Northern Trust Hedge Fund Services has called on the hedge fund industry to leverage technology and adopt clearer industry standards in data management to help close a gap in transparency expectations between fund managers and investors.
The recommendation follows a key finding from a 2014 survey of hedge fund managers and investors fielded by Northern Trust Hedge Fund Services, a leading provider of administration and middle-office services for hedge funds. The survey revealed that 55 percent of investors favor more transparency from their hedge fund managers while 98 percent of managers think investors are satisfied with the level of transparency as currently provided.
In a white paper, Overcoming the Challenge of Transparency, Northern Trust Hedge Fund Services suggests that better transparency capabilities, among other benefits, can be achieved through adopting clearer industry standards for data communications that pertain to four areas:
• Aggregation: Capturing data from multiple sources, centralizing it and providing a presentation and data-delivery element.
• Normalisation: Translating and formatting the data from each source consistently and enriching it by sourcing missing values.
• Verification: Validating the accuracy of received data through reconciliations, overriding valuations where needed, running data-quality checks and resolving issues or discrepancies.
• Integration: Assimilating systems, business processes and data-delivery formats to ensure easy delivery of aggregated data to external systems and counterparties.
While solutions exist to handle aggregation, normalisation and verification to varying degrees, the key to transparency lies in integration, or the ability to simultaneously support a single “golden” data set while preserving the flexibility to feed that data into multiple other systems, maintains Northern Trust. In addition, previous attempts at standardisation have fallen short of some of the industry’s key needs in terms of flexibility, granularity and data quality.
“The forces driving the industry today – investor needs, an increasingly competitive marketplace, more complex financial markets and regulatory scrutiny – are creating real needs for integrated data solutions,” says Peter Sanchez, head of Northern Trust Hedge Fund Services. “The technology exists today to allow investors to receive more transparency while managers protect their intellectual property, but a lack of market consistency around data makes those solutions quite expensive. We believe that better data standards, established through collaboration by industry leaders, can help more firms adopt these practices, which in turn can bring costs down and make these types of solutions accessible to the entire industry.”
Sanchez also considers transparency a critical competitive factor as investors seek out managers who provide the level of transparency they require. “Adopting an industry-wide integrated data model will help managers bridge the transparency gap with investors,” Sanchez said. “An industry-wide data model will also better position the industry to meet regulatory demands, facilitate data quality, and generate new and compelling value propositions for investors by making their services a more integrated part of investor portfolios.”