SunGard’s Hedge360, a cloud-based platform that launched in 2012, puts the power of institutional-grade controls firmly in the hands of hedge fund managers as they strive to achieve institutional-grade credibility. The platform supports the full lifecycle of a fund’s activities front through back, seamlessly integrating its full range of solutions from Front Arena, VPM, InvesTier through to risk management via APT.
Aside from the technology capabilities of Hedge360, which managers can avail of either as an installed or hosted option, what is really driving uptake in the platform – largely because of institutional demand – is the managed services component. This allows firms to outsource their middle and back-office functions.
In many respects, the concept of ‘managed services’ is a sleeping giant that has only recently awoken. As operational and regulatory costs continue to rise, however, the need to better streamline their businesses is something that managers will likely focus on more intently.
“We provide the technology, the software, the infrastructure and also the people who understand the hedge fund market,” stresses SunGard’s Hedge360 COO Dae Kim. “The idea of someone coming out of an Investment Management firm and running everything through Microsoft Excel spreadsheets no longer holds water. You are seeing a high level of regulatory requirements being applied to hedge funds, a high degree of investor due diligence. Investors are no longer just looking at a manager’s investment thesis. Now, it’s important to see that the manager has the infrastructure to support scalability, that there is a disaster recovery plan in place, that third party administrators have been appointed to check the numbers.
“A lot of hedge fund managers now are even looking to outsource their middle office functions. That means there are two independent sets of eyes reviewing a hedge fund’s business. When you see these changes taking place, you realise that the industry is maturing. It’s the exact same process that the mutual fund industry went through 20, 25 years ago.”
In a report published in January by Aite Group entitled Hedge Fund Trends and Challenges: Achieving Institutional Credibility, over half of respondents said that they were considering or intending to outsource operations over the next three years to help them focus on their core strengths (see figure 1).
There are two other drivers at work for the adoption of managed services: namely, the need for more sophisticated risk reporting and the ability to access and effectively trade new asset classes. Both tie in to the same narrative of institutionalisation.
“Hedge funds need to demonstrate institutional-grade standards to attract new money and grow and that’s being reinforced with every conversation we have,” says Dr Laurence Wormald, COO and head of research, SunGard’s APT business. “They are also moving into new areas such as bank debt to find higher yield opportunities. This requires them to think about whether they have the necessary infrastructure and expertise in place, particularly when facing the regulators.
“All of a manager’s technology and risk management processes and resources need to be correctly aligned.”
Reputation risk is now at the forefront of the minds of senior management within hedge fund firms. It’s not just about complying, “it’s about having the right systems in place to adopt best practices because that’s what investors want to see,” adds Wormald.
Risk reporting has always been a significant challenge for managers but the stakes today are higher than ever: regulators and investors alike want transparency and granularity. That’s not easy if a manager decides to launch multiple fund structures – offshore and onshore funds, UCITS, managed accounts, etc. – and/or new fund strategies to harvest alternative sources of alpha.
“It isn’t just about analytics and writing algorithms. You’ve got to create engineered data like volatilities, discount curves; it becomes an institutional-level problem to get your risk reports credible and intuitive at the same time. That’s why managers are taking a deep breath when diversifying their strategies because they need to ensure that they’ve got the risk reporting right,” says Wormald. “The problem of marshalling and analysing the data needed for risk reporting is an exponentially rising one.”
Scott Alintoff, COO of SunGard’s VPM solution notes that one of the interesting developments taking place today is the “commercialisation” of hedge funds. Increasingly, the media refers to wider adoption of liquid alternatives (’40 Act funds), of ETFs, of ways to hedge without needing hedge funds.
“This puts pressure on hedge funds because if the average investor thinks they get exposure to hedge funds by buying an ETF, for example, that’s a problem for managers charging 2 and 20. They need to demonstrate that what investors are getting on the traditional hedge fund side is better than on the liquid alternative side. They need to be unique, to get into different asset classes. At a macro level, these kind of pressures are affecting hedge fund managers today,” comments Alintoff.
Fee compression is a big driver of adoption for platforms like Hedge360, especially among smaller and mid-sized managers. It’s a win-win situation: managers achieve an institutional infrastructure and at the same time reduce their operating costs. This then gives them the confidence to diversify into new asset classes such as bank debt.
“Eight years ago they made up a small slice of the hedge fund world. Now it seems like almost everyone, to some degree, is trading bank debt. Hedge funds are increasingly willing to step in and take distressed loans off banks and we give those managers everything they need from trading the loans to settling the loans. It makes it operationally appealing, knowing that managers have a platform that is robust enough to help them manage this asset class,” says Alintoff.
In order to attract institutional dollars, access new asset classes and meet the regulatory risk reporting challenges, platforms such as Hedge360 are playing an increasingly prominent role.
