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Risk Management – More Expensive Than You Think

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Risk management, reporting requirements and regulatory compliance are not only becoming more important for licensing and on-going supervision of UCITS/AIF Managers, as well as investment firms covered by MiFID, but also much more costly in terms of time, money, systems and extra personnel.

The decision for small and medium sized funds and portfolio managers is how much risk management to develop in-house, or whether to outsource that function to an external AIFM, while retaining the portfolio management or investment advisor’s role. That is a decision that needs to be made on a case by case basis depending on the fund's size, complexity and internal resources. Delegation of portfolio management from the AIFM to the asset manager or investment firm also depends on whether they are authorized, licensed or regulated by their home regulator or competent authority.

For funds that are less than €100 million in assets under management (AUM) it may be worthwhile appointing an external UCITS/AIFM, or setting up a sub-fund on a segregated fund platform where the costs of risk management, reporting and compliance are significantly reduced due to economies of scale as they are shared across a number of funds with more AUM than a stand-alone fund.

In many popular financial centres just one extra full-time risk manager, one compliance officer and an internal auditor can add up to €450-600k in extra salary, benefits and work place related costs to the fund, which drags down performance as well as creates HR issues and personnel risks for the fund manager. 1

One survey done in Switzerland in 2012 put the cost-benefit break-even point for their funds at €500m AUM to implement CISA (the AIFMD equivalent) in-house.2 Certainly, new resistance to immigration and visa restrictions on foreign workers will drive up the costs there to recruit, train and retain mid-level, experienced risk management and compliance officers in some centres where the demand for their services will be the highest. Outsourcing non-strategic functions of the fund then becomes an attractive alternative.

KMG Capital Markets (KMG) can help new or existing UCITS/AIFs, as well as investment firms covered by MiFID, with their risk management, reporting and compliance functions in one of several ways. The UCITS/AIF can appoint KMG as its external UCITS/AIFM. A self-managed AIF can outsource their risk management to KMG. An investment firm wanting to manage collective investments can appoint KMG as its AIFM. Or an EU or non-EU asset manager can establish their own segregated sub-fund on the KMG SICAV SIF platform in Luxembourg.

1. Opening up to the idea of outsourcing, Hedge Week, May 2012
2. Switzerland Hedge Fund Services, Special Report, Hedge Week, May 2012