The Definitive Source for Everything Hedge Funds Top Accounting Firms RANK 2016 RANK 2015 1 4 PricewaterhouseCoopers 2 1 EisnerAmper 3 2 Ernst & Young 4 8 Grant Thornton International 5 — Marcum 6 3 Deloitte Touche Tohmatsu 7 7 RSM 8 5 KPMG COMPANY CLIMBING Performance TO THE TOP the only factorisn't that determines how well a firm fares in our annual Hedge Fund Report Card — but it's by far the most important. Volume 14 Winter 2016 . RESEARCH RANKINGS ALPHA AWARDS: ACCOUNTANTS STRATEGIES WHEN BIGGER ISN’T BETTER I IT WAS ONE of the biggest mergers of accounting and audit firms in the U.S. in years, and one that had significant implications for the accounting lineup that caters to the hedge fund industry. In May 2014, KPMG, one of the Big Four global accounting firms, announced it was buying regional powerhouse Rothstein Kass, a New Jersey–based firm that had fought its way to the top ranks of hedge fund accountants, in part thanks to its aggressive courtship of smaller and emerging managers. At the time, London-based research firm Preqin said the merger would dramatically reshuffle the leadership ranks in hedge fund accounting, propelling KPMG to the top of the heap of firms that provide global audit services, by at least one measure: number of funds served. Preqin said the merger would immediately give KPMG 26 percent of the hedge fund market, putting it ahead of the previous leaders, Ernst & Young, which had 21 percent, and Pricewaterhouse­ Coopers, with 20 percent. How’s the merger working out so far? Judging from the latest Alpha Awards ranking of accounting firms, and anecdotal comments, KPMG has faced some challenges in keeping all those Rothstein clients happy.

KPMG not only slips in the ranking, it lost former Rothstein managers to other firms. KPMG sinks three places to eighth in this year’s Alpha Awards ranking. (Rothstein was No. 6 a year ago.) KPMG finishes behind the other Big Four firms and four midsize outfits.

KPMG’s decline is one of several shifts in this year’s ranking. First-place firm PricewaterhouseCoopers edges out last year’s winner, Eisner­ mper, a midsize firm A that drops to second place. PwC soars to No. 1 from a fourth-place finish last year. Ernst & Young slips to No.

3 from second place last year. Another midsize firm, Grant Thornton International, surges to fourth place from eighth last year, followed by midtier Marcum in fifth. Another Big Four firm, Deloitte Touche Tohmatsu, falls to sixth from last year’s third-place finish, while RSM (which before October was known as McGladrey) comes in seventh. No. 8 KPMG rounds out the list.

To determine the Alpha Awards, we surveyed more than 425 hedge fund firms, asking them to rate the quality of service they received from their accounting firms over the past year in five categories: Audit, Client Service, Hedge Fund Expertise, Regulatory & Compliance and Tax. PwC’s situation this year is the reverse of KPMG’s. The firm not only shows improved popularity in the Alpha Awards ranking, it has gained new hedge fund business thanks to its rival’s merger. “We have picked up several large clients and expect more opportunities created by the That sort of client may not feel KPMG-RK transaction,” says as comfortable at KPMG. But Michael Greenstein, U.S.

and Mears adds that KPMG is far global leader of alternative from abandoning small maninvestments for PwC. agers and remains committed The firm isn’t alone in to emerging funds. snatching up former Rothstein The KPMG merger continclients. EisnerAmper says it ues a trend toward concentratoo has gained clients as a retion of hedge fund accounting sult of the merger. at a few firms, which in turn KPMG acknowledges that mirrors the growing concentrasome managers have left for tion of assets among the bigother firms since the merger gest managers. Preqin says the but says the losses have been top 10 percent of the 5,000-plus minor.

Former Rothstein single-manager hedge funds Kass chief operating officer it tracks control 90 percent of Christopher Mears, the assets in the who is now nasample. Globally, tional leader for some 8,000 hedge asset management funds hold about audit operations at $3 trillion in assets. KPMG, says more When Bostonthan 90 percent of headquartered his former firm’s hedge fund conmanagers stayed sultant NEPC reon. Rothstein recently polled some portedly had more 250 managers who than 1,100 hedge controlled nearly fund clients before $1 trillion in assets the merger; losing about their ac10 percent of that counting services, total translates to 91 percent said 100 hedge funds they used a Big that may have Four firm for their Grant Thornton client jumped ship. funds.

Of those KPMG reportedly had about who responded to the survey, 900 hedge fund clients before 85 percent managed $1 billion the merger. or more, and 38 percent ran Some of the Rothstein manmore than $10 billion. agers who left after the merger In the NEPC survey the may be major clients, but more concentration of business are likely to be smaller manamong the Big Four left just 9 agers who might not feel the percent for all other firms, and same love from a gi- most of that went to a few midant firm like KPMG size firms, including three on that they enjoyed at this year’s Alpha list: Eisner­ a smaller one like Amper, Grant Thornton and Rothstein. “The McGladrey. “The movement reality is that in the we are seeing is away from COMPANY emerging-manager smaller organizations to the PricewaterhouseCoopers space, Rothstein Big Four firms,” says NEPC Kass took everychief compliance officer WilEisnerAmper thing on,” Mears liam Bogle IV. Ernst & Young says.

“If a guy This year’s Alpha Awards Grant Thornton International launched with champ, PwC, also can boast $5 million and in about winning the annual Marcum three or four years revenue game. The firm edges Deloitte Touche Tohmatsu was still at $5 milout Deloitte to claim the highRSM lion, Rothstein est global revenue for the KPMG would deal with it.” most recent year: $35.4 billion, Top Accounting Firms RANK 2016 RANK 2015 1 4 2 1 3 2 4 8 5 — 6 3 7 7 8 5 “I knew I was never going to be an important client to a Big Four firm, but I would always be an important client to Grant Thornton.” . RESEARCH RANKINGS compared with second-place Deloitte’s $35.2 billion. PwC employs 208,000 worldwide. The firm can attribute some of its success in hedge fund accounting to the increasing complexity and scope of that business, particularly for the largest managers. What those mega-billion-dollar managers require these days is an accounting firm that can not only perform an audit on time but also make accurate valuations of complicated investments that may be scattered around the globe. All of that works in favor of a Big Four firm like PwC, with a global reach and a broad talent pool. “Hedge fund managers want to work with a firm that has a deep understanding of products and strategies, as well as a depth and breadth of skills,” Greenstein says.

“They want to have access to experts who can deliver business- and industry-specific knowledge, whether it is new asset classes, products, markets or ongoing challenges in tax and regulatory compliance.” Greenstein has been with the firm for more than 25 years and has been alternative-asset leader since 2010. One area of the hedge fund industry that has gotten extra attention at PwC is audit, Greenstein says. The firm has worked to simplify the audit process by investing in technology to help drive efficiency and allow quicker delivery. PwC is working to help managers use data developed in the audit process to gain insights that might be used elsewhere, providing a bonus to clients. All of that global knowledge and expertise, however, comes at a cost, and smaller managers or those with simpler strategies may not need the extra bells and whistles.

For those managers a firm like No. 2 Eisner­ mper fits the bill. A Top Firms by Aspects of Service RANK 2016 RANK 2015 COMPANY RANK 2016 RANK 2015 COMPANY 3 Audit — Grant Thornton International 1 4 PricewaterhouseCoopers 4 2 Ernst & Young 2 1 EisnerAmper 5 — Marcum 3 2 Ernst & Young 4 — Grant Thornton International 5 3 Deloitte Touche Tohmatsu Regulatory & Compliance 4 PricewaterhouseCoopers 2 1 EisnerAmper 3 2 Ernst & Young — Grant Thornton International 3 Deloitte Touche Tohmatsu 1 2 PricewaterhouseCoopers 2 Client Service 1 — Marcum 3 1 EisnerAmper 4 3 Ernst & Young 5 — Grant Thornton International 1 4 PricewaterhouseCoopers 4 2 1 EisnerAmper 5 3 — Marcum 4 — Grant Thornton International 5 3 Ernst & Young Hedge Fund Expertise 1 4 PricewaterhouseCoopers 2 1 EisnerAmper One EisnerAmper client, a manager with a straightforward strategy, says he once shopped the Big Four firms but found he could get what he needed at EisnerAmper for less. He says he has never regretted his choice and in fact feels that his access to top accountants is probably better than what he might get from a Big Four firm with a client roster of big-name managers. “Eisner has tremendous customer service,” the manager says.

“Sometimes I need an answer immediately, and the ability to pick up the phone and just dial the tax or audit partner and get a response back immediately is key. I don’t think I could get that in a big firm.” Eisner boasts 1,200 hedge fund clients. Its annual revenue of $305 million is a fraction of that of a Big Four firm, Tax as is its workforce of 1,300. The firm’s financial services group is its largest, with 250 professionals. To try to keep pace with larger firms, Eisner has been expanding its head count and geographic reach, adding offices in Miami and Los Angeles and launching a global network of independent firms and connections in Ireland and the Cayman Islands.

It has beefed up its cybersecurity advisory effort, not just to respond to its clients’ needs and compliance issues but also to keep pace with larger firms that are putting extra focus on that area. Peter Cogan and Chris Bekmessian cochair Eisner’s financial services business that focuses on hedge funds; both have spent their entire careers with the firm. Eisner’s challenge is to make itself look more like a Big Four firm without losing the personal touch its clients crave. The fact that it remains near the top of the Alpha rankings indicates that clients are satisfied. “I have worked at funds where we used bigger firms,” says one client.

“I don’t miss it.” Eisner’s appeal to smaller funds has helped it retain its position as one of the most-liked firms in the Alpha Awards. But Big Four firms are hardly ceding the smallmanager business, especially the emerging-manager field. “One area of focus where we continue to invest is in the start-up market,” says Natalie Deak Jaros, hedge funds market co-leader for the Americas at Ernst & Young. Although EY retains an interest in emerging managers, much of its hedge fund attention is focused on larger firms. In the U.S., EY insists that it is No. 1 in terms of clients served — at least, those big enough to register with the Securities and Exchange Commission, which requires hedge funds with more than $150 million in assets to file. EY says it audits about 40 percent of all SEC-­ egistered r hedge funds and hopes to grow that number. Jaros is not surprised by the continuing concentration of hedge fund clients and assets with the Big Four because those firms all view the industry as an important business and devote money and talent to ensuring they don’t lose their edge.

She points out that most of the largest hedge fund clients at EY have been with the firm since their inception. “I think this is still a niche business,” Jaros says. “You need to understand the nature of the business and be willing to invest in this niche. Not all firms are willing to do that, so the concentration doesn’t surprise me.” EY has more than 211,000 .

RESEARCH RANKINGS employees worldwide, including 15,000 in its asset management business, which includes hedge funds. Global revenue for its most recent year was $28.7 billion, third among the Big Four. Jaros, who has been an EY partner since 2006, shares the title of hedge fund co-leader with Michael Serota. Grant Thornton enjoys one of the biggest jumps in the Alpha Awards ratings, climbing to No. 4 from eighth place last year. Though it is considered a midsize firm, it is much larger and more of a global player than either EisnerAmper is or Rothstein Kass was. Grant Thornton had global revenue last year of about $4.7 billion and total employment of 40,000, including more than 450 professionals who focus on hedge funds. But it retains the small-firm ambience that its smaller clients appreciate. One hedge fund client with less than $1 billion under management and a straightforward long-short equity strategy says he gets the quality expertise he needs from Grant Thornton, plus a personal touch. “I knew I was never going to be a mega-billion-dollar hedge fund,” the client says. “So I knew I would never be an important client to a Big Four firm.

But I felt that I would always be an important client to Grant Thornton. And the fees would be significantly less.” The U.S. and the U.K.

account for more than half of Grant Thornton’s revenue and most of its hedge fund business. For the past four years, Michael Patanella has led the firm’s U.S. hedge fund practice, which represents about 350 hedge funds with a combined $150 billion in assets. Part of what makes the firm attractive is the access to top partners — including himself — that Patanella provides. “It is a personal relationship with him,” the client says. “I can call him on a Sunday afternoon if I need to.

He is accessible and responsive.” Fifth-place finisher Marcum has been developing a niche in hedge funds and maintains efforts aimed at smaller managers, including programs for emerging managers and hedge fund start-ups. The hedge fund practice is part of the firm’s alternative-investment group, which has more than 50 professionals and has been headed by Beth Wiener since Marcum’s founding in 2000. The firm has 1,500 employees in offices around the U.S., Grand Cayman and China. Although the next-ranked firm in the Alpha Awards, Deloitte, trails rival PwC in revenue, it has the largest workforce in the accounting field: 225,000.

Deloitte’s overall KPMG has about 174,000 hedge fund leader is Patrick employees, including 600 proHenry, who serves as head fessionals who work on hedge of investment management. fund accounts. Robert Mirsky, Edward Dougherty leads the the global hedge fund leader, hedge fund practice in the U.S. relocated from London to New RSM (formerly McGladrey), York in 2014 and has helped No. 7 in the Alpha Awards, shepherd the Rothstein merger exhibits many of the same along, working with Steve qualities as Grant Mena, the former Thornton.

It is also Rothstein managan upper-midtier ing partner who firm, with $4.4 bilnow leads the U.S. lion in global hedge fund revenue and 37,500 practice. employees. John Though movHague leads the ing from a small financial accountregional firm to a ing practice. Firm big multinational partner Alan Alzfan accountant may heads the hedge prove challenging fund audit unit, for some smaller while partner Richhedge fund firms ard Nichols runs affected by the the hedge fund tax merger, some Michael Greenstein, practice. larger managers Pricewaterhouse­ Coopers No.

8–ranked may welcome KPMG has enjoyed the change. One a boost in revenue KPMG client, now and hedge fund clients thanks a multi-billion-dollar manager, to the Rothstein Kass merger. hired Rothstein Kass years Its U.S. revenue grew by 9.8 ago, when the fund was a percent in its fiscal year ended small start-up.

An executive in September 2015, the first in that firm has heard some full year after the merger. mixed reviews of the merger KPMG reported from other managers but says global revenue of his own experience has been $24.4 billion last positive. year, and though “We don’t think we have that was below lost any attention or level of the previous year’s service since the transition,” he $24.8 billion, the says. “My biggest concern was ASPECT firm says that that responsiveness might be when the figure is Audit impacted. Our team has been expressed in local pretty happy with KPMG.” Hedge Fund Expertise currencies rather If KPMG can expand that Client Service than in dollars, it sentiment over the next year, Tax had a global revmaybe it can regain its footing enue increase of in the Alpha Awards as well. Regulatory & Compliance 8.1 percent. — Irwin Speizer “We have picked up several large clients and expect more opportunities created by the KPMG-RK transaction.” Order of Importance to Clients RANK 2016 RANK 2015 1 1 2 2 3 4 4 3 5 5 Reprinted from the Winter 2016 issue of alpha Magazine.

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