Private equity and hedge funds have exploded in popularity due to a period of unprecedented success. The performance in these types of alternative investments has led to many prospective fund managers thinking on how to start a private equity firm or hedge fund without properly considering cybersecurity practices.
Among many alternative investment managers, there’s the erroneous belief that the size of their operations or complexity of practices will dissuade hackers. This could not be further from the truth. It’s important to realize that most hackers are not after potential trades or insider information, but rather sensitive client information.
Most private equity managers find themselves in a unique position where they handle a tremendous amount of capital, deal with sensitive client information, and often lack the robust digital security practices that are seen among bulge bracket firms and large asset managers. This makes private equity and hedge fund managers incredibly appealing targets for cyber-criminals because they can move so much money, yet often don’t have a dedicated IT or cybersecurity team. This makes small one-man shops incredibly attractive targets.
Small Shops are Especially Vulnerable
In an interview conducted with cybersecurity specialists from RFA, cybersecurity specialists point out that one of the primary threats for private equity firms comes from phishing and wire transfer fraud – as often as two times a quarter. According to Ray Hillen, a cybersecurity specialist, wire transfer frauds can involve anywhere between $250,000 to $6 million. A primary reason why this type of fraud can go through is due to email-only authentication. For a small private equity firm, there’s a limited number of parties involved with a transaction, such as the private equity firm, portfolio company, bank, and attorney. Only one of these parties needs to be compromised in order for the fraud to take place.
For many small private equity shops, it might not be feasible to cross-check or call in every single transaction that happens each day. When you broaden the scope of everything a hacker may touch, it because an extremely complicated matter to try and actively prevent and monitor money movement, sensitive client data, and insider information.
Steps Towards More Robust Cybersecurity
Fortunately, there is a solution to ensure a firm’s digital security practices are robust. The first step involves a DDQ, or Due Diligence Questionnaire. A DDQ is a series of questions that create a standardized approach to assessing and auditing a firm’s vulnerabilities, lack of procedures, and risks from third parties.
In reality, the process of creating, writing, and executing a DDQ can take weeks or even months of time – leading to a time sink that may simply not be worth it for small firms. Fortunately, there are solutions in the form of IT outsourcing for hedge funds, private equity firms, and other specialized investment types from Agio. As a seasoned IT manager for a variety of financial services firms, Agio can overhaul and modernize the cybersecurity practices of a firm. Even better, as a veteran of the industry, Agio can ensure that any procedures can meet and exceed even the most stringent of regulatory requirements.