Kirsten Bischoff, Opalesque New York: The topic of hedge fund regulation has been dotted through the headlines over the past few weeks. It has appeared just often enough through news of further Presidential Working Group (PWG) meetings, comments by government figures, or finger pointing by US presidential candidates, to remain steadfast in the periphery of the news. In light of these pushes for hedge fund regulation, three providers within the hedge fund industry: Paladyne Systems – a technology provider, Thomson Reuters – an information provider, and NumeriX – which provides pricing and risk analytics – published a white paper on hedge fund portfolio pricing. It is a topic they believe whereby industry wide acceptance of best practices would be a solid first step towards keeping the hedge fund industry in control of what they see to be inevitable regulation.
“We are only delaying the inevitable. Either you are going to get together and figure out how to [self regulate] now or you are going to be told how to do it. This is a call for action to the industry to step up and deal with this challenge.” – Sameer Shalaby, CEO Paladyne Systems
Opalesque had a chance to speak with CEO of Paladyne, Sameer Shalaby, about the research paper and the next steps which these three companies are looking to take in addressing the challenges of pricing. Citing the many different perspectives involved in unified pricing practices, Shalaby pointed out that when hedge funds have had problems rooted in pricing discrepancies “Ultimately investors are the ones that suffer. And then regulators are dragged in as when a hedge fund blows up, or an investment bank blows up…and this problem is so far reaching and so intertwined with so many segments of the financial industry that the only way to resolve it is to bring everyone together and say ‘okay let’s deal with these issues and let’s try and come up with one standardized policy and process across the board.’ So that when a hedge fund looks at things they look at it the same way a prime broker, a data vendor, or an administrator looks at it.
Highly inconsistent, unreliable process
Approaching the topic
of pricing from a provider’s point of view the paper reveals the many ways
that even fund managers who are making every effort to conduct accurate
portfolio pricing, still leave room for major discrepancies. “Most hedge
funds are still using spreadsheets to document their pricing processes,
with no database or electronic workflow to highlight the process by which
prices are obtained and calculated….For now, without a transparent process
and consistent operational approach, hedge funds don’t have a way to prove
to investors that their pricing is reliable and market conforming.”
The major pushback on this point from hedge fund managers has always been the argument about guarding the secrecy of trade strategies. Shalaby and his partners recognize this argument but point out, “If there is a standard industry pricing process, where we all disclose the same pricing methodology across the board, we never have to worry about only disclosing how we price the [specific instruments] a fund trades because everyone is disclosing the same information. The requirement is not to disclose only what you are trading but agreeing on a standard across the board [for all instruments], not specific to one fund or another.”
Next steps
Much of the news has carried comments on
regulation by hedge fund managers and not often have the wide network of
providers within this industry been given a chance to vocalize what they
see as the day to day problems of the inner workings of managing a fund.
Paladyne, Thomson Reuters, and NumeriX hope to change that. “We are
certainly going to be taking some of our recommendations and reaching out
to the President’s Working Group, to share with them some of that. We will
also be holding more closed seminars and discussions with industry leaders
to discuss these topics. We would like to take a leadership role to
address the challenges that we are facing. Clearly it is a process and we
are hoping that by raising awareness everybody will work together to come
up with a resolution in the not too distant future.”
The paper in its entirety can be accessed at:
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