Posts by tempadmin

Why technology has become a bottle neck issue for hedge fund investors

February 23rd, 2012 Posted by Opinion 0 comments on “Why technology has become a bottle neck issue for hedge fund investors”

The parties to any single trade, be it the fund manager, the custodian, the investor or the administrator, are incorporating a degree of estimation in the course of the transaction process. It is still difficult to operate otherwise. Each participant is using different parameters to view mission critical data and communications. Each still relies on paper-based processes and spread sheets to manage billions of dollars of alternative investments. But can any of them express with 100% confidence that a specific trade is at a specific location in the transaction trade at any given time of the day? And can they put a value to it when they do find it?

At this juncture in time we stand in an industry that is becoming increasingly institutional, with over 60% of the assets being managed by hedge funds now originating from institutional clients. The client complexion of the industry has changed while the legacy technology in use within many firms harks back to an earlier and simpler era.

Technology issues are becoming a bottle neck for institutional investors, particularly with regard to managing and reviewing hedge fund portfolios. This is creating a demand for a more proactive and integrated approach to client reporting using technology that has the ability to break down the different components of the hedge fund trade. By bridging these operational processes, institutional investors can manage and review accurate data with a higher degree of confidence.

The scale of the problem facing the industry has been highlighted by Swift’s SHARP (Swift Hedge Funds Harmonisation Project) initiative. Swift identified a number of key operational issues within the hedge fund transaction cycle. While custodians and administrators can handle the paper trail when transaction volumes are low, the largest service providers to hedge funds now process well over 1000 transactions every month. Each order may come with up to 50 pages of documentation attached. A typical team within a hedge fund administrator might be handling 600-700 orders with a dedicated staff of a dozen or so. Apart from reconciling data with their own records, they must also ensure investors are complying with KYC and other regulations.

Because subscriptions processing is time consuming and error prone, the entire cycle from the time when the order is taken to taken until confirmation is received and accounts are reconciled can be as much as a month. Faxes of subscription agreements must be sent to transfer agents, which in turn must be confirmed by phone, with final documents being sent over by courier.

For a fund with monthly liquidity, these transactions can prove costly, particularly if the market has moved. Missing a deadline for an order could lead to a fund holding unnecessary cash, while a missed redemption deadline would leave a fund exposed to an unwanted position for another month, quarter of a year or more.

If funds restrict liquidity, or extend their lock-in periods, or raise gates, the risks of moving transactions in and out of funds grows. It is still very hard for custodians to provide funds of funds with accurate status reports, particularly when they are bombarded by faxes from administrators and transfer agents at the end of the month. For larger custodians, with dozens of service providers to deal with, the problem is only magnified.

How do you cope when things go wrong?

February 9th, 2012 Posted by Opinion 0 comments on “How do you cope when things go wrong?”

A detailed liquidity report of an underlying portfolio of hedge funds, one that could be dynamically updated, was the Holy Grail for many funds of funds in the dark days of 2008. Proper liquidity reporting is underpinned by effective data and tools. It requires a degree of investment in technology that can be proactive, agile and responsive.

One of the real tests of any portfolio management system occurs when things go wrong: in the world of money management, operational failures, for instance on the part of a business further down the service provider chain, can force the portfolio manager to re-evaluate retrospectively. Can he be sure that such revaluations are being consistently applied, especially if multiple individuals within the same firm are juggling dozens of spread sheets? Once mistakes creep into the historical portfolio picture, they can be difficult to track down and correct, and they can continue to have an unforeseen impact on reporting further down the line.

Beyond the problems of effective performance tracking, investors in hedge fund portfolios today want to feel they have a better grip on what is happening in underlying hedge funds. This means being able to view a more complete operational picture. Their questions cover key issues relating to fund liquidity, including whether funds have the ability to gate withdrawals, whether gates have been initiated, the expiry of each tranche lock up, and what the options are to reduce lock ups and when. Better information on the liquidity scenario can deliver important additional advantages to the portfolio manager.

It all comes down to a question of confidence: can an investor feel confident that a trade has been properly executed? Has it been confirmed by the relevant custodian and underlying transfer agent? How long does it take to receive the estimated and real NAVs? Do they always come in on time? Are communications with relevant parties secure and dynamic enough to process real-time information flows?

With a more detailed picture comes a higher degree of confidence in the underlying investment and a superior level of reporting to end investors when required. This also helps the portfolio manager to allocate further funds more efficiently.

In pursuit of a confident measure of liquidity

January 26th, 2012 Posted by Opinion 0 comments on “In pursuit of a confident measure of liquidity”

Since the subprime crash of 2008 the alternative investment industry has been focusing in unprecedented detail on the issue of operational risk. This is being driven forwards from a number of quarters, including by regulators and investors concerned that assets might be placed in jeopardy as a consequence of future systemic failures. There is a general appreciation, however, that within the hedge funds industry there are systemic issues in the way business is being done that will need to be addressed if operational risk is to be reduced.

The investor community in particular is seeking solutions that will allow it to improve the efficiency of the hedge fund trade cycle, providing for enhanced interaction with fund managers and service providers like administrators and custodians.

Talk of ‘transparency’ is more prevalent than ever: we have statements to this effect from regulators and investors (e.g. in the recent survey of managers and investors published by Ernst & Young). But can we properly define what we mean by hedge fund transparency and produce a benchmark industry standard?  Commentators have discussed the transparency of the trade, for example in equities pricing, but how can you translate this into hedge fund investments? In the post-Madoff environment, transparency now means proper verification of every stage of the trade, from the initial investment in the fund to where the assets are held.

From the perspective of the investor, for example a typical pension fund or family office, an investment in a hedge fund is treated as a security, and with that come concerns about liquidity: where is the investment held, what it is worth? How is it treated from a legal perspective?

In short, investors would like to be able to see their alternative investments alongside their other assets, be they exchange-traded securities or long only mutual funds. The problem is that hedge funds – and their private equity equivalents – are more opaque and are still seeking solutions that will allow them to deliver this degree of enhanced reporting to the investor community. It is difficult to get away from the spread sheet when it comes to managing an alternative investment portfolio: finding out what something is worth is hard enough using Excel; what about providing a confident measure of liquidity?

The leading fund of hedge funds technology provider

April 30th, 2011 Posted by Opinion 0 comments on “The leading fund of hedge funds technology provider”

Article published in The Hedge Fund Journal, April 2011, written by Stuart Fieldhouse.

As the dust has settled in the wake of the credit crisis, it has become increasingly obvious to funds of hedge funds managers that more needs to be done to address the issue of the inherent risks within their portfolios. The offshore hedge funds industry has lagged the onshore one in the straight-through-processing and settlement stakes, and as the credit crisis exploded onto the scene in 2008, this started to show.

Historically, the offshore investor base was happy with the levels of speed and efficiency at which things were being done. Back office functionality was allowed to proceed at a slower pace, and risk calculations for hedge fund investors had to take that into consideration.

That all changed in 2008. Memories are still bitter in some quarters at how long it has taken funds of funds to liquidate their holdings and pass on cash. Investors in alternative investments have learned their painful lessons, and are now much more demanding when it comes to reporting what a fund currently holds, and how much it has been valued at.

Deploying cost-effective monitoring and reporting solutions has crept to the top of many COO’s agendas in the last couple of years and is now likely to stay there.

M.A.T. Share
Comada’s M.A.T. Share product, a web-delivered solution for funds of hedge funds, earned it recognition from The Hedge Fund Journal thanks to the revolutionary approach it has taken to solving some of these challenges and problems.

First and foremost has been the use of Comada’s proprietary M.A.T.ware technology, which was used to build a product that can enhance the levels of communication between funds of hedge funds and their service providers. It has allowed firms to also be able to improve their reporting to end investor customers. This is vitally important in a climate where hedge fund investors are keeping much closer tabs on their investments, and where transparency and liquidity have replaced alpha-generation and capacity as key concerns.

In the words of Dave Shastri, co-founder of Comada: “M.A.T. Share represents a new operating model for the fund of hedge fund client. It represents the true ability to integrate the workflow process between the fund of hedge funds manager, the service provider, and ultimately the end investor.”

Shastri sees M.A.T. Share as a solution that can strip away much of the operational headache for both the fund manager and the service provider. It can smooth away many of the glitches and human error-inspired problems that can easily creep into day-to-day trade processing and settlement, and can do so using a package that is easy to deliver, install and update. Comada’s senior management team has always been wedded to the idea that its solutions should be easily deployable and should make a big difference in the way funds and service providers communicate.

Comada’s message is being taken on board by the industry and it has already been working with some leading names in fund administration and custody, amongst them SEI Investments, and PFS (Prime Fund Services), as well as fund of fund groups like Gottex. “We need our technology to be able to satisfy the appetite of the service provider as well as the fund manager,” explains Shastri.

Comada’s technology has been designed to be adaptable to the requirements of banks and other large service providers who need to meet the growing demands of funds of hedge funds. Funds are averse to the idea of costly re-builds, and anyway, why put them through it when compatible solutions are on hand?

Modern architecture
“Funds of funds and indeed their service providers recognise the need to move away from silo-trapped technology,” explains Rupert Vaughan Williams, co-founder of Comada. “We have therefore developed modern architecture that allows firms to integrate more successfully, both upstream to investors and downstream to service providers. This has required significant investment on our part in M.A.T. Share’s integration capabilities.”

Vaughan Williams is keen to emphasise that Comada’s proprietary core technology offering, M.A.T.ware, is not just a modular offering, for instance when encompassed in the M.A.T. Share fund of funds product, but can also be tailored to meet more specific requirements. It is highly adaptable, and can mesh easily with legacy internal systems without the need for prohibitively lengthy and costly new build-outs.

“In practice,” says Vaughan Williams, “we understand what it takes to make a technology application work in the real world. We have established a process that is effective and allows us to join up the dots for the fund of funds administration process. We recognise that funds of funds don’t operate on their own, and by connecting them seamlessly to their service providers, we can significantly enhance their own deliverables to their clients.”
M.A.T. Share also has significant advantages as a risk management application, but at the same time has been designed to be adaptable to the various risk management platforms that funds of hedge funds have been developing. In particular, it offers solid deliverables for funds seeking to provide more transparency to their clients, or wishing to track liquidity risk more accurately across their portfolios.

“We are talking here about providing a precise liquidity picture,” says Shastri. “Everyone is concerned about managing tail risk, but we can provide a much more efficient information set needed to understand liquidity elements.” This includes real and hypothetical scenarios, readily available at the touch of a button.

Accruing to this, of course, is the enhanced client reporting and communication advantages M.A.T. Share can offer the fund of funds.

“We’re living in an environment now where efficient and transparent client reporting can make the difference between keeping assets and facing a redemption notice,” explains Vaughan Williams. “Maintaining client confidence is essential, and having a tool which can generate customised reports with reassuring levels of detail, including liquidity profiling, will go a long way towards maintaining client confidence.”

Comada’s offering now extends to limited partnership structures and private equity funds. The technology firm’s management team, which has a long track record in the fund services business, intends to keep M.A.T.ware as scalable as possible. This makes it of value to the small fund of funds operation, as in the case of the award winning M.A.T. Share offering, as well as to the large fund administrator or custodian, where the adaptability and scalability of M.A.T.ware – the DNA of the M.A.T. Share – can add value.

“Scalability is key,” says Vaughan Williams. “You need to be able to operate with transaction capable architecture that will allow you to manage growth and deliver efficiencies in different areas of your business when needed. The business logic required to do this also needs to be able to digest and manage vast amounts of data, making it useful simultaneously and dynamically throughout your entire business. Getting a proper picture of this information is critical if you are going to stay on top of both operational and portfolio risk.”

The future of financial technology for the fund of hedge funds market requires systems that can deliver portfolio managers everything they require, be that ‘what if’ scenarios, liquidity-driven analysis, real-time cash flow, or electronic trade confirmation from a custodian. M.A.T. Share can deliver an unprecedented level of risk transparency: managers can see their liquidity risk clearly, they can assess risk using a variety of different parameters based on what is actually in their portfolio today, as well as running scenarios based on what they might want to add or change. Comada understands that some funds use very different approaches to risk analysis, but is confident that its tool box can be adapted to most of the analytical approaches currently being used.

“We have the ability to integrate into the standard analytical process; this allows the front end to run seamless and efficiently,” explains Vaughan Williams. “This is the way the industry is starting to specialise, using different types of liquidity and exposure risk analysis. We believe M.A.T. Share can add significantly to the analysis that funds of funds are already doing, providing them with more accurate and additional levels of data on a dynamic basis. We think they’ll be impressed with what they see.”

Building the dynamic funds environment
Comada’s development team cannot have reached the point where its technology is winning increasing acceptance in the hedge funds industry without a fundamental understanding of the hedge funds industry, and particularly what is required to deliver efficient straight through processing capabilities. Comada’s products serve as the link between various parties in the processing environment, and it can leverage these for the benefit of its customers. It has focused much of its development activities on building a dynamic environment that can keep pace with the increasing demands of the fund of hedge funds industry and its investor base.

Comada’s technology is based on the latest connectivity processes, its aim being to deliver web-based functionality to fund of funds users via Windows Environment. It employs ASP .NET technology to enhance integration, both within a business and with counterparties externally.

M.A.T.-based products can be managed either as a hosted solution, or run internally as part of a firm’s existing systems, as has been the case with some of the larger banks and fund managers that have made use of it. This also allows M.A.T.ware-based products to be deployed quickly and cost-effectively, and makes M.A.T. Share an offering that can be readily rolled out globally should an organisation desire to do so.

“We’ve been working around hedge funds and their service providers for decades,” says Vaughan Williams. “The challenges funds of funds face today, both operationally and from a portfolio risk perspective, are not new to us. We wanted to be able to deliver a solution to funds of hedge funds which they would find adds very real value to the way they run their businesses on a day-to-day level. This means a new, and dare I say it, exciting approach to data management that drills down into a highly granular level of detail that many hedge fund professionals will not have seen before. Ultimately, this is where the industry is going, and it needs solutions like M.A.T. Share to get there.”

About Comada
Comada was founded in 2004 to develop technology solutions for funds of funds, administrators and custodians, particularly in the alternative investments space. Its core team has an extensive track record in banking, fund management and administration. Its development and technology support teams work on a global basis with some of the largest firms in the fund of hedge funds services industry.

Comada’s raison d’etre has always been to reduce many of the inefficiencies that have existed historically in the back and middle office hedge funds environment by designing easily scalable and deliverable solutions that will help funds and their counterparties to manage risk and communicate more effectively with each other. It has done this by creating dynamic products that draw on the input of various users to create a larger and more effective end offering, one that cuts down on human error while delivering the highly scalable advantages that are conferred by increased automation.

The three ‘Ds’ of separation eluding technology integration

September 1st, 2008 Posted by Opinion 0 comments on “The three ‘Ds’ of separation eluding technology integration”

Article published in AIMA Journal, Autumn 2008, by Rupert Vaughan Williams, Comada.

The three ‘Ds’ currently playing a large role in the STP conundrum in today’s fund of funds businesses are:

  • Duplication
  • Data
  • Documentation

They have a lot to do with the specific technology risks some alternative investment firms are running; addressing the challenges these ‘Ds’ pose will help funds of funds immeasurably, both in terms of cost savings achieved and in overall operational efficiencies.

Let us start with Duplication (and its surly cousin Error): Both are an ongoing bane for funds of hedge funds that find they cannot synchronise pricing and trades as a result of both duplication and error. Fund managers are faced with a need to reconcile actual positions and performance, received from managers’ transfer agents, administrators and custodians – data which can then allow them to analyse performance/risk and report accurately to their investors. It is a goal that is hard to achieve without a serious re-think of IT strategy. Confirmed details of prices from managers, administrators, and even a sub-adviser, need to be improved to avoid creating reams of unnecessary work.

This brings us to our second ‘D’: Data.

Although the industry has changed over the last ten years, in terms of the size of the assets under management and the scale of investors participating in hedge fund type investments, much in the way of pricing and data management has not. Infrastructure which might have been considered adequate in 1998 does not really meet the grade today.

This is probably true of many areas of technology (who fancies the prospects of the Sony mini disk these days?). However, given the influence that institutions are having in shaping the way hedge funds manage their operations, funds of funds will need to seriously address the systems they have in place at the moment. The point here is, that in many cases the commitment to invest in infrastructure has been sadly lacking.

Firms must now consider the way they are managing transaction-level data within their businesses. This should take into consideration a wide variety of factors beyond simply pricing data i.e. due diligence, risk assessment and monitoring, lock-ups and gates and even tail risk, as well as charges and other fund parameters. Such information should be readily available and actionable but the unstructured tools still being employed by hedge funds, coupled with the increased complexity and illiquidity of underlying portfolios, means that it is hard to track down.

Funds of funds need to balance the benefits of operating solely with third party data, compared with managing their own transaction-based data internally. The latter solution would allow more effective modelling and risk management, as well as letting the portfolio managers make an informed comparison with third party data resources. As always, integrating these different data sources still means addressing the way data is managed in-house.

Funds of funds are also waking up to the fact that proprietary data and third party data are not the same thing. As many hedge funds start to adopt a liquidity profile that more accurately reflects private equity vehicles, funds of funds have to formalise liquidity management and risk procedures. This includes an ongoing analysis of redemption options and an awareness that these can change with the markets, as we saw last summer.

Hedge funds, by their very nature, are not liquid securities and essentially operate as private placements. One may be in for a disappointment if approaching hedge fund portfolios within the IT parameters of more conventional securities.

Managers need the peculiarities of the various funds they have exposure to at their fingertips, including the investment structure, the explanatory memoranda and the costs and terms that might be associated with accessing and redeeming units. They need a snapshot of those liquidity and cost variables but how does one get it in a scalable manner?

This brings us to the third of our ‘Ds’: Documentation. For a fund of funds, portfolio managers need to be able to retrieve due diligence and other associated documentation quickly and logically, in an electronic format. The correct management and availability of documentation on an ongoing basis, sometimes across multiple offices, is critical in helping funds to stay on top of liquidity risk. Various IT applications are available to help achieve this but some are more suitable than others. A tailored approach to document management that addresses the unique requirements of funds of funds managers, seems the most suitable.

ASP Delivery
It is obvious why the ASP delivery model has become so popular with IT providers for the investment management industry. Remotely-hosted technology is easier to mesh with a highly robust infrastructure profile, easier to maintain and it can interface smoothly with disaster-recovery protocols. The ASP approach has the added benefit of not requiring the installation of masses of new hardware in an otherwise lean investment management operations environment. It is also cheaper. Funds of funds are, after all, in the business of investment management, not technology development. The cost of developing and maintaining in-house solutions can be astronomical, affordable only if you are an investment bank or custodian with a large infrastructure but not otherwise.

For an industry that has traditionally outsourced virtually all its key components from accounting and custody to fundraising, the step to outsourcing its technology should, conceptually, be straightforward. What should make this kind of decision even easier is the ability to use an ASP solution, even better if it is web-based. If there was ever a single solution developed to help integrate a fragmented industry, the use of browser based applications is the one.

An ASP solution is also readily scalable and software can be easily updated remotely by the provider, as and when the fund manager’s requirements change. Firms that are using multiple offices can ensure that the technology is readily deployable across time zones and continents.

Integration: It is achievable
The morass of conflicting data that CIOs of funds of funds can face need not be a problem. A single, integrated ASP-hosted system can ensure that the data in use in-house is the right data, it is updated, it is accurate and it is readily accessible, whether sitting in your office in London or with a client in Jakarta. Real and accurate valuations, exposure and analyses are now more important than ever in the reporting process.

Apart from levering proprietary data out of the legacy silos it has probably been collecting in over the years, established firms will also be grappling with scalability issues as they get bigger, make more hires and open new offices. For example, we are seeing many major funds of funds opening new offices and expanding their operations in Asia. This relates partly to an appetite for increased allocations to managers in the region and partly to a need to service increasing numbers of cash-rich Asian customers. For increasingly global businesses, a single, harmonised data-management system is needed, so that fund of funds managers can make informed decisions, using real data, much of it proprietary.

This is not rocket science. It does require careful thought as to how growing businesses formalise their data management processes. It does not require building systems from scratch. However, it does need a revision of systems that might have grown organically and which might be fragmented or which might not have evolved as the fund management business has grown. As a consequence, operational risk is being created unwittingly through the failure to source appropriate data. Worse still, it is leading to the making of decisions that are based on inaccurate data. It also means that funds may end up reporting inaccurately to investors – a situation that opens up a whole new can of regulatory worms.

The ASP model is also more robust from a security perspective. Internally-hosted systems, as some major quant funds will attest, can require a huge investment in personnel and infrastructure, in order to ensure security requirements are addressed. It can take months, even years in some cases, for institutional-grade IT security measures to be properly implemented on a firm-wide basis. With ASP-delivered systems, managers can be up and running in a matter of weeks, safe in the knowledge that much of the mission-critical software is being hosted remotely in highly secure locations.

ASP-delivered software can be completely outsourced to an IT partner, or can be installed within the investment management entity to varying degrees. For funds of funds, the key is getting this balance right and finding the formula which matches one’s size and operational expectations. Luckily, many ASP solutions can be upgraded gradually over time. It is important that the solution chosen is one that the whole business can make use of, is easy to use and can run on multiple applications.