Are Service Providers To Hedge Funds Doing What They Say They Do?
<p>Two recent stories in the news made me (again) reflect on the importance of service providers to hedge funds: the collapse of an Australian hedge fund following a cyber-attack and York Capital winding down its European hedge fund business.</p><p>In the cyber-attack case, the fraudsters might have been stopped earlier if all the relevant counterparties had followed best practice when it comes to signing off on money transfers and double-checking things when red flags should have been raised (but weren’t).</p><p>In the York Capital case, Credit Suisse expects to take a US$450m hit as a result of the shutdown. Credit Suisse reportedly owns a 30% stake in York Capital through its asset management arm. One of the reasons behind that investment seems to have been to get access to distributing the York Capital funds to CS clients. It seems we here have another case of a wealth manager that “recommends” funds managed by a firm that it is a part-owner of... This is very common and very wrong.</p><p>It needs to be clear where one’s fiduciary duty lies. Either you are a wealth manager helping clients choosing appropriate funds for their needs and risk tolerance. Or you are a product distributor selling your products. You can’t be both. A salesperson and an adviser are different things with different bosses. The lazy and unprofessional practice of counterparties not reacting in a timely manner and follow protocol when there are red flags and unusual activities on an account needs to be eliminated from our industry. I have seen too many instances in recent times of service providers failing to do the most basic checks that would have prevented fraud and breaches of rules. Investors and regulators need to wise up and better understand the dynamics of these things and demand that service providers actually deliver what they say they do. Many service providers in our industry provide a world-class and flawless service just as they say they do, but there are currently too many who don't. That needs to change.</p><p> </p><p> </p>