The hedge fund industry has experienced significant forces of change in recent years, mostly driven by market regulation in the form of FATCA and the Dodd-Frank Act placing Form PF and CPO-PQR reporting obligations on firms.
This has led to far greater complexity with respect to operational compliance and prompted a wide universe of service providers to offer their support, from trade execution and portfolio management services, all the way through to compliance, accountancy and audit services.
But as the complexity of the marketplace increases, smaller and emerging managers find it increasingly hard to find the right service provider to give them the support that larger, established blue chip names cannot necessarily offer.
Muhammad Akram (pictured) is the founder of the eponymous firm, Akram & Associates, a certified public accountancy based in North Carolina.
“We are fortunate in the sense that our overheads are lower than our competitors as we are not located in the largest cities,” says Akram. “We offer very responsive services compared to the big 4 and national CPA firms. They tend to place smaller clients on the back burner to take care of their larger, more established clients.
“All accounting firms attempt to provide transparency, but in my opinion a lot of smaller funds don’t get as much attention from national public accounting firms; not necessarily the Big 4, but regional public accounting firms who might drop the ball in terms of their service level.”
Indeed, with investors becoming more comfortable investing with managers who use niche providers, this is helping achieve a stronger alignment of interests as managers select partners they know will give them a more bespoke service, and offer better cost value.
Moreover, in an environment where seemingly everything has to now be done in real-time, having a partner that will respond swiftly to tax or regulatory issues, is a huge benefit to managers in the early stages of building their businesses.
“I like to partner up with each one of our clients,” says Akram. “Even if managers build a good track record, they don’t necessarily have the time or resources to go out to the market to raise more capital. We can help in that respect. We introduce them to clients in our network and help them introduce industry best practices into their businesses, which in turn can help them when it comes to raising assets. This remains the biggest challenge for all emerging managers. The majority of industry assets are still managed by the 100 largest funds.”
Not that Akram & Associates will help with fund raising in any capacity. After all, that would be a clear conflict of interest. Rather, it introduces managers into its network who it thinks could help them with their marketing efforts.
“Attend the right conferences, sit on panel discussions, go to networking events to meet as many people as possible; that’s what I tell all my clients.
“Even before they establish their fund, I share various documents with them to give them an insight into what it takes to run a hedge fund and I will offer advice and help where and when possible. This is important to develop a trust-based relationship. If I can introduce my manager clients to useful contacts within my network I will do so. That’s why I’m keen for them not to view us merely as a service provider but as a business partner,” explains Akram.
On the regulatory front, the SEC is introducing more and more regulations, the latest being Rule 22e-4, which will make liquidity risk management a much more detailed operation for registered investment advisors.
It is, says Akram, becoming increasingly difficult for fund managers to focus on the task of making money for their investors:
“I see our role at Akram & Associates as bridging the gap between the manager and their end investors to make sure they are making tax-efficient investments and running the strategy in line with what they set out in the Limited Partnership Agreement.”
Maintaining an ongoing dialogue allows Akram & Associates to give its clients clear insight on the tax position of the fund, and the management company itself. Its staff constantly provides updates on tax regulation developments, tax reforms and so on, thereby ensuring that their tax policies are correct.
One major tax development in the US is the introduction of new partnership tax audit rules. In short, an updated version of the Tax Equity and Fiscal Responsibility Act (TEFRA) audit rules will allow the IRS to collect partnership tax deficiencies from the assets of the partnership itself (or, indirectly, its general partner), rather than being forced to collect such deficiencies from individual LPs.
“This new tax regime will be effective next year and we are currently explaining to managers what are the pros and cons of these rules.
“Managers cannot assume that just issuing a K-1 will be sufficient. Under the new rules, the IRS will be able to get hold of the tax details of the partnership and ask the partnership to pay taxes if any issues arise. Therefore, managers will have to be more careful from a compliance perspective,” advises Akram.
Overall, Akram says 2017 has been a very promising year and look forward to continued growth in the coming years
One of the reasons for its growth has been word of mouth referrals from existing clients who share details with their peers.
“Some of our industry relationships also refer us to their clients,” says Akram. In his view, continued consolidation in the industry will continue as larger firms buy up the competition. This was seen a couple of years ago when KPMG acquired Rothstein Kass.
Fewer firms will be around to support smaller and emerging managers, which should provide a real opportunity for boutique accounting firms like Akram.
“We are starting to get clients as they move out of the larger accountancy groups either because they are being asked to, or because they aren’t happy with the level of service, or because the costs are too high.
“A lot of funds are missing the personal touch. We can help them comply with all the necessary requirements to successfully run their hedge fund, while at the same time save money,” concludes Akram.