In the highly competitive hedge fund community, the most productive use of information and data drives success. Managers must efficiently collect and process data to ensure its accuracy. The old saying, “GIGO” (garbage in-garbage out) is a constant risk. This is particularly true when it comes to unstructured data that is increasingly used in investment analysis and required for accurate investment recordkeeping.
The best practices to intelligently collect and deploy accurate structured and unstructured data to minimise risks and drive investment success.
By Stephen Hixon – In the highly competitive hedge fund community, the most productive use of information and data drives success. Managers must efficiently collect and process data to ensure its accuracy. The old saying, “GIGO” (garbage in-garbage out) is a constant risk. This is particularly true when it comes to unstructured data that is increasingly used in investment analysis and required for accurate investment recordkeeping.
Structured data is generally easy to find and analyse, residing in databases, spreadsheets, formatted documents and the like. Custodians, brokers, pricing services and other third-party data aggregators provide data on liquid assets in very structured file formats. Unstructured data, typically related to illiquid investments, such as derivative contracts or private investments, is much harder to collect and process.
Unstructured data is typically unusable until it is manually extracted for analysis, and is often found in PDF files, media files, regulatory filings and even emails.
Extracting unstructured data for use in investment recordkeeping and analysis can be a time-consuming and expensive process; it usually involves repetitive manual effort with high error rates that can ultimately lead to bad investment decisions. Hedge fund managers would naturally prefer to deploy their resources to actual investment work rather than extracting unstructured data from PDF files.
Managers now recognise that they need a comprehensive data solution that can deliver reliable data – structured and unstructured – in a timely and cost-effective manner. And, while there are managed services providers (MSPs) that can deliver one or the other, there are few who can provide a truly ‘holistic’ solution.
Let’s look at a few examples where this type of holistic solution has added measurable value for a fund:
Solving reconciliation inefficiencies
This is an example where a hedge fund administrator was concerned about improving its investment operations reconciliation practices. Reconciliations were being performed on a sporadic and decentralised basis across a team of over 16 investment support professionals. The administrator was looking to improve the collection of data from brokers/custodians in order to process reconciliations more efficiently; institute standards for recon processing and the underlying data; and implement management reporting to monitor and control the process. The scope included mapping, data management and automated scheduling for the retrieval of over 100 files containing either security position, cash transaction and/or cash balance activity.
These files came from over 20 secure internet sites across 17 different brokers/custodians.
The administrator realised that if they could deploy a powerful and flexible tool to integrate both structured and unstructured data into formats that would directly integrate with the reconciliation process, it would reap significant benefits. They selected a data solution that allowed them to collect the data, transform it and load it into a new reconciliation tool that the fund administrator’s support professionals could easily use for their tasks. The new recon tool not only provided rich functionality for managing (approving, adding notes, etc.) any breaks or unmatched items, but it enabled the administrator to achieve significant efficiencies, including savings of 75 per cent of man-hours per week, and automated matching and approval rates of more than 99 per cent in the first year.
Data is the key
Hedge fund managers understand they need accurate data to ensure accurate recordkeeping and to outperform their competitors. Their customers are endowments, foundations, pension plans, family offices – all organisations that represent individual investors who have entrusted them with their hard-earned savings. A manager’s use of inaccurate data could result not only in bad investments, but loss of business and potential legal liability.
Many hedge funds have developed in-house solutions to collecting and extracting data from structured sources. But when faced with having to retrieve data from unstructured documents, typically PDF files or directly from emails, they resort to manual methods. The process for reconciling derivative confirms, processing rate resets, coupon rollovers for CDS, etc., is typically manual due to the unstructured nature of the documents received for notification of these events. Extracting data from these notifications can be very challenging as the documents can have complex structures and, if using commercially available data extraction tools, require significant amounts of data cleansing and translation.
A good example of this is a large Boston-based hedge fund manager. This manager had more than USD6 billion in assets under management and needed a solution to its reconciliation process, which was prone to errors, cumbersome to maintain and difficult to enhance. The requirements were complex: the fund is global, multi-strategy, and trades in a wide variety of asset classes. Its requirements could not be met by traditional reconciliation systems. It needed to import data from custodians, brokers and internal accounting systems, as well as aggregated bank records tied to trading activity. The fund’s requirements were particularly complex due to the nature of the fixed-income derivatives it was trading.
This multi-asset class fund also opted to deploy this type of holistic data solution. Deployed in just four weeks, it now boasts an automated reconciliation system that quickly enabled the fund’s professionals to validate trading and banking records, matching a far greater percentage of transactions than their previous system.
Best practices: identifying the right data solution
The examples above illustrate how the flexibility and customisation of a solution are key to solving complicated data reconciliation problems. Unfortunately, many solutions and providers often try to hammer square pegs into round holes with a one-size-fits-all approach.
So, when evaluating any holistic solution to meet a hedge fund’s data needs, a manager should consider the following:
• Does the provider offer a holistic solution to your data needs? Can they perform all the required steps of the data processing workflow including collection, extraction, translation and integration for both structured and unstructured data?
• Does the provider offer customised development, including workflow tools, data integrations and custom products such as reporting tools?
• Does the provider possess deep knowledge of the investment process and operations, especially business gathering requirements?
• Have you performed due diligence? What kind of track record does the provider have in project management? Does it perform on-time and on-budget? Can it provide customer testimonials? Will it be around to provide enhancements, fixes or implement new systems?
• Has the provider offered you clear objectives: a well-defined business case and requirements; a stable project scope; robust contracts with clear responsibilities for each party?
If the answers to these questions are yes, congratulations – you have likely found a reliable partner that will, where structured and unstructured data is concerned, be able to help you fit round pegs into round holes and deliver the holistic data solution needed to help drive investment success.
About the author
Stephen Hixon has been a principal and co-owner of Smonik Systems LLC since 2016. He brings over 37 years of investment operations and back-office expertise including significant experience in software design, programme management and implementation. He was formerly SVP within the alternative investment solutions group at State Street Bank. Smonik Systems LLC is a financial software and consulting firm specialising in providing innovative solutions to the financial services industry, including institutional investors, fund administrators, investment managers and asset owners.
