The credit crunch, financial industry crisis and economic downturn of the past three years have had huge implications not only for managers of alternative funds and service providers to the sector but for providers of software systems to hedge fund administrators. The turbulence the industry has undergone has proved an important test of the ability of firms such as Koger to react to the changing needs of its clients and ultimately of managers and investors.
As a technology provider to the administration industry, Koger is well established in Ireland, the world’s largest hedge fund services centre, and its clientele includes such leading industry names as Daiwa, HSBC, Prime Fund Solutions and Citco. In conjunction with its NTAS transfer agency platform, which encompasses a wide range of functionality for alternative fund administrators including performance fee calculation, limited partnership, equalisation and series functions, Koger has developed modules for funds of funds and private equity, as well as products such as a web front end for NTAS and a middleware product that facilitates straight-through processing and communication between NTAS and third-party systems.
However, the impact of the crisis has prompted demand from the industry for solutions to deal with new and unforeseen circumstances, such as the sudden absence of liquidity, and the mechanisms that managers were obliged to put in place to protect their businesses, notably the use of side-pockets to house temporarily illiquid assets, and revision of management and performance fee arrangements in order to stabilise management company revenues.
In the past couple of years, managers have placed more demands on their administrators, which automatically feed through to vendors like Koger, as the firm’s clients require a flexible and adaptable system that can satisfy their own fund manager clients in a timely manner. Often this requires vendors to react extremely quickly, but Koger has responded with a flexible rule-based system that handles many of the mechanisms used by fund managers to deal with a multitude of issues.
These include lot level calculations, such as the ability to charge different management fees to different investors in the same fund, and the ability to distribute P&L at a lot level by applying certain income and expenses to a select number of investors within a fund. This eliminates the need to set up a separate fund for investors who don’t conform to the parameters of the fund.
The main focus of capital retention during the crisis was to switch investors from existing classes of a fund into a new share class with lower fees, allowing losses to be carried forward and protecting investors from the obligation to pay performance fees until all their losses had been recovered. Being able to do this on the system rather than on a spreadsheet ensured clients a solution tried and tested in the marketplace. Koger’s system had to be flexible in its ability to handle customised calculations and a variety of fund structures, and in accommodating calculations that had not yet been devised.
The industry is now recovering, but its consequences remain, notably the increased emphasis on regulation and compliance of all kinds. Funds of funds and other investors want greater transparency in a fund’s underlying investments, while administrators in turn are focusing on investor compliance. These demands entail more work for managers and service providers, but Koger can ease the burden by automating these processes, reducing the cost and effort required of industry players.
Alan Raftery is head of operations and Keith Parker is sales and marketing manager with Koger in Dublin