Managing the unexpected: Best practices for hedge fund business continuity

As market conditions change rapidly, the ability to stress test portfolios across a range of scenarios becomes increasingly important. This is not only

Savvy business leaders understand there is often only one truth when it comes to running an organization: expect the unexpected. 

While creating a Business Continuity Plan (BCP) is a best practice across most industries, money management presents its own set of unique challenges because of the industry’s complexities, vulnerabilities, and global reach. These challenges, along with a fiduciary responsibility to investors, means that fund managers must be as proactive as possible in building out an effective BCP. 

At a high level, these policies should be tailored to match the fund’s size and scope, as well as idiosyncratic risks the enterprise poses. A BCP should detail how each business function will operate post-incident, as well as how client needs will be met. 

Important to remember is that a comprehensive BCP doesn’t have to be a drag on a firm’s internal resources. Vendor managed solutions can play a vital role in facilitating contingency planning by not only streamlining and simplifying processes, but also by making sure there is seamless front, middle, and back office integration of the plan.

To help better understand what an effective BCP entails, we’ve put together the following suggested best practices, grouped into five key areas. 

Ensuring access to technology during an unforeseen event is arguably the most important component of a BCP. Data recovery, monitoring portfolio positions, and email accessibility are just a few examples of critically important functions needed in the wake of a market emergency. In any continuity plan, fund managers should prioritize remote system access and test this access regularly. 

Importantly, advances in cloud storage solutions in recent years means that the threat of failing localized servers is minimized. Additionally, having a suddenly dispersed workforce for prolonged periods of time can create new cybersecurity vulnerabilities, especially if the right protocols are not in place or employees are not familiar with remote access security measures. Ensuring that company information is treated with the same level of security offsite as it is onsite is crucial.   

When creating a BCP, managers should have a full understanding of their reliance on third parties for critical services, including understanding the vendor’s own contingency planning. However, the BCP should also consider whether third-party providers are needed to help implement the firm’s contingency plans, something that may be particularly useful for smaller firms that lack the middle and back office resources (e.g., IT, fund accounting, etc.) that larger managers retain. Vendor managed services can help these managers build out effective BCPs that provide holistic operational support solutions.

Personnel management is another equally critical component. In other words, after a disruptive event, who’s in charge? Even for the smallest of organizations, it’s imperative that there be a line of organizational succession in the event a firm’s leadership becomes displaced or incapacitated. There should be multiple people involved in the succession planning, including senior management, compliance, legal, and risk management personnel. 

Registered funds have been required to have written compliance policies and procedures in place for more than a decade. More recently, regulators have been paying close attention to how fund managers are positioned to respond during periods of crisis. As a result of the regulatory attention around BCPs, many advisors have taken additional steps to prepare. According to a 2017 survey, 26% of investment advisors were updating their BCPs to address the concerns of the SEC in particular.      

Of course, it won’t just be the regulators with questions about continuity planning. Clients are going to want to understand the systems managers have in place to ensure continuity, including how they can contact the manager during these periods. Clients need to know managers are doing everything in their power to protect client assets. They want to know their investments are in good hands.

Resiliency against unexpected market events is as important today as it has ever been. As a result, BCPs should be increasingly dynamic, tested on a regular and ongoing basis. 

There is no doubt BCPs can be challenging for firms to implement and manage over time. This is why vendor managed solutions are very often the most effective way for managers to build out a sustainable continuity plan. Vendor managed services not only help fund managers be more resilient, but also signals clients that the vendor takes its fiduciary responsibilities seriously and is prepared for whatever the markets may throw its way.