Global presence key for hedge fund audit firms

Ernst & Young’s international presence is a big draw for hedge fund managers while KPMG and Rothstein Kass plan to grow their global footprint as competition among accounting and audit firms heats up.

"When it comes to accounting and audit services for hedge funds, we think there is really a ‘big five'," says Howard Altman, co-CEO and co-managing principal of Rothstein Kass and head of its financial services group.

The results of Hedge Funds Review's service provider rankings support Altman's case.

Rothstein Kass was ranked as the top audit and accounting firm by respondents in the US by a sizable margin, garnering 30% of the votes compared with 19% for second placed Ernst & Young.

Rothstein Kass ranked fourth overall in global votes, edging Deloitte into fifth place.

Ernst & Young ranked as the top accounting and audit firm for hedge funds when votes from all regions were aggregated.

Ernst & Young's overall ranking is testament to the firm's ability to provide a consistent level of service to hedge fund clients in all the major international financial centres.

While Rothstein Kass received the most votes in the US and KPMG was favoured in Europe, Ernst & Young was the only audit and accounting firm ranked in the top three in both regions.

"Our ability to provide services to clients no matter where in the world they operate is clearly unique," says Mike Serota, co-leader of the global hedge fund practice at Ernst & Young. "We see this as a global business and we have organised ourselves to work with clients in that way."

Ernst & Young's global platform is a clear draw for many hedge funds. "They have a global capability and that goes across auditing, tax and regulatory practices," says the CFO of a US hedge fund with offices in Hong Kong and Singapore that recently switched to Ernst & Young from Rothstein Kass.

The need to provide a global service to hedge funds is not lost on Ernst & Young's rivals.

Rothstein Kass, which has eight offices in the US and a presence in the Cayman Islands, plans to open offices in Europe and Asia in the near future. "Our business is going global because the industry has become global," says Altman.

"The issues that we are advising clients on – the Dodd-Frank financial reforms, SEC [Securities and Exchange Commission] registration, the AIFMD [alternative investment fund managers directive] – these are global issues."

KPMG, which has a particularly strong hedge fund practice in Europe, plans to double the size of its alternative investments business in the US by 2015. "We will be placing a much stronger focus on the US over the next few years in alternative investments and hedge funds in particular," says Robert Mirsky, global head of KPMG's hedge fund practice.

The idea is that KPMG's hedge fund practice will have a major presence in the US in time for the implementation of the AIFM directive, which will usher in a new era of cross-border regulation of hedge funds. Starting in 2015, US managers will be able to apply for a ‘passport' to market funds domiciled in the EU across the 27 member states.

KPMG is seeing plenty of demand for advice on the directive from managers on both sides of the Atlantic. "We are doing ‘gap analysis' for a lot of larger managers with a product suite that will be impacted by AIFMD," says Mirsky.

"The reality is that AIFMD has serious implications for any hedge funds that have European investors or do business with European financial institutions," he says.

"The transition to a post-AIFMD world is going to be easier for managers that have been dealing with European regulation for a while than it is for US managers that have never dealt with regulations on an EU level before."

KPMG has been working with European managers to prepare for the EU legislation. It is also advising US managers that are interested in establishing parallel fund structures in EU jurisdictions to qualify for the marketing passport.

While the industry waits for the European Commission to issue the level 2 detailed guidance on how the directive will be implemented, the tax and advisory groups at the ‘big five' have also been advising hedge funds on more immediate regulatory challenges.

At Ernst & Young the focus has been on getting ready for the Foreign Account Tax Compliance Act (Fatca), which imposes certain reporting requirements on foreign-held assets and closes some tax loopholes. The legislation has implications for offshore hedge funds, which will need to collect more information on their investors and implement US tax withholding and reporting procedures.

"Fatca is a major administrative challenge for clients as we have been working with them and the administration community to get them prepared for its implementation," says Ernst & Young's Serota.

Like other pieces of financial regulation, Fatca has been subject to various implementation delays. The compliance date was recently pushed back a year to January 2014. "The challenge has been to try and help clients prepare for regulations in a way that is appropriate and consistent with the final rules," Serota states.

"If you wait the regulations are finalised to make changes or advise clients, it is too late. We stay in constant dialogue with clients and keep them updated as often as possible so they have all the information they need to plan appropriately. We also try and establish a dialogue with regulators, make sure we understand their views and share those insights with clients," he adds.

For many US hedge funds, the race to meet the filing deadline for Form PF has overshadowed preparations for Fatca, according to Altman at Rothstein Kass. He says hedge funds have sought the firm's advice on implementing an efficient model for Form PF compliance.

"There are a number of different approaches to dealing with Form PF. Hedge funds can use information from their administrator, they can try to do everything internally or they can use technology to bridge the administrative data with their internal records," says Altman.

"We have worked with clients in an advisory capacity to help them navigate some of these questions and get a best of breed process in place."

Fatca and Form PF will continue be on hedge funds' agenda in 2013. The largest hedge funds with assets under management of more than $5 billion made their first Form PF filings in August and will now have to make filings on a quarterly basis while the rest of the industry will have to file Form PF annually starting at the end of 2012.

Preparations for Fatca will intensify as the January 2014 deadline approaches. Next year is already shaping up to be another busy year for the hedge fund practices of audit and accounting firms.

Accounting/auditing – global votes
1 Ernst & Young (18.0%)
2 PricewaterhouseCoopers (17.2%)
3 KPMG (15.9%)
4 Rothstein Kass (13.4%)
5 Deloitte (12.9%)

Accounting/auditing - Europe votes
1 KPMG (24.1%)
2 Ernst and Young (20.3%)
3 Deloitte (19.5%)
4 PricewaterhouseCoopers(12.3%)
5 Grant Thornton (10.9%)

Accounting/auditing - US votes
1 Rothstein Kass (25.3%)
2 PricewaterhouseCoopers (18.9%)
3 Ernst and Young (14.6%)
4 KPMG (12.0%)
5 Deloitte (11.1%)