Workflow efficiency is becoming increasingly challenging for hedge fund managers as they look to launch multiple fund structures. Managing multiple hedge funds as well as separately managed accounts often leads to multiple systems, data flow complexity and a web of counterparty relationships to make sense of.
There can be little room for error in today’s regulatory environment. As a result, managers are turning to solutions that can handle front to back trade cycles using one integrated solution to mitigate the risk of data discrepancies.
In a recently published case study, New York-based Liquid Holdings, a cloud-based technology platform supporting hedge funds, detail how they were able to address various pinch points being felt by an equity long/short options specialist running a variety of fund structures. The firm had three priorities to address whilst in capital raising mode: 1) achieve detailed views of the drivers of performance in each structure; 2) reduce the number of systems and processes and 3) achieve a real-time risk environment.
“When multiple custody relationships come into play for an organization, allocation automation and an intra-day book of records become requirements. Liquid solves these problems by providing a simpler and more elegant single-vendor solution, which was exactly what this client had been looking for,” Robert O’Boyle, Executive Vice President and Director of Sales & Marketing at Liquid tells Hedgeweek.
By moving towards a single-vendor relationship, the manager was able to create a 60 per cent annual cost saving. As Liquid points out, its platform helped the investment team create the exact execution, compliance and governance capabilities needed to effectively run the front office and streamline workflows using hotkeys and allocation schemes.
Also, by using Liquid’s managed service offering, all of the manager’s transaction, allocation and settlement information is automatically sent to their prime broker and administrator. Moreover, by having Liquid support a continuous operational environment the manager gets to receive a daily reconciliation of the fund with all trade breaks and other red flags addressed as and when they arise.
What this demonstrates is that technology can now make massive inroads for hedge funders as they attempt to streamline their businesses, resolve legacy system issues and essentially become a more institutional ‘well oiled’ machine. Indeed, the ability to avail of managed services is a key trend in the marketplace that firms like Liquid are well aware of.
“I see new entrepreneurs often coming to market from a legacy firm with large bulky solutions in place. The cost of replicating those solutions is a barrier to entry in the market place. Outsourcing becomes a solution for scale that removes the hurdles. We see this from new launches all the way up to established organizations that are looking for greater cost and operational efficiency along with the benefits of new technology delivery,” says O’Boyle.
The manager referred to in Liquid’s case study is now also able to benefit from active risk; that is, they have a complete real-time view of market and liquidity risk, P&L, portfolio attribution etc. This is critical for managers who choose to run multiple versions of the same strategy but need to keep to different investment guidelines e.g. an SMA that limits exposure to specific stock sectors.
For managers deciding how to overcome legacy system issues, O’Boyle offers the following advice:
“Work with a cloud provider whose platform is engineered to meet your current and ongoing requirements and also is supported with services that eliminate manual processes and clunky workflows and integrations. The regulatory climate and the reputational-risk/potential loss of allocations due to discrepancies in reporting all point to outsourcing processes and accurate data management. Outsourcing to experts allows any fund to be more nimble and to focus its attention on — and tailor its spending toward — alpha generating initiatives.”
To read the case study in full, please click here.