The sky is the limit for cloud-based hedge fund solutions
According to Alexei Miller, head of the Financial Services practice and managing director at DataArt, a technology consulting firm that designs and builds custom software systems, data and data management remains front and centre of managers’ minds in the alternatives industry. Regardless of their size, hedge fund managers face the same data management demands, which is leading to a lot of data-related projects and keeping Miller’s team busy. These projects range from data acquisition, data cleansing to customising data feeds and data visualisation.
“There’s still a significant need among managers, even those running USD100 million, not just billion dollar managers, for proprietary technology solutions, which is obviously good for us as a firm.
“One interesting trend that we are seeing is large managers spinning off their technology assets into smaller firms; we’ve seen D.E. Shaw launch Arcesieum and they’ve since announced that Blackstone’s alternative asset management (‘BAAM’) business has signed on to be a client. I expect to see more managers doing this going forward. We are also having discussions with buy-side firms on whether it makes sense for them to pool their resources together to develop non-proprietary technology platforms,” explains Miller.
With respect to Arcesium, this is a fully hosted technology platform offering asset managers sophisticated post-trade support in areas such as security master maintenance, trade capture, asset servicing, treasury functions and portfolio data warehousing. That this is a platform spin-off from a well-established manager is intriguing and could indicate a future evolution of the hedge fund technology space.
For now, however, the vast majority of managers are turning to mobile technology solutions to bring greater efficiencies to the way they operate. By mobile, what we mean here is the web-based cloud environment just as much as tablet and smartphone-based applications.
One firm that has utilised the cloud, and who engaged the services of DataArt to build the solution is OpsCheck, of whom Frank Caccio is the Managing Partner.
OpsCheck is designed to foster operational excellence, especially in compliance, whereby the COO can manage all the operational tasks, make sure they are getting done on a timely basis, and provide accountability; it is, in effect, a central repository where the user can easily retrieve and verify information. As a web-based application, OpsCheck allows firms to strengthen the management of their infrastructure oversight. What makes it credible is that Caccio has led operations teams at Highbridge Capital and Tiger Management, as well as serve as COO to emerging managers. He therefore knows the challenges that today’s COO faces.
“There are so many things that you have to fulfill on the infrastructure side, so many responsibilities and tasks, that I recognised a need in the marketplace for a comprehensive tool. I created OpsCheck to help alternative investment firms address their operational challenges more efficiently, today and in the years ahead,” says Caccio.
OpsCheck is customisable, allowing users to create departments and categories. In addition, one can build a hierarchy within the system to give people different levels of permission. As Caccio explains: “You can permission them based on the departments they should and should not see. In a large organisation, you would typically build that hierarchy because you don’t need every operations person seeing who the investors are and how much they are investing.
“In a small organisation, by comparison, you will likely want to run a flat organisational structure where everyone has full access to everything to manage the operations,” says Caccio.
Another firm that is helping managers achieve greater scale with their operations is New York-based Gravitas, whose platform is designed specifically to support front- and middle-office functions. Shadow Accounting is becoming a key focus for managers, and their investors. Not only do managers want the ease of using an effective outsourced solution that can function as an extension of their operations team, they want to be better equipped at identifying and acting upon trade breaks and verifying the data coming from their administrator.
“In one case, we had a client who was getting 500 trade breaks. By using our platform, they were able to bring that number down to 50 trade breaks,” says Gravitas founder and CEO, Jayesh Punater. “This point about ‘Who is checking the administrator?’ is becoming more important. Regardless of whether it is a fund administrator issue, or an internal staff issue, by having better technology and transparency, managers are better placed to fix the issue.”
Reconciliation services for the middle office and market risk reporting services for the front office are the key areas of focus for Gravitas for 2015, with Punater confirming that the firm has started to dabble in mobile technology functionality in order to provide dashboards and risk reports.
“What is important to consider with mobile communications is that the look and feel of the application has to change (compared to desktop applications). It needs to change from a Bloomberg look and feel to more of a Facebook look and feel.
“One of the areas we are focusing on is the interface. It needs to be user-friendly and easy to navigate,” says Punater.
Jeremy Hintze is COO at ClearStructure Financial Technology. The firm runs Sentry PM, a comprehensive front- to back-office portfolio management system, which is both mobile-ready and uses the latest web technology.
To support start-ups in their need for single integrated solutions to control costs, ClearStructure has created the ClearStart™ program, which was introduced to the market in late 2014.
“ClearStart is aimed at giving start-ups access to the same technology as larger managers. With Sentry PM it works really well because it’s a system that scales easily. ClearStart gives managers an institutional-grade core portfolio management system, inclusive of reconciliations, custom reporting and all applicable data feeds. It is fully hosted with disaster recovery. We have disaster recovery sites in Slough, UK, and in Utah and Chicago in the US,” clarifies Hintze.
ClearStart offers links to EMS technology such as Bloomberg EMSX, taking in post-trade feeds to report on, perform reconciliations and provide daily fund compliance.
“With ClearStart, there’s no further integration needed with other systems, as Sentry is an ‘all inclusive’ system. Additionally, since our system is modularised, as the fund grows we simply turn on additional functionality according to the manager’s needs.
“Today, all managers have access to enterprise-strength systems. Whether they host them internally or use cloud-deployed solutions like Sentry PM, either way it’s saving them money operationally, whilst at the same time checking the boxes when institutions come in to do their due diligence,” adds Hintze.
With respect to front-office technology, managers who trade OTC derivatives face a major challenge on three fronts: firstly, regulation has atomised the markets, thinning the depth of liquidity. Secondly, the banks have scaled back their market making activities making it harder for buy-side traders to find suitable counterparties. Thirdly, given that traders are required to perform pre-trade compliance checks on their portfolios, their existing systems have been rendered obsolete; especially as they were designed to interact primarily with banks.
To meet this challenge head-on, last November TradingScreen® , a leading provider of electronic trading solutions, introduced TradeCross, which helps buy-side institutions trade blocks safely and anonymously as bond trading moves towards an all-electronic, all-to-all market structure.
“We have close relationships with a lot of large buy-side firms. They came to Trading Screen and said: ‘Can you help us? We know that there are other buy-side participants who would like to buy bonds that we want to sell, but we have no way of doing that safely without publishing our position to the marketplace and getting taken advantage of’,”explains Philippe Buhannic, CEO of TradingScreen.
Whereas previously, traders have used a Request for Quote (RFQ) model, the problem with this is that they have to disclose their position. TradeCross overcomes that issue. There is no public showing of their hand to the market.
“On the one hand what we offer is a fully integrated SaaS solution that allows the buy-side to cover their needs in one place. On the other hand, we decided that if we are showing information on positions and orders we should also provide an intermediary piece; a kind of network where people can communicate safely with no risk. We can connect the buy-side through this intermediary structure to help them load up or unload positions in a safe, anonymous way,” adds Buhannic.
PrimeOne Solutions has also developed a solution to improve trading efficiency in front-office teams with its SwapOne product. This enables traders to perform real-time, accurate calculations for the financing of a swap. The team can look at the workings of that swap at any given moment and have an intelligent conversation with their counterparty, who will be looking at exactly the same information.
“Up until now there has been a real problem with respect to leakage of profitability in the buy-side community through inaccurate financing and equity economics calculations within their own platform because they’ve been reliant upon systems that weren’t designed for that purpose.
“We are reacting to a real need in the market as managers look to improve their operational efficiency,” states Chris Chanod, Global Head of Business Development at PrimeOne Solutions.
It’s not only execution specialists that are shaping market infrastructure.
SS&C GlobeOp is also using its technology heritage to good effect. Ever mindful that managers want to know where they stand, in relation to where trade breaks are and in what positions, before the markets have even opened each morning, the administrator is now producing reconciliations quicker and more frequently than ever before.
“We are able to produce a report on all trade break reconciliations for the prior day on a T+1 basis by 8am EST. We have an Asia-based office and a European office and a US office. This is a global solution to support managers before the relevant fund market opens.
“Also, we have a solution that produces those reconciliations automatically, using technology to look for the availability of the prime broker or custodian files. Once those files are available it runs an automated process to pull in the data from our systems to produce the reconciliation automatically. Our staff in Asia and Europe then resolve the breaks and deliver the report for the US manager to open first thing in the morning,” explains Eamonn Greaves, Head of Business Development at SS&C GlobeOp.
Technology solutions like those offered by SS&C GlobeOp, Gravitas and others, are creating a fundamental shift in the way that hedge funds operate. No longer do they need to hire teams of people to do time-intensive tasks; now, as technology improves and becomes more web-based. Managers are able to replace a team with a single person to oversee the process and generally do a lot more high-level analytical work on the output that the technology provider produces.
To use a military analogy, modern-day armies are no longer composed of hundreds of thousands of ground troops. Instead, by switching to technology, remote weaponry is being deployed with ever-greater precision, making today’s 21st Century army a much leaner and meaner outfit. A similar situation is now unfolding as more and more hedge funds adopt cloud technology.
“All of our systems and processes are covered on our SSAE 16. They are fully automated and documented and from a due diligence perspective investors want to feel confident that the systems in place are battle-tested, audited, and industry-standard rather than assess some system that a CTO has built internally,” explains Greaves, who confirms that SS&C GlobeOp is taking a step-by-step approach to mobility:
“We’ve started off by providing reporting functionality to our hedge fund clients; commuting home they can access the fund’s P&L report, and within that application they can annotate, do voice recognition, they can record voice mails and email them. If they have a question in the report they can circle it, post a voice note and send that directly to us from their mobile device.
“The second phase of mobility relates to cash movements: wires, expense payments etc. You can now get a digital signature from the CEO or CIO within our application to move money for expenses, invoices. This helps to keep the business running smoothly even when you are on the road.”
Bob Guilbert is Managing Director at Eze Castle Integration, a leading provider of IT solutions and private cloud services to more than 650 global alternative fund managers. He confirms that three significant enhancements have been made to the Eze Private Cloud recently.
The first is Microsoft Lync, which enables users to have full chat room capabilities and multi-party video sharing capabilities.
“You now have the ability through the Lync interface to see whether or not someone is on the phone, in a meeting, out of the office, or present and available. It’s really an efficiency tool and a communications enhancement. We have incorporated this into the Eze Private Cloud at no additional charge,” confirms Guilbert.
“We also added new technology from a company called Varonis. One solution is called DatAnywhere, which allows secure Dropbox-like capabilities for sharing documents on the cloud. The other solution is called DatAdvantage. This is a monitoring audit and reporting tool. It allows us to share, if requested by a fund, who accessed the file, who might have modified it, and who might have deleted it.
“If the SEC pays someone a visit and wants to know why files were deleted we can produce proof with an audit trail of what happened, and by whom. It could also help managers determine if someone who leaves the firm has taken files with them, or has done something damaging,” adds Guilbert.
In the US, ECI has also launched an Eze Voice offering, which provides voiceover IP capability. It is not yet available in Europe, but in Guilbert’s words it will be “groundbreaking”.
“It is a voiceover IP phone that is delivered over a standard internet point-to-point service to the office. We will be the first service provider offering such a hosted solution to the alternative investments industry in the UK,” says Guilbert.
Whilst a lot of technology solutions have brought improvements to the way managers control their workflow and collaborate internally, front to back, what has been missing is the ability to extend that collaboration to other firms: be that a prime broker, an administrator, or an investor who can contribute to the workflow as part of a manager’s monthly process.
“With Advent Direct, one area of product innovation we are working on is cross-firm collaboration. That’s a tricky thing to solve, getting all the entitlement and privacy concerns in place, but it’s something that no one has solved and as part of Advent Direct we think it could bring a lot of positive benefits to the hedge fund industry,” confirms Robert Roley, Vice President of Solutions at Advent Software.
One of the most pressing areas that Advent is looking to solve for asset managers is the provision of client-facing technology as investors ask for more transparency.
“They want to see transparency not just into a manager’s investment performance but also into the investment process. We are building a new product within Advent Direct called Advent Direct Research Management, which is addressing transparency in the research process; much like our Tamale product, but leveraging the benefits of the cloud. Most of these demands for transparency solutions are actually coming from managers’ end investors,” adds Roley.
At Gravitas, Punater confirms that the firm has recently hired a Chief Information Security Officer (CISO) – one of a growing breed of specialists being hired by hedge funds and technologists alike to tackle cybersecurity issues.
“On the one hand managers want to outsource services, but on the other hand they are concerned about security and the robustness of the platform. There are three components to manage security:
• Technology – having the right technology safeguards in place; firewalls, antivirus software etc.
• Training – having good training internally. Don’t share passwords with third parties, control who can access data, make sure it is password protected etc.
• Processes – put in controls. If your COO sends you an email to wire USD1 million don’t just go ahead and do it. Get a separate sign-off and be absolutely certain of the email’s authenticity.
“Doing all three of the above is critical in terms of managing security within a hedge fund,” states Punater.
“We attach only the link to find the document in the manager’s network, meaning anyone outside of the network could never access the data within the document. The links are only valuable to those who have access,” says Caccio, stating that the aim of OpsCheck is to give COOs a “good night’s sleep”. Moreover, Caccio believes that by developing best practices with its operations, a hedge fund manager puts himself in a better position to attract institutional assets.
“Institutional investors don’t invest in hedge funds because of their operations, but they’ll make a decision not to invest because of operations. If an investor feels good on the investment side, and especially good on the operational side, that’s where they’ll put their money. OpsCheck can give managers an edge over their peers by demonstrating how well they are running their business,” opines Caccio.
Eze Castle Integration has just announced what it calls Eze Active Threat Protection (ATP), a virtual solution for intrusion detection and protection to protect its clients from cybersecurity incidents.
“These attacks are happening every day. With Eze ATP, clients receive the combined benefit of active intrusion detection, 24x7 human security monitoring by eSentire analysts, and rapid threat resolution executed by Eze Castle Integration,” concludes Guilbert.