By Chris Kundro, Wells Fargo Global Fund Services – There are many professionals, both internal and external to a fund manager, who play an important role in controlling a fund's operational infrastructure and mitigating a fund's operational risk. COOs, CFOs, and CCOs manage the functions necessary to support a hedge fund, while fund directors, auditors, and operational risk analysts ensure that a hedge fund's infrastructure is sound and secure.
However, unlike portfolio managers and traders that have always had portfolio management, trade order management, and other systems to leverage, operational professionals have historically lacked sophisticated or comprehensive systems for managing and analysing a fund's operations, accounting, compliance, and investor servicing related functions.
Consequently, operational management of a fund has been inherently challenging due to a lack of complete and timely operational information. Furthermore taking that information, analysing it, and identifying systemic issues has been virtually impossible or at the very least manually intensive. However solutions to these problems are quickly evolving and in turn both the operational management and due diligence of hedge funds are becoming more sophisticated and comprehensive.
Best practice in hedge fund operational management now dictates the use of a new category of applications that we call "Operational Management Systems". Operational Management Systems are not processing or accounting systems but workstations that provide a window into the post trade activities of a fund. These workstations provide the information necessary to monitor and measure operational activities, analyse and mitigate operational risk, and ultimately ensure that both internally supported and outsourced functions are performing efficiently and effectively.
Operational Management Systems vary in design and function; however these systems provide some or all of the following functions and information:
• Real-time monitoring of middle and back office operations activities such as trade capture, securities/cash reconciliation, confirmation, settlement, cash and collateral management, asset servicing and P&L calculations,
• Real time monitoring of fund accounting activities such as NAV calculation and financial statement processing,
• Real time monitoring of investor activities such as subscription/redemption and capital call/distribution, KYC/AML, and investor accounting and servicing activities,
• Counterparty risk information and information related to the operational effectiveness of counterparties such as prime brokers,
• On-line access to operations, accounting, investor and regulatory information and reporting, including report writer capabilities for generating customised reports.
At Wells Fargo Global Fund Services, we took an exception-based approach in designing our Operational Management System for both hedge fund and private equity managers, which is called Fund View. While our clients and internal teams can utilise our system to access and design comprehensive middle and back office operations, fund accounting, and investor and regulatory related reports, Fund View, like similar applications, provides real-time dashboards with key performance indicators that highlight current and potential operational issues. These issues include:
• Transaction capture errors
• Position and cash breaks
• Unconfirmed and failed transactions
• Counterparty operational issues
• Pricing exceptions and variances
• Delinquent activities related to critical processes (e.g., NAV production)
• Non-compliant investors/transactions (KYC/AML, FACTA)
• Unplanned counterparty financial and operational exposure.
While Operational Management Systems are still in their infancy relative to their more mature front office siblings, they are growing and evolving quickly. However, even in their current stage of development, they finally provide the critical automation and information that COOs and other fund professionals have long awaited.