“The landscape for alternative investments is at an interesting and important inflection point,” says Michael Appenzeller. “Managers as well as investors need to cope with an unprecedented array of change.”
Appenzeller is co-founder of Etops, a service company with offices in Pfäffikon and Bratislava that -specialises in operational solutions for both single managers and organisations running multi-manager portfolios including funds of funds, family offices and private banks.
Switzerland remains a key hub for funds of funds, family offices, private banks and other alternative asset investors, but while institutions value the role played by hedge funds in their portfolios, they struggle with the overall operational processes and often lack the necessary transparency to deal with these investments efficiently.
That’s even more so when investing directly into single hedge funds, which increases operational risk, Appenzeller says: “Do you have the right data, transparency and ‘live’ reporting, do you know your liquidity profile? We want to be at the forefront of helping investors to make the process institutional and cost-efficient.”
The issue of operational robustness applies to both single managers and large asset managers investing in hedge funds on behalf of clients. Appenzeller notes that even the largest financial institutions struggle with operations and infrastructure in alternative investments, suggesting that throwing huge budgets and IT resources at the problem is no guarantee of success. “In this industry it’s often the details that make all the difference,” he says.
Etops focuses on operational processes and infrastructure, providing an integrated outsourcing solution for all alternative asset classes. The firm handles middle-office operations and data management, and offers institutional systems and reporting solutions underpinning these processes.
Says Appenzeller: “People today have two issues: how to handle complexity, growing client and regulatory demands, and how to save costs at the same time? Outsourcing can solve this conflict.”
He believes that institutions are starting to think differently about their operations and opening their minds to the idea of outsourcing, allowing them to focus on their core business, the investment process.
“The most successful managers focus solely on investment and risk management,” Appenzeller says. “Portfolio managers shouldn’t spend time thinking about subscriptions and redemptions, reconciling positions, reporting or hassling with service providers. A cost-efficient way to improve operational processes and ultimately performance is to outsource to specialists.”
Changes in Swiss regulation are set to benefit firms such as Etops. “Regulation may entail appointing additional external board members, and FINMA will also want to see organisational delineation of portfolio management, risk management and compliance in a contingent fashion including the four-eyes principle,” Appenzeller says. “Operationally, this will mean adding at least two or three employees, which in Switzerland will cost up to EUR500,000.
“We can take care of the whole operations process for these clients for much less than the in-house cost. We provide administration support as well – keeping all the necessary documentation updated, or preparing material for the auditors.”
This industrialised way of thinking is increasingly shared by big multi-manager firms with EUR5bn-plus in assets. Says Appenzeller: “They are realising that to be successful in the future, they must focus on their core competences and invest resources in performance-oriented functions rather than handling all operations in-house at a premium.”