It's business as usual at RSM Robson Rhodes. The firm has bounced back from the departure of three of its senior hedge fund brains in late 2004 and its hedge fund advisory practise looks as bright-eyed and bushy-tailed as ever, ready to pursue a similar strategy to that of the previous hedge funds team, advising both start-up and established hedge fund managers. But at the same time it is at pains to point out that it is taking this opportunity to revisit the increasingly important role that hedge fund managers play within its client base. Yes, it is business as usual, but there are differences which the firm hopes will help it to continue to enjoy its central position in the hedge fund advisory market.

"We're very collegiate," explains Sheila Duignan, who joined the firm in 2002 as director of its Dublin Advisory Group. "There are no silos here. It's an easy thing to say, but not an easy thing to make work. The various parts of this business are very connected to each other, and we make sure partners visit other locations."

Duignan is an example of how the firm draws on its network of offices, and broad range of expertise. A graduate of Trinity College Dublin, she started work with RSM in Ireland, but in 2004 started spending more time in the London office. She has worked in the financial services marketplace for more than 15 years, including roles in corporate finance and corporate banking in London, as well as advising fund management and stock broking firms in her native Ireland. As part of the Dublin Advisory Group, she also looks after project management and listing, which includes advising hedge funds on their critical Irish Stock Exchange listings. It made her the natural choice to head up the new look hedge funds practise.

The creation of a new practise from the beginning of this year has allowed the firm to really recreate its offering to the hedge fund community from scratch, and to make sure that it is up to speed on the changing requirements that small and large hedge fund firms bring to the table. Duignan sees her team now offering a broad range of services suitable for hedge fund managers, but using a 'turn key' approach. It includes audit, listing and regulatory advice, tax, and potentially IT support and consulting via its technology arm, RSM Moffat.

"Established managers won't need all of that," Duignan says, "it really will depend on whether they are a significant institutional start-up or smaller."

RSM Robson Rhodes has been more aware than most of the pressures currently facing start-up hedge funds, as well as those more established asset management players considering a move into the hedge funds space. With increased scrutiny of their operations and reporting facilities, as well as heavier compliance and regulatory demands from both sides of the Atlantic, hedge fund managers are facing unprecedented challenges beyond their trading screens. "We have a strong consulting ethos which offers great synergies in the hedge funds space," Duignan explains. "The IT offering is often critical".

A changing industry

Keeping your finger on the pulse also helps you to understand when an industry is changing, and along with this transformation, facing up to different priorities. The firm knows that major service providers in the hedge funds space are already pointing towards a process of 'instututionalisation' within the hedge funds industry. Even start-ups resemble less the two men and a Bloomberg profile of an early 1990s venture, but rather more sophisticated asset management entities with complex demands for compliance and tax advice, as well as a durable operational framework right from the off. RSM Robson Rhodes has advised on one of the largest every US/UK hedge fund start-ups, with extremely challenging logistical elements, as both its offices were required to go live simultaneously with a state-of-the art IT infrastructure.

"There's been a lot of very decent-sized start-ups recently," Duignan says. "For example, you've had firms like WMG coming onto the scene which look more like a mini-investment bank. Eton Park launched in London and New York contemporaneously. Five years ago small start-ups were still in vogue, now we're advising traditional asset managers on their hedge funds operations. There are still plenty of launches happening, but the frequency of the smaller launches has gone down."

Apart from the sheer size of launches, there has also been the realisation amongst seasoned managers that in order to continue to grow their businesses, they have to look at becoming more multi-manager in their outlook, at adopting a multi-strategy offering, and becoming more like traditional asset management houses in their outlook. As a firm already advising the mainstream funds houses, RSM Robson Rhodes can call on expertise from a variety of different areas to help with some of the unforeseen problems than can spring up. Establishing new offices and worrying about the various pay-roll and taxation issues that having more employees can bring with it are just some of the challenges the firm helps out with. Duignan expects to see the creation of more houses in the mould of RAB Capital and New Star going forwards.

"If you're going to try to build a business in the long-term, then you will probably be looking at a multi-manager, multi-jurisdictional entity," she says. "You will be facing a hugely complicated spectrum of possibilities. Take WMG, for example: they're really a bank, rather than guys simply running money. There will always be room for well-run, small, efficient boutiques, with workable operations, a suite of reliable advisors, and a strategy they pursue rigorously. But people are falling out of the industry – the costs are becoming too great for some, and some very natural hedge funds are simply not making it. It's becoming a survival of the fittest situation."

It is an issue that has been touched on by the FSA recently, in its clarification of some of the points raised in its discussion papers on future regulation of the hedge funds industry. The regulator is aware that managers starting new hedge fund firms may be doing so in an environment where they lack the operational back-up they enjoyed at a big asset management house or investment bank. It has perceived this as a regulatory risk.

As a firm, RSM Robson Rhodes is frequently asked to beauty parade by prime brokers advising on start-ups. Their role in these scenarios is usually to provide support on the business, particularly in the areas where RSM Robson Rhodes is seen to have a core area of expertise. "The obvious expectation is that we can advise on audit and other tax activities, but we also end up advising on regulatory structures and complex technology issues," Duignan explains. "We find this is quite helpful for managers at the outset. Running money is really just one part of this business."

This year the poorer returns from many established strategies have also caused fund managers within big long-only firms to think twice before packing their bags for the West End. "Speculative launches have gone, and expectations are getting higher," Duignan explains. She thinks that hedge funds' clients are becoming more demanding too, and are asking whether their managers' approach to running money is both systematic and repeatable. The rules of the game are definitely changing.

A taxing situation

Traditionally a provider of tax advice, RSM Robson Rhodes has been well-positioned to advise hedge fund firms on their fiscal affairs. Duignan says her clients are well aware that tax can be a serious business risk if not handled properly, for example in the areas of transfer pricing or the initial domiciliation of funds. In addition, however, the UK Inland Revenue seems to have woken up to hedge funds recently, and has turned its spotlight on their tax affairs. Recognising this, the firm has hired Anne Stopford, who has come on board from PricewaterhouseCoopers, where she spent 20 years advising fund management clients, amongst them hedge funds.

Stopford will be able to help managers with their day-to-day tax compliance at the management level, including audit provisions and completion of accounts. She sees the challenge facing many of her clients as being one of coping with the enhanced Revenue scrutiny of their operations: "As time goes on, it is easy to slip into bad habits," she says. UK-based managers with offshore management companies have to be particularly careful that central management control – i.e. board meetings – are seen to be taking place outside the UK. Too many firms are still making this mistake, and falling foul of the UK tax authorities.

"We know HM Revenue and Customs have been looking at a high level of detail," Stopford says. Two to three years ago the Inland Revenue increased the frequency and level of audits it conducted in the hedge funds space, and this trend looks set to continue, particularly where they feel there is not enough substance.

"When looking at the tax and regulatory requirements of hedge funds, with audit it is easier to find the right fit," Stopford says. "Hedge funds need to feel that advice will be plain-speaking, robust, and effective. This process can get too commoditised – what they need is lots of communication and hand-holding. Many tax issues will be areas that managers have simply not had to handle themselves before. This is one area where they need to know we can work effectively with them."

Stopford thinks the presence of a full-time COO role within hedge funds is really a given, but also feels many firms may need a chief tax officer working alongside him. "Some of the larger launches need a seriously weighty management team," she says. "Investors will be looking to check that there is appropriate management. There is inherent risk outside the trading and financial elements of the business."

The men from Washington

Also on the agenda this year is the prospect of increased regulatory oversight, both from the FSA and the SEC. It is partly because of the heightened importance of regulatory affairs that the hedge funds practise has Sofia Lawson on its roster. Formerly with Ivy Asset Management, she is a regulatory specialist with a primary expertise in hedge funds, particularly in the area of compliance advice and regulatory project management. Trained originally as a private client fund manager, at Ivy she looked after compliance and operational issues.

"Hedge fund managers in the UK have always been regulated," Lawson says. "They have wanted the comfort of a robust compliance regime, but they may have to raise standards going forwards. The SEC has increased its staffing, and although its reach will be limited by these resources, there is no doubt that the SEC and FSA are in dialogue. This is something that hedge funds are fearful of – the fact that the SEC will be able to make visits here in the UK."

It is certainly an issue that is creating controversy at the highest levels of the industry, where major firms are already reviewing whether the compliance costs are worth the added regulatory burden. It is an area where RSM Robson Rhodes is well-positioned to advise its clients, familiar as it already is with the state of play in the US hedge funds sector. "Any manager with a long-only history will see this as de rigeur," Lawson explains. "It's a harder decision for the smaller houses if US money does not play a huge part in their business. But for the bigger firms it will be seen as just another hoop they have to leap through: ultimately, they want to conform to good governance and corporate best practice."

Conclusion

Scale is something that has not been made much of thus far in this article, but it is a point that should be made: in the UK alone RSM Robson Rhodes has nine offices and over 1000 partners and staff. As a firm it is regularly engaged by all the UK regulatory authorities, including the FSA, to undertake work on their behalf. In the tax and consultancy stakes, it may not be Big Four, but it sits very close to the top table. Perhaps of most interest to hedge fund managers is the fact that it is part of the massive RSM International network, one of the world's largest organisations of accountants and business advisors. RSM member firms coordinate internationally, and have some form of presence in 80 plus countries. It is a network with a core specialisation in financial services, and offices in the key hedge fund business centres, including London, Dublin, New York, Chicago, the Cayman Islands, Jersey, Guernsey, Luxembourg, and Hong Kong. As scale becomes more of an issue in the alternative investment industry in the next few years, it is this scale as an international network, and RSM Robson Rhodes' membership in it, that will stand it in very good stead.

RSM Moffat: technology consultancy with a hedge funds flavour

In early 2004 RSM acquired the technology consulting company, Moffat Communications, which specialises in servicing the hedge fund and investment banking sectors. Moffat was well known as an innovative operator in the hedge fund world, having advised over 50 start ups in recent years, including a number of leading names in the hedge funds industry on both sides of the Atlantic. Moffat is run by Richard Seager, comprises over 50 people, and is considered a market leader in supplying technology consultancy and project management, outsourced IT support, business contingency management and software enhancement services to the hedge fund sector.

The acquisitionof Moffat reflected a strategic decision by RSM to position itself squarely and robustly in the hedge fund sector, and enabled the firm to combine its skills and expertise with those of Moffat to service start up and established managers on an end to end basis, delivering technology strategy and IT project management as well as regulatory consulting and compliance, tax structuring, transactional support (including Irish Stock Exchange listings) and of course audit services.

Nearly two years after the acquisition was announced, Moffat is a fully integrated member of the RSM Robson Rhodes stable and has been re-branded RSM Moffat. Sheila Duignan sees the Moffat technology offering as a key element of RSM's route to the hedge fund market. The acquisition strengthened RSM Robson Rhodes' position as a leading advisor in the sector, providing it also with an early calling card to some of the brightest hedge fund talent in London. RSM Moffat has experience of working with significant scale start ups, including global launches, increasingly a feature of the start up market. It is expected to be a key component in RSM's ambitious plans to grow the practice threefold by 2007.

A distinguishing feature of RSM Moffat is that the team works closely with prime brokers and clients to identify solutions to IT problems from the client's perspective. An example of this is its work in Intranet design. It helps the client's internal communication by facilitating the centralisation of documentation and also provides a mechanism for indexing information that is searchable, providing fund managers with powerful tools to assist them. RSM Moffat has specific experience in customising Microsoft SharePoint to achieve this.

Another example is Business Contingency Management. Since the terrorist attacks in London on July 7th 2005, the focus of Operations Directors everywhere has shifted to coping with unexpected events. RSM Moffat has extended its range of services in this area, from simple backup and offsite tape storage, to a fully replicated remote datacentre hosting solution.