Institutional Investor's Alpha Magazine - October 2007 - (Page 76)

ACCOUNTING AND LEGAL SERVICES FOR HEDGE FUNDS to-the-grave service,” says Pope, “from hedge fund formation to administration of the business. Each year, a new service gets bolted on as we identify the market need.” Litigation services have become especially important for offshore firms to offer, as has a strong structured finance practice. New Practices, Shortage of Talent Like their legal counterparts, accounting firms are coping with a rising demand for timely and highly responsive service and for a variety of offerings that broaden and deepen as the hedge fund business becomes more complex. Unlike law firms, they also face an acute shortage of professionals with expertise working for financial services clients. “You'll find some very large firms walking away from existing clients, because the supply of accountants to do the work is just not out there,” says Castro. Maples and Calder, which employs accountants in its offshore hedge fund administration practice, is also feeling the shortage, Pope reports. To cope with the problem, Rothstein Kass recruits large classes out of school each year, then “nurtures them in the field,” Altman says. The maturing of hedge funds themselves, meanwhile, has driven accounting firms to add more consulting services in such areas as infrastructure Ron Geffner issues and internal controls – promptSadis & Goldberg ed in part by the more stringent postSarbanes environment. Like attorneys, US-based accountants are expanding their international capabilities and presence – China being one often-mentioned market – to help set up operations and to deal with tax issues, such as those surrounding taxation of offshore deferred compensation for hedge fund managers. But it’s in auditing, the core of the accounting practice, that firms are most pressed to ramp up their expertise. “Auditing standards governing all private companies have become more SOX-like,” says Altman. “Every auditing firm will have to dig deeper into how it monitors and controls capital contribution, trade ticket, NAV calculation and the preparation of financial statements.” Tax rules relating to private investment funds are changing as well, and “most people believe even more substantial changes will occur after the November 2008 elections.” The related need, of both regulators and the marketplace, for transparency and to mark more illiquid assets to market – often ones that the investor is holding for income rather than for strictly capital appreciation purposes – is creating a more treacherous environment for hedge Kevin Scanlan funds and other private investment vehiOrrick cles. “This creates systemic risk, and it's something the fund has to understand thoroughly and expects its accountant to understand as well,” says Castro. All the more reason why firms are concerned about the shortage of accountants. Castro expects it to continue for some time. Meanwhile, “don't overpromise,” he counsels. “We don't just hop on things because we see cash in front of our eyes.” In the hedge fund world, keeping a promise is all-important, Altman adds: “Everything is their word when it comes to a trade. At Rothstein, our rule is, 'Underpromise and overdeliver.' Timely reporting is still the main driver of business for accountants.” Growth Predicted Despite shortages of accountants and barriers to entry on the legal side, most firms foresee continued expansion over the next few years. The past year has seen fewer start-ups and some consolidation in the hedge fund market, in part due to the recent well-publicized turmoil in the credit markets. But “growth will resume,” Scanlan predicts, as the investment banks and other large financial institutions that want to be able to sell a vast array of hedge fund products to their clients seek to expand their product lines. Offshore law firms have experienced some consolidation as firms in other jurisdictions scramble for a presence in hot markets like the Cayman Islands. And some accounting firms are resorting to strategic alliances and acquisitions to boost their expertise in certain areas. PricewaterhouseCoopers, for example, recently formed an alliance with Vontu, a data loss prevention specialist, while Rothstein Kass acquired Stadtler, Rosenblum & Saris to strengthen its capabilities in alternative investments. But by and large, neither accountants nor offshore or US-based law firms expect such moves to slow their growth, because the hedge fund business itself will not stop growing. “I don't see it,” says Geffner. “Consolidation is possible only in a downturn, if people are actually leaving the industry. And even if the investment banks are laying off people, the hedge funds can hire them.” ■ Hedge Fund Strategy Composition (%) (By Assets Under Management - July 2007) Convertible Arbitrage Distressed Securities Emerging Markets (total) Equity Hedge Equity Market Neutral Equity Non-Hedge Event-Driven FI: Arbitrage FI: Convertible Bonds FI: Diversified FI: High Yield FI: MBS Macro Market Timing Merger Arbitrage Regulation D Relative Value Arbitrage Sector (total) Short Selling Source: HFR Industry Report-Special Edition: July/August 2007 3.02 5.26 4.44 27.80 2.34 3.73 13.12 2.83 0.09 1.39 1.45 1.83 11.16 0.30 1.41 0.21 14.21 5.13 0.28 4 • Alpha Sponsored Report • October 2007

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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