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Cost saving through effective treasury management

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The treasury function within a hedge fund can provide meaningful additional value and cost savings, if it is managed in an effective and efficient manner. However, many managers are not yet prioritising it, to the potential detriment of their investments and their clients. With regulation striving for greater transparency requirements the need to focus on this function is anticipated only to increase. 

“It’s about understanding the magnitude of the costs and money at stake,” stresses Chris Hagstrom, CEO at Kayenta, “Hedge funds are paying banks billions of dollars a year in financing payments, and its likely to be the biggest share of their wallet in terms of fees paid, trumping execution fees.” 

But despite this, there is a considerable lack of understanding among hedge fund managers about how controlling these costs can impact their business. Hagstrom outlines the main concerns. 

“It’s an industry-wide problem from a data perspective because prime brokers and banks are using legacy technology with numerous, disparate systems. The way data is displayed and sent differs between banks, making it impossible for managers to really understand their costs without a technology solution,” he says. 

Treasury Management Systems (TMS) aggregate, normalise, and present this information to provide the necessary transparency, and Kayenta’s offering is proving to be a powerful solution for their hedge fund clients. 

Data reliability 

What differentiates Kayenta’s TMS is the dependability of the data it presents, according to Hagstrom, “The daily PB reports funds receive are unreconciled and may have missing trade activity. So moving positions on this information alone can cause more problems than it solves. We know from our networks that hedge funds want to optimise their portfolios, but they will only act if they know it’s the right thing to do”. 

To address this, Kayenta asks their clients to provide a ‘golden source’ of position data that it can integrate into. The firm then recalculates the financing costs on those positions through its independent accrual technology and suggests actions that can be implemented with confidence. 

Kayenta is expounding a combination of education and focus on the treasury function, to the benefit of managers and their counterparts. “We want our clients to be more aware of exactly what they could be saving, how they could be a better partner for their prime brokers, and what problems exist within this part of their business which they maybe hadn’t thought were issues at all,” Hagstrom notes. 

One key consideration is the amount hedge funds pay their counterparties, and what returns those counterparties generate from the business. “In this environment you can’t reduce what you pay and expect the same service levels – the banks need to make profits as well. But give the banks your balances that they can best monetise, and you solve it for both.” 

One of Kayenta’s optional modules is a Financing Wallet calculation, which offers granular insights into where prime brokers are likely to monetise a portfolio. Understanding these preferences means managers can allocate balances to benefit their providers as well as their own costs, and consequently the return metrics of the relationship. “If the cost to the manager is roughly the same, why wouldn’t you react to your prime broker’s preferences?”, asks Hagstrom. 

Straightforward implementation 

At present, it’s estimated only around 500 of the 7,000+ hedge fund investment managers are using a treasury management system to optimise their portfolio financing. Hagstrom sees it as a resourcing issue both in headcount, time and technology: “Getting budget for treasury management to the top of the technology priority list is difficult, but we believe our service will pay for itself through the cost saving it provides clients; it’s a guarantee I’ve made to clients before they come on board.” 

Kayenta aims to provide a service which is affordable to all, as Hagstrom believes that treasury management systems will soon become a necessary part of every hedge fund tech stack: “We want to do more than just help a few clients. We want this to become a market standard.” 

Seamless and speedy onboarding is critical to embedding the concept: “Once managers recognise they need this service, we need to make it easy for them and get them up and running quickly. They do not have the time to make it work, so it is on us to make it a seamless process,” Hagstrom underscores. 

And although market disruption can be considered with certain levels of apprehension, it often raises awareness around the need for a service like Kayenta’s: “When the financial crisis broke out in 2008, everyone was suddenly concerned with the credit worthiness of their counterparties and wanted access to their treasury information. Then they forgot about it until something like the Archegos collapse raises a different set of questions and problems involving treasury,” Hagstrom says. 

Growth perspective 

As hedge funds continue to grow, so will the importance of their treasury function. How investment managers control the complexities of portfolio financing will be a differentiating factor for investors as an efficient treasury function provides control and stability, as well as directly impacting net returns. 

In Hagstrom’s view, the scope for growth is significant. “Simplifying the whole treasury process is meaningful given the numbers are getting so big, and it affects funds of all sizes and strategies. But it’s not easy. Technology is clearly the solution given the volume of data and complexity of methodologies, and I feel like we are providing the market with the solution at a very opportune time,” he concludes. 

Chris Hagstrom, CEO at Kayenta
Chris has over 30 years’ experience in hedge fund financing. Prior to joining Kayenta in May 2020, Chris spent 15 years at UBS where he was America’s Head of Global Financing Services with responsibility for the Prime Brokerage, Equity Finance, and Futures businesses. Chris was also a member of UBS’s Americas Equities Management Committee and chaired the Americas Equities People Forum. Prior to UBS Chris set up the New York financing desk for Société Générale and ran their global equity finance sales team.

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