Operation Control in Hedge Funds

The Importance of Operation Control in Hedge Funds

When discussing hedge funds, many people focus on investment strategies and potential profits. However, it is also very important to consider risk management. The right operational control allows hedge fund managers to safeguard the finances and satisfaction of their clients. Why is operation control so valuable for hedge fund management? To understand its many uses and applications, it’s necessary to take a close look at how it affects a financial company.

Operation Control Affects Hedge Funds in Many Ways

Operation control is a somewhat broad term that describes a variety of different financial processes. It can include everything from carefully recording trading losses to properly valuing assets. The main thing that all of these operation control processes have in common is that they safeguard assets and ensure all regulations are properly followed.

A good hedge fund manager can use their operation control plan to ensure they are fulfilling their financial responsibilities to their client. Operation control involves creating a clear plan for how to handle business and taking steps to confirm that staff members properly adhere to all these procedures. Every proper operation control plan should help a hedge fund meet these goals:

  • Keep clients satisfied
  • Help the hedge fund run smoothly
  • Protect assets from avoidable losses
  • Comply with regulatory requirements

Recent Regulatory Updates Highlight the Importance of Operation Control

In the wake of the 2008 financial crisis, the hedge fund industry has become a major target for federal scrutiny. When the government started taking a closer look at hedge funds, they realized that funds without proper operational control posed a lot of risk for investors. Those who make the mistake of investing in poorly run hedge funds run the risk of getting trapped in an illiquid fund if something goes wrong.

Due to these risks, regulatory bodies now require stringent operation control from hedge funds. In the past decade, there has been a sharp increase in regulations related to operation control. Those who fail to follow guidelines can potentially face fines, lawsuits, and other consequences. Therefore, paying close attention to operation control practices comes with many advantages for hedge funds. Not only does it safeguard their customers, but it also keeps them from encountering legal complications.

5 Ways Operation Control Benefits Hedge Funds

As you can see, operation control is a smart way to protect client funds while also adhering to legal guidelines. Hedge funds that prioritize operation control can provide their clients with these benefits.

The Ability to Focus on Portfolio Management

One of the most beneficial types of operation control is simply hiring the right number of staff. Of course, many hedge funds are small, boutique businesses. However, it’s still important for them to have a dedicated CFO/COO and support staff. Having employees who focus solely on daily management tasks allows portfolio managers to prioritize generating profit for their clients.

Confidence That All Regulatory Guidelines Are Being Followed

There are a lot of different compliance policies that hedge funds need to follow, and without operation control, it is easy for details to slip through the cracks. This is one of the biggest reasons that a hedge fund needs a dedicated operation control plan. The best hedge funds tend to have a set of compliance policies and a compliance officer who can guarantee that employees are being fully trained and monitored. When a hedge fund has such a detailed plan in place, customers can be confident that no one is making mistakes with their funds.

Fraud Prevention

An unfortunate reality is that hedge funds without operation control are vulnerable to fraud. If internal policies are set up in a way that allows one person to manage multiple systems, they can easily defraud the company. The benefit of operations control is that it carefully designs fraud-proof hedge fund procedures. Automated systems ensure that every trade is carefully logged, so fraudulent activity can be caught. Meanwhile, segregating duties properly ensures that every staff member’s activities are overseen by another person. These sorts of operation control practices combine to create a hedge fund office where no employee can easily defraud clients.

More Accurate Asset Valuation Reports

Asset valuation is one of the most essential aspects of operation control. Without proper operation control, there is a chance that some unscrupulous traders will boost asset valuation as a way of making their funds look more promising. However, these misvalued assets don’t provide a full look at how a fund is performing, so it causes more problems for the hedge fund in the long run. Since asset valuation is so important, operation control policies tend to include a lot of different guidelines for valuation. This can include things like setting company-wide standards for valuation and requiring brokers to average quotes before finalizing valuations. Overall, these practices allow hedge fund managers to make smarter decisions and help a fund perform optimally.

Less Chance of Wasting Money on Clerical Errors

Another major advantage of operation control is that it reduces the chance of little errors snowballing into big losses. In the fast-paced world of hedge fund management, it’s common for things to go wrong. Something like incorrect settlement instructions or faulty reference data can keep a trade from settling on time. If a company is following proper operation control guidelines, these sorts of errors get immediately caught and addressed. The failsafes provided by operation control can avoid mistakes that cost thousands of dollars to fix.

Before investing in any hedge fund, investors need to take a close look at the manager’s operational risks. A good hedge fund will have a thorough operation control plan that carefully monitors and protects clients’ funds. When you work with Fund Studio, you can count on our team to provide high-quality operation control. Our team follows a strict set of guidelines designed to ensure your fund is managed properly. To learn more about our services, contact Fund Studio today.

About Fund Studio

Fund Studio is a software company that provides technical services to financial services companies. We offer middle and back office functionality and can handle your company’s daily operations, such as processing all trades, managing cash movement, automating reporting packages, and offering data support.

Contact our team to learn more about how we can help. 

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