GC Friday Interview: Scott Sherman, Global Head of Sales and Business Development, Imagine

In July, Rothschild and Larch Lane jointly launched a liquid alternative fund, and in doing so, the hedge fund firms selected a customized risk and compliance platform from Imagine. Scott Sherman, a founding partner of Imagine and global head of sales and business development, explains how the technology necessary for these vehicles differs from that needed for “traditional” hedge funds.

GC: Was the ‘40 Act risk management solution something you planned to create or did Rothschild Larch Lane approach you?

SS: Our clients were looking to broaden their investment strategies with ‘40 Act Funds, but they had a specific hurdle—the need to deal with a new and complex set of regulatory and reporting requirements. When we met with Larch Lane, which had partnered with Rothschild to create a ’40 Act Fund, we both recognized the enormous potential in creating the solution using our background in risk management and Larch Lane’s extensive domain expertise. We worked closely with Larch Lane to examine all of the ‘40 Act rules and define the methodologies most appropriate for the Rothschild Larch Lane fund as the business expands.

GC: In terms of risk management technology requirements, how is a ‘40 Act different than a normal fund?

SS: The SEC and other regulators are taking a very close look at ’40 Act Funds, because they’re being offered to retail investors. This presents a steep risk management challenge for hedge funds and other asset managers who are now faced with the need to comply with regulatory reporting requirements—specifically real-time limits monitoring, which are part and parcel of offering a ’40 Act Fund. The companies we work with have identified ’40 Acts as an ideal diversification strategy and are looking to implement the required solution that they can customize to solve problems that they haven’t yet anticipated.

GC: How is your ’40 Act platform customizable?

SS: The current ‘40 Acts rules allow funds to define some of their own methodologies, so when clients started to talk to us about their needs, we built a solution that goes beyond limit monitoring funds, putting into place every protection that a regulator or investor could demand. Specifically, we created tailored dashboards that simultaneously monitor limits, identify breaches and conduct stress testing. Every trader and portfolio manager has a different way of looking at/measuring portfolio activity, and using our solution they can access real-time data when and how they need to see it. We know that given the evolving set of ’40 Act rules, customization will be an important element for each individual portfolio manager.

GC: How much bigger do you see this platform getting? Do you have more clients in the pipeline?

SS: We believe this will be a tremendous area of growth in both the U.S. and U.K. for the funds looking to diversity their investor base and for us to support that growth. We are launching a similar product for another global fund of funds and are very excited to add this asset management solution to our product lineup. We identified that the challenge is not just to comply with the regulatory needs but to meet the broader transparency demands of retail investors. In our conversations with clients about the right way to structure a ’40 Act solution that would scale for the future, it became very clear that we needed to build a comprehensive system that would satisfy regulatory and investor demands today, and deliver a solution that will support the kind of growth we all expect to see in the years ahead.

GC: What differentiates the Imagine platform from other types of risk and compliance systems?

SS: Imagine can track both a single manager ‘40 Act fund and a larger fund of funds structure. For example, there are cases where each individual fund must monitor its compliance with the ’40 Act—while at the same time monitor its compliance as a whole fund of funds. We have the ability to simultaneously manage and track the needs for both requirements.

Another important aspect of the solution is our flexibility to conduct “what-if” analyses. Our system allows individuals to test different trades and sets of trades to see in advance if the activity would breach limits. The system’s scenario analysis helps funds better understand the interaction of events and market movements so they can keep their assets intact. Particularly for fund of funds investing in funds, it also alerts them if there’s any style drift within the underlying fund—which is a critical red flag.

GC: How does the platform differ from what service providers might offer to funds?

SS: Funds will typically get T+1 or T+3 reports from their custodian detailing their compliance status, but that’s a static report that does not help them track—or be in compliance with—market movements in real time. Because operational costs are often a consideration for funds, we spent a great deal of time merging both risk management and compliance capabilities. By creating and delivering that functionality in a single system, our clients have the power they need to monitor for violations, as well as to quickly determine an efficient way to get back into compliance. And that is a consideration for all funds as they seek to grow into the ’40 Act space.

Editor’s note: For more on this topic, please read last week’s Friday Interview with Larch Lane.