Growing complexity within the strategies of hedge funds means it is harder for managers to keep track of the portfolio and of their total exposure to securities and asset classes. When the hedge fund manager runs more than one fund, as is usually the case, tracking exposure becomes even harder. But it is essential, for the health of the firm and the confidence of investors, that their exposure is monitored and acted upon.
'Firms are developing expertise in areas such as bank debt, loans, derivatives that they did not have before,' says Chris Cattermole, Advent Software's sales manager for Europe, the Middle East and Africa for the firm's Geneva investment management, reporting and accounting platform. 'They are looking to spread risk and open up new avenues in terms of markets and clients. But this creates a dilemma because cross-asset class cash flows are not easy to track.'
Whereas once the model was one of various silos with different asset classes in each, the requirement for rapid views on cross-asset exposure of shares, futures, options and other securities issued by the same company is driving funds to consolidate their books onto a single platform.
For the hedge fund manager, the chief investment officer and the prime broker, having access to an intra-day P&L is essential to manage the risks inherent in volatile markets. The trouble is, some funds have outsourced all their back and middle office functions to administrators.
Says Cattermole: 'The fund manager may get daily reports on his desk first thing in the morning, but that reflects what has happened yesterday.' If an event takes place in the morning, the manager may find it difficult and time consuming to get an accurate valuation of his latest exposure. 'In that case, the manager will lack visibility and could be adversely affected,' he adds.
In the US, much hedge fund accounting is done in-house, but in Europe outsourcing as a model has taken off. This has cost benefits but does not allow the manager to have a full, detailed report exactly when it is required to facilitate risk-adjusted portfolio decisions.
Systems such as Advent Geneva can run reports showing a consolidated view of a firm's positions within seconds. In effect, such systems are handing back middle office functionality to hedge funds, but with a reduced staff requirement.
Cattermole believes this capability, along with a pedigree name, is attractive to institutional investors, which provide the bulk of new assets to funds these days. 'It shows that you have tight control, can react in a timely manner and have a high level of compliance with the contracted investment strategy,' he says.
But doesn't this fly in the face of conventional wisdom that says the more elements of the business that can be outsourced, the more reliable and cost-effective the business model? Cattermole believes conventional wisdom has to be selectively applied.
'It is a case of combining inhouse and outsourced capabilities,' he says. 'One provides a tradeable NAV while the other provides an indicative NAV. Paying the administrator for intraday reports can be very expensive so this model works well.' In addition, investors are happier. 'Transparency is reduced if everything is outsourced, so institutional investors could be turned off,' Cattermole adds.
Chris Cattermole, sales manager for Advent Software's Geneva in Europe, the Middle East and Africa