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Common Cybersecurity Concerns for Private Equity and Hedge Funds

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Common Cybersecurity Concerns for Private Equity and Hedge Funds

As alternative investments such as private equity and hedge funds explode with success, more and more fund managers are entering the space. For many new fund managers, the process of starting a private equity firm or hedge fund often doesn’t give cybersecurity practices enough weight – a decision that can lead to huge ramifications in the future.

To help small and future fund managers understand the risks of ignoring cybersecurity is Agio, a managed IT and cybersecurity firm specializing within the financial space.

The Most Common Threat: Phishing

By far, the most common threat to small private equity firms is phishing. This is becoming more and more relevant as firms are relying more on third-party services to sort and analyze enormous amounts of data or provide other services. Oftentimes, these vendors deal with confidential information – meaning a breach at the vendor level can expose your investors and clients. The more vendors a firm works with, the more points of entry become available to potential hackers.

Smaller Firms are More Attractive

The size of a firm matter to hackers – smaller is better in their minds. Both private equity and hedge fund managers contact and move enormous amounts of money regularly. While giant financial institutions may touch more capital, they also have more stringent and better-tested cybersecurity procedures. On the other hand, small one-man fund managers can’t possibly compete in terms of digital security.

Considering the fact that many small firms still rely on email verification to move capital, wire transfer fraud becomes especially threatening. A transaction that doesn’t have multi-level authentication and involves just a small number of parties makes it so just a single party needs to be compromised in order for fraud to take place. Many private equity firms face wire transfer fraud as much as twice a quarter, which can affect anywhere between $250,000 to $6 million in each attempt.

Taking the First Step Towards Stronger Cybersecurity

Phishing and wire transfer fraud are both very easy to prevent if employees have proper phishing-resistant procedures, proper employee education, and consistent data monitoring. The good news is that identifying gaps in user knowledge and money transfer procedures can be done through a DDQ, or Due Diligence Questionnaire.

A DDQ provides a standardized way to audit your firm’s cybersecurity practices, allowing targeted overhauls of poor practices. For many small fund managers, the prospect of creating, testing, and executing a DDQ can be daunting. Fortunately, Agio can help streamline and complete the process. As an expert in IT outsourcing for hedge funds and private equity firms, Agio can ensure that a firm meets and exceeds all relevant regulatory requirements.