The past six months have seen hedge fund managers deploy their disaster recovery plans which had probably been gathering dust since they were first drawn up. The shift to remote working has however uncovered key-person risk organisations were unknowingly exposed to. This in turn underscored the need for co-sourcing solutions to document and streamline all processes within a firm.
“Many firms are guilty of having that person on the ground who is running processes outside of the day to day system. We all know that even with the best will in the world, there are always workarounds and spreadsheets being maintained outside the environment,” points out Daniel Leader, Solutions Consultant at SS&C Advent.
The largely new working environment brought about by the global Covid-19 pandemic has highlighted this practice. According to Leader, every firm has an element of key person risk: “People are aware of it and there are things you can do to try to eradicate it, such as cross-training. However, when people have been in a business for several years or they’ve grown with the business there are certain things they just do, without documenting the process. The pandemic has definitely highlighted additional concerns around key person risk.”
In turn, it also underlined the importance of having all processes documented and streamlined. Technology is key to mitigating or even eliminating key person risk.
“Firms need to employ more straight-through processing. When you have an extremely capable system and you trust the software you have on board, then professionals will not spend time double-checking the data and the output.
“When one is working with an in-house system or in an excel spreadsheet, professionals spend more time checking the calculations then actually checking the output. And this is how key person risk is created, because one person understands the intricacies of the system and works around it. Firms need to get to a place where they trust the output of their system,” Leader stresses.
Having a proper software system which is designed to calculate and produce this data means professionals can spend their time checking the output rather than questioning the data itself. After all, Leader remarks, a hedge fund or a manager is only as good as the data it receives. Having clean, reliable data means the manager can focus on the essence of its business – that is generating alpha for investors.
Size differences
In Leader’s view, larger hedge fund firms have been in a better position to handle the wave of change brought on by the Coronavirus pandemic: “The way they have evolved over time means they probably would have dealt with data outages and tested their disaster recovery plans at some point in time. Also, they tend to have more extensive business continuity plans which means they would have had an idea of how something like this would play out. Smaller firms on the other hand, those that may not have invested in certain technology, might not have as robust contingencies in place.”
The risk of data outages for a smaller hedge fund is a considerable consequence, particularly in the current environment. Leader notes: “If they can’t see their positions, they can’t see what their limits are and they don’t know what they’re going to trade. The only thing you can do in that situation is to cease trading. With the markets moving as dramatically as they have been this year, you don’t want to be in a position where you can’t go to market.”
This risk is also cascading into a change in the frequency of certain high-level checks. Leader notes: “I don’t think any processes have been replaced in this environment but rather, they have increased in frequency. So if something used to be carried out once a week, it is now happening daily. This helps to make sure that if there are any data outages, then the manager would have a very good idea of where their books and records are.”
Rise of co-sourcing and re-alignment
“Firms are moving from outsourcing, which often is considered with some apprehension, to the concept of co-sourcing. This is where most of the environment is hosted in addition to managed services being provided. Having such an arrangement in place removes the stress of questioning whether the infrastructure is up and running – that concern is placed in the hands of someone else,” Leader explains.
He says having a hosted infrastructure is critical to helping hedge funds weather the Covid storm: “When you partner with a provider to co-source this aspect of your business, it is their sole responsibility, it’s not an add-on, or an afterthought. When a firm like SS&C Advent hosts the environment, it has dedicated resources to make sure those environments are up and running and those data feeds are occurring.”
Leader believes the pandemic also highlighted demand for additional services on the managed service side: “We are seeing an increased need to help extend our clients’ operational day as businesses require longer business hours. This would mean people can look at security data, can carry out reconciliations on T rather than T+1, all after the regular close of business. This partnership is about extending a firm’s operational framework; it’s not about replacing internal staff.”
Arguably, Covid-19 helped firms re-align their objectives: “It’s opened people’s eyes as to what they should be focusing on and where their money should be spent. You don’t want your head of operations, who’s earning a high salary and is extremely skilled, to be looking at data imports and chasing after files. Firms need to utilise the skills they have internally and outsource those fundamentals to a professional firm that can take care of that on their behalf,” Leader remarks.
This re-alignment and sharpening of focus can be said to be a bi-product of the pandemic. Leader observes: “Managers need to make sure the processes they carry out are actually adding value. The pandemic has allowed senior operational staff the time to reflect on this. When you’re deep in operations you have a long list of things you have to get done every day. One of the biggest issues is that you can’t remove yourself from that process; you don’t have that luxury.
“The current environment has forced that hand, giving people more time to look at what is important. They can take stock and see how they can make sure the five key processes they need to operate efficiently are robust and won’t crack under pressure.”
Daniel Leader
Solutions Consultant, SS&C Advent
Daniel Leader joined SS&C Advent in February 2019 and currently holds the position of Solutions Consultant. With 20 years of experience in the fund and alternatives industry, he has a deep knowledge of operational frameworks and is responsible for delivering world class technology and service solutions to Hedge Funds and Asset Managers.
Prior to working for SS&C Advent, Daniel worked for Barclays Global Investors before transitioning to the Hedge Fund industry in 2006 where he worked for Winton Capital for 12 years, leaving as Head of Fund Accounting & Valuation.
