Heard at GAIM Ops Cayman April 2018

Castle Hall's Esther Zurba won the hardship lottery to attend the GAIM Ops conference in the Cayman Islands this year - we’re delighted to have the chance to meet so many of our clients and industry friends at the event.

What’s hot: 

• ESG, with a focus on “S”. The conference kicked off its first panel discussion with a conversation about ESG issues, and specifically, diversity in the workplace (not just in the portfolio). This was noted to be a GAIM Ops “first”. While it’s no particular revelation that the finance industry has “gender” and “minority” issues, the conversation addressed challenges to remediate pay equity and leadership issues, and importantly, how to attract and recruit diverse candidates of a new generation that prioritizes compensation on an equal, if not lower, rank with joining a firm that enable alignment with greater good / impactful causes that solve broader problems. The “Google-ization” of the workplace was held up an example. 

• Crypto:“People don’t want to miss out.” Everyone’s talking about crypto. The longer view is that this area is somewhat akin to the tech startup and “cloud” phenomena but with its own areas of concern. The disrupting technologies in this area – blockchain - are thought to be a future driver of change on a broader level as, looking forward, we may see securities such as equities “become more crypto-like” as new technologies are adopted, instead of crypto being forced to behave like equities. 
  
  
• Cybersecurity:“this should be on the top of every asset manager CCO’s list”. Tabletop exercises mimicking third party breaches, ransomware, network intrusions are important steps towards preparedness for the inevitable attacks. Managers who have not locked down USB ports, who are not frequently monitoring their network, performing patches, performing 3^rd vendor cybersecurity due diligence, who do not have a remediation plan are now far behind the curve. Documentation, documentation, documentation! Cybersecurity is a key area of current focus for regulators who will look to see that KRIs / KPIs are in place and that controls tested regularly. For ODD practitioners, evaluating managers’ cyber preparedness – in terms of both process and documentation – becomes ever more important, despite this technical area requiring a different knowledge base as compared to traditional fund accounting and operations.

What’s not: 

• “Pass through expenses are the new four letter word”. Operational due diligence always includes a scrutiny of expenses that are permitted to be passed through to the Fund. While this should by no means be a “new” story to anyone, we believe there is increasing awareness in this area as social justice considerations come increasingly to the surface. Institutional investors (particularly pensions) continue to push back on expenses, reminding fund managers of who the ultimate investors are: e.g. someone’s grandmother, a retired janitor etc. As such, there is increasingly less appetite for investors to have to bear expenses that are deemed to be a cost of a fund manager’s doing business.

• Crypto:there are several concerns holding institutional investors back: the primary ones are risk of fraud and hacking, not to mention ambiguities with respect to existence of the assets (the auditors and fund administrators are both grappling with this), ownership (in most cases, there is no way to find a tie from the Fund to the assets), custody risk (difficulties in finding a comfort level with the few players participating; no common terms, lack of understanding of how they operate). There is debate regarding whether valuation is a concern given high volatility and fragmentation of markets.

• No shortcuts for CCOs faced with internal politics: CCOs should not succumb to internal politics or the old lines: “other firms are doing it this way” / “you need to have a more commercial view”. There are no shortcuts in compliance. A firm with strong compliance controls is one with a strong culture of compliance, and this derives from a strong CCO. The CCO who pushes back upfront, is able to prioritize the numerous compliance demands, and develops procedures to review / double check everything is the one who will have a better success rate at avoiding mistakes.