Cor Financial’s Salerio has published a whitepaper examining how automation in appropriate business critical areas of hedge funds operations can deliver meaningful commercial advantages.
Operational due diligence (ODD) is an increasingly important element in the decision making process of institutional investors. Investment performance without robust infrastructure is unlikely to convince investors to entrust their money to funds where doubts exist over operational systems and procedures.
With risk in general now such a focus for regulators, market operators and investors alike, the risk (and therefore cost) of potential errors within manual processing is one coming under increasing scrutiny in ODD assessments. The whitepaper uses post trade processing as an example of a business critical area where proving the robustness of systems and procedures can deliver significant commercial benefits.
The whitepaper also reports that there is increasing evidence that prime and executing brokers are beginning to examine the relationship between risk and reward across their customers, with particular attention to operational procedures and the quality of information provided by clients. A leading figure in investment bank global operations quoted in the paper supports the case for collaboration between asset managers, their prime brokers and their executing brokers to improve relationships and lower costs.
Ken Skehan, Cor-FS Salerio, says: “AIFMD is occupying the minds of many fund managers right now. A general requirement of the legislation is that the information flow between all parties in the trading cycle is effective. So an example of appropriate investment in technology would be confirming trades at the earliest point in the trading cycle, to ensure all subsequent flow of information is accurate and trustworthy. We also believe any size fund – even at start up - should be able to enjoy both the financial and risk related benefits brought about by increased automation.
“Investment performance alone just isn’t enough to rely on attracting new funds. An ODD consultant we work with, cites in the paper a case of a highly successful hedge fund in terms of investment returns, who were consistently prevented from securing new institutional investment because of significant operational flaws that were immediate ‘red flags’ to investors. It wasn’t until these were remedied that the fund was able to attract institutional investments that took it from sub USD250m AUM to USD1.3bn within 12 months.”