What Are the Key Elements of a Comprehensive Hedge Fund Adviser Disaster Recovery Plan, and Why Are Such Plans a Business Imperative?

A key element of any hedge fund manager’s business continuity plan (BCP) is the disaster recovery plan (DRP), which contains procedures for getting back to business as quickly as possible following a business interruption via natural (e.g., hurricanes and pandemics), man-made (e.g., terrorism and theft) or technological (e.g., power outages and computer viruses) events. Institutional investors are focusing with renewed vigor on DRPs (as they are on BCPs) in the course of their due diligence, particularly as a recent spate of cyberattacks have affected various sectors around the globe. See “Steps Hedge Fund Managers Should Take to Defend Against the Rising Threat of Ransomware in the Wake of WannaCry” (Jun. 15, 2017). The SEC also issued a 2013 risk alert directed at deficiencies in fund manager BCPs and DRPs, as well as best practices that should be adopted. See “SEC Risk Alert Describes Deficiencies Found During Reviews of Investment Advisers’ Business Continuity and Disaster Recovery Plans and Recommends Best Practices for Such Plans” (Sep. 26, 2013). The Commission followed that alert up in 2016 by issuing a rule proposal that would require investment advisers to adopt and implement written BCPs and transition plans. To assist fund managers in preparing for this scrutiny, this article outlines key elements of a DRP; analyzes the impact a fund’s strategy has on a manager’s DRP; describes the role DRPs play in institutional investor due diligence; identifies specific technology issues (e.g., cloud-computing and smart phones); and outlines measures managers can undertake to test and maintain their DRPs. For more on BCPs and DRPs, see “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015).

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