities, a lack of accountability and
bad communication are all some of the most
The planning phase must include an common reasons projects are not executed
extensive period of requirements successfully. The team should focus on
gathering from all relevant areas. Make accomplishments and keep the morale sapping
it clear to everyone affected why the “blame-game” to a minimum. However it also
Global Perspectives Consulting
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

6. must to be clear that everyone involved
in the project will be held accountable  Project Management
for their piece. Failure to meet a
deadline is not acceptable. On a large transformational project, with multiple
streams across a Hedge Fund company, the
Fostering teamwork to ensure organisation needs to appoint a dedicated
successful project execution is easier Project / Programme Manager.
said than done. Often in our industry the
guys working in Operations might have This is not meant as a reflection on the often
previously little time to spend getting to very talent Senior Managers in the company.
know the Portfolio Managers or Risk The simple truth is that managing a large multi
team. If the project covers multiple work stream project takes a specific set of skills
departments the Project Manager needs and experience, and this is often best done by
to schedule some time to allow someone external to the organisation.
everyone to get to know each other,
preferably socially as well as As well as their obvious previous project
professionally. The Project Manager has management knowledge an external project
an important role to play here and manager come to the table immune from
carefully articulating and repeating the existing internal politics and historical
common goal of the project, as well as animosities. Their temporary duration also
everyone’s assigned role, can help a ensures they do not get as easily bogged down
team develop into a coherent whole by internal disagreements.
On large projects strategic alliances with Often at Global Perspectives we have been
suppliers, functional groups and relevant retained to manage a project after the client has
stakeholders can make the process of tried to progress it on their own. In that process
delivering change far smoother. If you they have encountered internal resistance -
are executing change with a third party exhausted staff trying to juggle their daily work
(e.g. Service provider like an with projects requirements and a sinking sense
Administrator, Consultancy or Software of morale as the project runs into trouble.
Vendor) consider using a partnership
approach. This means adopting an open An external Project Manager ensures a fresh set
communication process where either of eyes is brought to the organisation, with an
party can freely raise issues or independent perspective, and most importantly,
concerns. someone whose attention is focused solely on
the success of the project and who will not be
A partnership process moves beyond distracted by the daily operational activity.
the traditional Client – Supplier It is the Project Manager’s job to ensure the
relationship where instead each party is team is sold on the project from Day 1 and that
ready to help the other In order to meet communication is clear, regular and concise. It is
the projects requirements. This win-win easy to confuse a new team with mixed
process tends to reinforce the success messages and unclear resource assignment.
of the project as both partners want the The process of allocating tasks should be as
other to succeed. It also means there is transparent as possible.
a far less chance of encountering
unexpected surprises throughout the Project Managers should be able to organise the
project’s execution, as each party chaos and install organisation administration on
should be keeping the other fully briefed the project, ensuring each element of the
at all times. change process is managed, assigned and
timetabled for delivery. Similarly they must every
Global Perspectives Consulting
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

7. goal oriented and adaptive to the project when a year or two later you have to upgrade to
requirements as this may be required that new software or launch that new Fund
during project execution, when umbrella and the experiences of the previous
requirements can be amended or project are long forgotten and everyone’s
updated. If a change deadline is memories is hazy. This is not a time for
particularly aggressive, they must flag recrimination but is actually an investment in the
this to the Project Sponsor and carefully organisations future success.
balanced the business need against
burning the team out, and ultimately
sapping morale. Conclusion
A really effective Project Manager leads
In conclusion, it is clear our industry is in the
from behind the scenes, allowing the
process of adopting its next huge wave of
achievements of the team members to
change. The pain of managing these changes
be recorded and recognised. They must
can be greatly alleviated by successfully
be open and approachable and be fully
planning and executing the process using an
familiar with the main formal change
experience Project Manager.
management methodologies, as well as
having a deep knowledge of the Hedge
Fund industry itself.
We will return to the Project Management theme
in a future Global Perspectives white paper.
 Lessons learned.
Finally, ensure your organisation
documents the lessons learned while
they are still fresh in everyone’s mind.
Often when a project is completed,
when everyone is under pressure and
the project participants are exhausted,
people just want to get the project
finalised and move onto to the hundred
other things waiting their attention. This
is a mistake.
Once of the most valuable things you
can do to help your future hedge funds
projects be a success is to spent some
time documenting the lessons that have
been learned. Particularly while they are
still fresh in everyone’s mind. What
worked, what didn’t? What do the
project team wish they had of had more
of – more time, a larger budget, a better
test plan, more responsive service
providers?
Spending a brief session brainstorming
and documenting everyone’s thoughts
can be invaluable to the organisation
Global Perspectives Consulting
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173