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March 18, 2020  

Managers Seek to Cope With "Trial By Fire'

The coronavirus is testing hedge fund business continuity plans in ways never before seen — or even imagined.

Many New York-area operations established their continuity policies after the terrorist attacks of Sept. 11, 2001, or following Hurricane Sandy in October 2012, delineating responsibilities in order to allow those firms to continue running for a prolonged period during emergency scenarios.

But it wasn’t until 2016 that the SEC made it mandatory for registered firms to adopt business continuity and transition plans in the event of a natural disaster, terrorist act, cybersecurity attack, technology failure or other unforeseen operational risks. Pandemics weren’t mentioned at the time. Firms that didn’t reasonably address operational concerns would be deemed “fraudulent and deceptive.”

While employees of most firms affected by 9/11 or Sandy knew they would return in a matter of weeks, this pandemic has the feel of a game-changer. Workers from an industry that relies on conferences and face-to-face meetings have had to practice “social distancing” and communicate by video. They don’t know whether they’ll be back in their offices in weeks — or months.

“There’s a lot more uncertainty and anxiety,” said Daniel Viola, a partner at hedge fund law firm Sadis & Goldberg in New York. “At this point, everybody is saying to be prepared to work remotely for 30 days. The SEC is actually working remotely as well.”

As the coronavirus spreads across the world, firms have been forced to revisit their business continuity plans to ensure they can operate effectively if employees need to work remotely for an extended period.

Point72 Asset Management employees started working from home last week after a staffer in the multi-strategy giant’s New York office was confirmed to have Covid-19. Other hedge fund operations have followed suit, often after a one- or two-day test drive in which employees worked remotely.

This is the first time that numerous billion-dollar-plus firms that cut across multiple strategies have had to use their continuity plans. Some are scrambling to get access to Bloomberg terminals, while portfolio managers, analysts and traders who escaped New York City for homes or retreats in upstate New York or Florida are finding the internet connection isn’t as solid as it was in the city, particularly with millions of Americans working from home, causing intermittent lags on performance.

“These kinds of disaster-recovery solutions work well on paper, but this is unprecedented in terms of a trial by fire,” one hedge-fund marketer said. “The strain that this is going to put on resources for managers could be a real problem.”

While firms may have set up secondary offices with redundant internet connections they can use during disasters, few, if any, firms would have planned to have one remote office for each employee. It’s the rare hedge fund executive who may have installed a dedicated, highly reliable internet connection at home. As a result, during the current emergency, most hedge fund investment and back-office staffers are left to rely on their basic home internet connections, with mobile phone hotspots as potential backups.

Viola and other Sadis & Goldberg employees are working from home this week, as are nearly all of the firm’s hedge fund clients.

“It’s certainly one of those instances where it’s hard to imagine how a firm can operate completely remotely,” Viola said.

The SEC is allowing firms to file for relief if they feel they will miss deadlines in submitting Form ADV or Form PF regulatory filings before April 30. But that brings its own set of problems, a source said. As part of the protocol for getting relief on deadlines, firms have to also notify their clients. And how many firms want to admit they’re having operational problems due to the coronavirus?

Law and compliance firms are asking their hedge fund clients to review business continuity plans to consider what to do if personnel become ill or quarantined or if technology systems become interrupted.

Hedge fund auditor Anchin is eliminating non-essential third-party access to its office and employees’ visits to client locations until further notice.

Almost everyone hedge fund recruiter Robin Judson has spoken to is working remotely, whether from home or from vacation homes where they have moved their families.

“Our clients continue to interview, using Zoom, Skype, or just phones. The technology to allow everyone to work remotely is far better than during any of the previous [catastrophic] events,” said Judson, founder of New York-based Robin Judson Partners. “For now, it’s all working. People seem resigned to it. How it will be in a month is anyone’s guess.”