“There is what I call a Holy Trinity for hedge funds. They’ve got to be able to raise capital, they’ve got to be able to deliver performance, and they’ve got to be able to control costs,” says Paul Compton (pictured), head of strategy in SunGard’s asset management business. Within the context of managed accounts, the last point on cost control is especially important.
One of the clear drivers of interest in managed accounts among institutional investors is the need to demonstrate to their own stakeholders that they have all the checks and processes in place to mitigate the risk of fraud. Managed accounts give them the segregation of funds and the transparency they need, but as demand grows, so does the operational complexity for managers.
“Operating managed accounts places a premium on a manager’s ability to automate things like allocations, fee calculations and service potentially a large number of investors, each within effectively their own separate fund,” says Compton.
Automation, says Compton, is now an imperative. Managers cannot rely on spreadsheets when they have multiple managed account mandates as things like tax reporting become too complex. Each mandate will be slightly different, and it is this customisation feature that makes managed accounts more demanding than a commingled fund where all investors are treated equal.
“The kind of investor that wants to be segregated will expect a high standard. The world of spreadsheets might not be something they want to see when they do their operational due diligence,” adds Compton.
In a recent survey of global hedge funds conducted by SunGard, 82% of senior hedge fund executives agreed that institutional credibility is ‘extremely’ or ‘very important’ to their business, especially when it comes to raising capital from institutional investors. To be successful requires having a robust automation process.
SunGard understands this and last year rolled out Hedge360 to deliver institutional credibility in a cost-efficient way. Hedge360 provides a hosted, integrated platform for hedge funds to pick and choose proven solutions in areas such as portfolio management, fund accounting and investor allocations that deliver precisely the kind of automation now required by the industry.
“Hedge 360’s investor accounting capabilities support the proper automated handling of all investors, including managed account investors,” says Compton, noting that overcoming the complexities of multiple fee structures is a key component.
“Managed accounts aside, most hedge funds have a pretty complex entity structure whether it’s masters and feeders, partnership-based accounting for US investors, equalisation-based accounting elsewhere. Some investors are carved out in side pockets and remain in only the liquid investments. Potentially you have almost as many fee calculation formulas as investors.
“This creates a high level of complexity in the investor accounting process. With SunGard, hedge funds can manage all those different fee structures in an automated way.”
Hedge360 is a cloud-based platform. Therefore, by choosing a proper investor accounting platform as they evolve and potentially take on managed accounts, hedge funds have the ability to control costs yet still present a robust institutional-quality operational framework to investors.
“That’s the benefit of having a hosted, integrated platform. We can take care of the technology management and infrastructure, which deploys proven solutions with a lower total cost of ownership. With institutional credibility now a priority for any fund looking to raise capital, we can provide that institutional-quality framework, allowing hedge funds to automate their processes as they take on more managed account mandates.”