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Focus on customisation to support HF operational workflows

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Technologists are responding rapidly to the operational demands of hedge fund managers as COOs and CCOs search for greater simplicity in an increasingly complex business environment. Compliance and regulatory demands are manifold. As such, managers need the confidence, and, importantly, the customisation of software solutions to help them integrate their operational workflows. 

“One of our key value propositions is that all of our solutions are customisable based on the needs of the manager. In that sense, we become partners and an extension of their operations team,” says Mark Daniel, Principal at Imagineer Technology Group. 

There are two clear trends that are pushing managers and software providers closer together: one is the ongoing institutionalisation of the hedge fund industry with investors demanding more information and transparency; second is increased global regulatory scrutiny. 

“For both of those reasons, and the security and compliance concerns that are associated with them, I think it is genuinely exciting to be a technology provider today. Managers realise that they need solutions and we can provide the workflow solutions to meet those needs over the entire lifecycle of a manager,” continues Daniel.

Imagineer is supporting managers to meet compliance and transparency demands with Clienteer, a comprehensive CRM solution, and WebVision, a web reporting portal. 

Clienteer allows managers to ensure that they are collecting all the relevant information required to be compliant; whether it’s storing documents in a central location, having an audit trail of investor communications, managing compliant document distribution, or tracking attributes of their accounts and reporting accordingly on them such as new issue restrictions. 

“All fund, investor and account attributes can be maintained and managed in a central location and appropriate reports can be easily generated when needed. If it’s the Offering Memorandum, for example, Clienteer allows the Manager to track every person it was sent to,” explains Erol Dusi, Founder and President of Imagineer. “Our goal is to give managers control so that they are never dependent on anybody to run their business; whether it’s content management, permissioning, or report generation. That said, we are always there to support them because we know their business. We can help them much more directly than any generic system.”

Backstop Solutions, a market leader in providing a Software-as-a-service platform to the alternative funds industry, is leveraging the full capabilities of the cloud environment, providing software solutions that span investor relations, CRM, sales & marketing and investor reporting. 

“We are focused on helping clients work smarter and make the most of their time as well as to reduce operational risk,” says Chris DeNigris, Global Marketing Manager at Backstop. “As we are sharing resources across the cloud, any fund can access our platform that allows them to do so much more than just document management, calls meetings and notes’ tracking, etc: it’s allowing them to create custom templates for regulatory requirements and build out custom workflows.”

Having all their investor meetings’ notes, documents and emails in one centralised location with full audit tracking is certainly beneficial to managers. 

“If a manager has a presence exam the first thing the SEC will ask to see is the initial correspondence from an investor all the way through to subscription. If you can easily populate an activity report and send it off it shows the regulator that you’ve got a stringent operational process in place. That’s not to guarantee that a manager would never have a presence exam but if they can turn things around quickly it certainly takes away a lot of the headaches,” suggests DeNigris. 

What seems to be increasingly clear among financial technology groups is that they are working hard to make managers’ lives as easy as possible. If hedge funds, regardless of their shape or size, can establish robust operational and compliance workflows in a way that limits the number of platforms and systems being used, the better equipped they will be to pilot their way through a myriad of market challenges. 

Last month, Cordium, a leading compliance consultancy firm, introduced a new solution called Pilot; a comprehensive tool for managers to control and monitor their compliance workflows front to back. Pilot is a revamped version of its existing flagship product, ComplianceTrak, and as such uses the latest technology.

“Pilot uses a SQL server back-end, as well as C# and MVC.  On the front-end we are using HTML5 and Angular, which is a front-end language developed by Google. What Angular can do is a lot of nice, neat things on the user experience to make the application more responsive.

“We also spent quite a bit of time on the back-end architecture of Pilot to make sure that it was scalable,” explains Jordan Schwartz, Director of Global Software Solutions at Cordium.

Another firm that is helping hedge funders to manage the entire workflow on one platform is Eze Software Group. One group, in particular, that need a robust system in place from day one to navigate the complexity of regulatory and market risks is start-up managers.

“Being able to have a system in place like Eze Software Group’s Investment Suite helps managers to check the box, from an investor’s perspective, and grow their business. This might have been something five or 10 years ago that a manager would wait for until their fund had reached a certain AUM threshold; now it’s an expectation from the get-go that a fund has this front to back infrastructure in place.

“As a result, we have created Eze JumpStart for smaller funds and start-ups. We’ve taken our services and products and bundled them together into a turnkey solution including: portfolio analysis, advanced electronic trading, order management, compliance, reconciliation and operations. This is helping start-up managers to reduce their operational risk and infrastructure costs,” explains Jeffrey Shoreman, President. 

Eze JumpStart launched in the US at the end of Q1 2015. It offers the exact same software as that used in Investment Suite, the only difference being that “we’ve toggled off a lot of functions and simplified the package to what we believe funds need to get going. As they grow, we can then toggle on additional functionality to help them grow and scale their operation,” adds Shoreman.

To illustrate the scale of the operational challenge facing managers, over the last three years Bloomberg has released more than 1,000 new tools and product enhancements to Bloomberg AIM, the award-winning OMS and integrated front-office platform; many of which have been designed to facilitate its clients’ regulatory compliance efforts, according to Dan Matthies, Global Business Head of Bloomberg AIM. 

“We were first to market with a regulatory reporting solution for derivatives trading both in the US for SEF compliance and in Europe for EMIR. We have released new regulatory compliance templates supporting new countries and new regulations and expanded trading support for sophisticated derivatives, enabling our clients to use our solution in lieu of more expensive third-party applications,” says Matthies. 

With risk management and regulatory reporting a key priority, Bloomberg AIM has established seamless integration with Bloomberg’s risk and analytics offerings. 

“To help customers achieve required advances in efficiency, we released a new global middle-office matching and affirmation blotter which enables clients to centrally manage trades across assets and trading platforms, as well as an advanced reconciliation tool. Providing these comprehensive compliance and operations tools enables our customers to better support their front-office,” notes Matthies. 

For hedge funds that trade derivatives, having to report on their positions, valuations and collateral is the latest example of where regulation is forcing managers not only to have to manage significant volumes of data, but to do so accurately and on time. 

This is new territory for many. Whilst the purpose of EMIR reporting is to avoid potential systemic risk, one has to question the necessity of a hedge fund to report on every moving part in their fund. It is becoming a tiresome exercise, yet it is a fertile climate for technologists.

“Without turn-key integration, clients have to enter deal and allocation details manually into a SEF and multiple systems, which in turn allows them to be susceptible to errors and inefficiencies. The only alternative is to invest in internal or vendor IT projects to build out order, compliance and allocation interfaces to support pre-clearing certainty, which makes these types of interfaces more complex than what the market commonly deals with. 

“AIM’s proven integration solution leverages Bloomberg’s deep relationships and market-leading expertise to mitigate that complexity and resource drain, enabling our clients to focus on their core business and proficiencies,” states Matthies. 

As managers seek to partner with technology vendors to build closer alliances in order to successfully grow their business it needs to be done so whilst upholding responsibility to their investors; in other words, using outsourced models should never equate to outsourcing operational risk. Whilst a manager might be giving up the labour and the technology, they still have ultimate responsibility for what goes on in their fund; from a compliance perspective, a legal and regulatory perspective, according to Bennett Egeth, President of Broadridge Investment Management Solutions. 

“As a manager, you still need to maintain control to verify the work your administrator and other service providers are doing – you have governance responsibility for everything that you outsource. What we’ve seen with institutional and other large investors is that there is no consensus yet in terms of how heavy the footprint needs to be within a fund to supervise their service providers.

“By providing a lighter technology footprint, our solution allows an automated way for the fund to track the daily NAV, reconcile trades to their prime broker(s) and administrator, etc. It’s a technology-heavy versus an operations-heavy process that meets the institutional-grade requirements for the supervision of their service providers using a fraction of the staff they needed to use previously,” comments Egeth. 

This system-driven integration is helping managers to reduce time and cost maintaining multiple legacy systems and potentially still getting bogged down in manual processes that leave the fund susceptible to human error, compliance oversight, and, in a worst case scenario, serious reputational risk.

“As an example, one client of ours is a credit fund with more than USD3 billion in AUM and a complex asset class mix across its fund products. They are able, with the equivalent of half a person on their operations team, to manage the technology infrastructure that we provide for them and supervise the reconciliations to their 12 prime brokers and administrator,” confirms Egeth.  

This is using technology to leverage and scale the management and control of a manager’s service providers. 

Over at Confluence, a data management and software company whose heritage lies in US mutual funds, the discussion centres on ‘disruptive technology’; that is, thinking about how technology can fundamentally change operational functions, as opposed to building technology for existing operations. 

“We are talking about changing the ways problems are analysed and planned for before they even become problems. Having a solution that is built around the premise that there’s going to be more and more regulation down the line, as well as solving for today’s current challenges,” says Thomas Pfister, Manager of EMEA Market Management for Confluence. 

“We are building a data-agnostic regulatory transparency reporting platform. It will leverage comprehensive data and business logic. The solution is targeted towards solving the data management challenges that regulation has created in recent times by bringing consistency to managers’ reporting obligations through re-use of raw and scrubbed data, re-use of business logic and filing logistics to reduce the risk of making inaccurate filings. And ultimately to help managers reduce the amount of time spent on these challenges.”

The opportunity is there for managers to use technology to change how they operate and service their clients. “It’s a chance to grow and continue lowering their fees, growing their assets and focusing on what they are paid to do as an asset manager, which is to generate returns for their investors,” adds Pfister.

Matthies expands on the virtue of partnering with technologists to drive forward the change Pfister refers to above by saying: “By providing clients with multi-asset execution solutions and supporting investment cycle analytics, we enable them to turn their data into competitive insights (advantages) when trading, assessing risk, optimising costs and remaining compliant.” 

UMB Fund Services has its own proprietary system, FastPro, which brings significant automation to managers’ operational workflows. In addition to providing the daily/monthly/quarterly NAVs, it provides customised: reporting, fund statements, side pockets and fee structures and delivers in multiple formats such as PDF, Excel, CSV, email and a web portal.

“We utilise the Advent Geneva portfolio accounting engine so when clients send us a trade blotter via secured FTP site, Geneva will automatically upload the blotter. Geneva has been programmed to check for new investments not in our database and will automatically reach out to a third party and retrieve the pertinent information on that security.

“Because we own our technology, FastPro, we can offer different products to our clients to help them stay ahead of regulatory requirements such as Form PF and FATCA. Our FATCA offering is the latest addition and we are currently servicing clients to help with the first Cayman filing on 31 May,” confirms Chad Allen, Managing Director of Alternative Investments at UMB Fund Services. 

Over at Backstop Solutions, one recent enhancement to its product suite has been to integrate with Preqin, a market leader in alternative industry data and intelligence. 

“When raising capital, to have Preqin integrated into Backstop is a real advantage. We will shortly be rolling out a beta version of Preqin integrated within Backstop so clients will be able to do everything within one screen. They’ll be able to easily update investor names, contact numbers and all other investor details,” states DeNigris. 

At Eze Software Group, the medium to long-term focus is on bringing its comprehensive desktop functionality to the cloud. 

“Managers are looking to streamline their systems and move away from housing multi-system architecture. Our plan is to deliver an industrial-class cloud solution that the industry is looking for. It’s well underway. We’ve been building out the cloud framework and moving functionality over to the cloud in an iterative fashion,” confirms Shoreman.

A good example of this is Eze Broker Review. This allows asset managers to vote on where to direct their commission dollars. “This is functionality that we had in a few different modules in the system. We took all that functionality and migrated it to the cloud to allow it to work alongside the rest of the Eze Software investment suite,” adds Shoreman.

Egeth says that one current area of focus is asset class coverage. Over the years, funds have broadened their asset class coverage, which has in turn increased the operational risk of maintaining multiple systems.

“It used to be that the fixed income team would run one platform and the derivatives team would run another platform. It has become extremely important to bring everything together onto a single platform in as close to real-time as possible.

“In the eyes of an institutional investor, it is critical for a hedge fund to have a fully backed up and redundant infrastructure that can prevent any form of disruption. The fund’s operations team must have knowledge and expertise to be able to build resilient applications that can run multiple data centres in order to minimise downtime – and that’s something else that they get out of using providers like Broadridge,” concludes Egeth.

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