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.
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?
“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.”
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.