According to consultancy firm MackayWilliams, the quality of fund reporting is the third most important criterion when selecting a fund manager, after risk management and the quality of the fund management team.
Citing survey results provided by Fund Buyer Focus, 10.7 per cent of a pool of 999 fund selectors highlighted the importance of reporting, suggesting that fund managers who have the technology in place to deliver fast, accurate reports are going to be best placed, going forward, to attract institutional assets.
STP reporting
"The hedge fund community is still limited in terms of the amount of reporting it faces but if fund managers offer a UCITS fund they may face multiple reporting obligations. Although the underlying data might be broadly similar, if they set up a process to manage each report independently it's going to become a burden. However, if they manage their data centrally and all that is needed to file each report is a different set of outputs it becomes more automated, more manageable, and more cost-efficient," explains Lee Godfrey, Deputy CEO of KNEIP, one of the industry's leading legal and regulatory report specialists.
KNEIP focuses primarily on ensuring that fund data is sourced and managed in an optimal fashion. As far as regulatory reporting goes, it sets the parameters by supporting only the fund data and the fund's obligations, ignoring anything to do with transactions – EMIR for example –and anything to do with the underlying investor – i.e. FATCA.
"Right now, our focus is on developing more of a hands-on approach; a self-service type model. Once you've uploaded the data, it should be completely straight-through processed i.e. you upload the data and a report comes out the other end with all the necessary built-in checks. We are almost there for all of the reports that we produce today. In the near future, end users will be able to sit by the pool and produce a fund report on their iPad, should they wish to!" explains Godfrey.
The ability to report data effectively mitigates not only the risk of investor dissatisfaction but also the risk of regulatory fines and potentially increases speed to market by supplying data feeds to Bloomberg when a new fund is launched. Then there's the reduction of noise – operations teams are less distracted having to fix inaccurate data and field calls from investors, or from ratings sites.
Working with accurate data is a necessity but it needn't become a burden, nor a distraction, for hedge fund managers.
Godfrey says that regulation has become a fact of life but it can be managed if legacy technology is replaced with STP processing capability.
"Last year, when we produced the first significant volume of Annex IV reports, everyone was struggling. We ended up sending our specialists to managers' offices to go and sit in their office and ask, `Where's your data coming from? Where can we trust it? How can we set up a trusted and permanent source of data?' Once that was put in place with clients, this year their Annex IV reports were produced seamlessly. Our reporting volume has risen 18% even though our team is 30% lighter. And that's predominantly thanks to the fact that we've introduced STP capabilities on our end and our clients' end."
Improved collaboration can reduce operational costs
Connecticut-based Nedelma has developed a powerful accounting and reporting platform called Portfolio Amalfi" that is helping asset managers drive home real operational efficiency.
As the regulatory and compliance requirements become ever stricter, Portfolio Amalfi" is arming managers with sophisticated, state-of-the-art dynamic reporting. By addressing regulatory and compliance needs faster, managers can spend more time on generating better alpha. Senior management can feel comfortable that wherever they are, they can get answers straight away thanks to the mobile functionality of Portfolio Amalfi. As fast as people send data to the platform, so it can be viewed remotely. This allows the COO to view the fund's P&L, its exposure limits, whether there have been any trade breaks that need resolving and so on.
"Nedelma's products help managers to do their work more efficiently," says Nedelma CEO, Michael Medvinsky. "They improve collaboration between different departments, allowing financial and marketing professionals to analyse information by themselves on the fly and dynamically generate flexible reports.
"As a result, we allow people to work more efficiently and more quickly and that helps to reduce operational costs and maximise productivity. Technology staff can focus on more important issues to help improve the hedge fund business, rather than being consumed with reporting obligations.
"Also, our products can potentially reduce the number of systems used and lessen the number of manual reports."
Medvinsky expands on the collaboration point by referring to one particular fund manager who, prior to using Portfolio Amalfi, was spending upwards of two hours a day on one data gathering task that required navigating between different systems. "Now they can do the same task in 10 minutes because our platform gives them a proper holistic view.
"If the portfolio management team wants to look at a specific data set, ordinarily this would involve going to the IT team and the stock response will often be, `No problem but what would you like us to stop working on? We are busy.'
"Now, if the front office can do this by themselves it dramatically improves efficiency as it avoids putting more burden on the IT and operations teams. Time is money. Getting answers quicker can allow the investment team to trade markets faster and, hopefully, improve fund performance," suggests Medvinsky.
Building investor insight
In some respects, the fact that hedge funds are sharing so much data with investors and regulators can have its advantages, even if the reporting requirements can feel frustrating. One of the most useful advantages is that it can build greater insights on end investors, assuming the right technology is in place.
New York-based Imagineer Technology Group (`ITG') offers award-winning solutions to help hedge fund managers address the transparency and workflow demands necessary to stand out and succeed in today's marketplace. Although best known for its flagship CRM platform, Clienteer, the firm's web portal product, WebVision, enhances the fund and investor level reporting experience for managers and their investors, in addition providing metrics to allow managers to better understand the needs and wants of investors and prospects.
"As all the information is online with WebVision it creates a `hands-off' methodology for hedge fund managers," says Erol Dusi, Founder and President of Imagineer. "Whether it's financial reports, fund reports, audits, etc, all can be presented on WebVision for investors to download, not just for current needs but historical purposes as well. If somebody wants to reference K1 reports from previous years they can freely download them.
"The enhanced transparency that comes with accessing all of the fund's reports, and even specific account level data that relates to the investor's allocation in that fund, can be a valuable tool, allowing managers to better control the dialogue with investors. In addition, giving investors the ability to self-serve eliminates the inefficiency of waiting on managers or their appointed fund administrators to provide reports."
This is very helpful for smaller and emerging managers where making a positive first impression with potential investors is so critical. By leveraging technology provided by Imagineer and others to improve the day-to-day business operations of running a hedge fund it can go a long way to demonstrating the institutional quality of the fund and address potential concerns that the investor might have.
Indeed, Nedelma's Managing Director, Jeff Strauss, says that improved performance coupled with more transparent, robust portfolio information, delivered quickly, can make acquiring new investors much easier.
"Managers can do dynamic reporting, showing their fund's performance by sector, by market, by asset class in response to investors' questions, which is not possible when using a static PowerPoint presentation. It builds confidence among investors and prospects and can help to retain the fund's assets as well as to raise new assets," comments Strauss.
Culture of compliance
Back at Imagineer, although the primary function of Clienteer is the investor relations module, the functionality set goes far beyond that, touching all areas of a hedge fund's daily activities including business development and marketing, operations and financial reporting.
Having a centralised system, such as Clienteer, creates a proper firm-wide culture of compliance. The system typically becomes an important hub for all of the hedge fund's information and workflow management around investor onboarding and investor relations on an ongoing basis.
"It allows the hedge fund to track relevant compliance data such as ERISA capacities, FATCA compliance, and even Form-PF questions as they relate to investors.
"Moreover, if the SEC pays you a visit and you can easily pull up all fund documents on every investor, communication logs, the details of every investor that the Offering Memorandum was sent to – basically the full audit trail of the hedge fund's operations – it clearly demonstrates a proper culture of compliance. Beyond that, it makes life much easier when an investor calls up as the IR team doesn't have to waste time searching for answers across disparate systems," explains Dusi.
Real-time mobile technology
One technology company that has focused heavily on mobile technology is Eze Software Group, a leading industry provider of global investment technology. It recently enhanced its mobile offering, Eze Mobile, for iPhone 6 and 6 Plus; a single application that can be downloaded remotely to run on Apple devices which gives users of the Eze Software OMS access to critical compliance, trading and portfolio management functionality when on the move.
"Fund management groups – both traditional and alternative – no longer need to feel confined to their desktop to harness the power of the Eze Software OMS. What we notice is that for most of our smaller and mid-sized hedge fund clients, they are happy for all of their internal staff to utilise the mobile technology whereas some of the larger fund management groups will typically restrict access to the senior compliance officer, the portfolio manager(s) or the senior analysts – basically those who need it the most," observes Michael Hutner, Senior Managing Director of Americas Sales and Business Development at Eze Software Group.
One of the most powerful features of Eze Mobile is the ability for users to view data on their mobile device in near real time. They can see what is happening to their portfolio positions, which might prompt them to dial up or dial down risk depending on the market. Or, if the COO happens to be at a conference and wants to [show] answer questions about the fund's performance to a prospective investor, they can view P&L and liquidity, and perform benchmark analysis, and drill down into performance relative to critical market changes.
"There are very few technology groups that are able to manage real-time data and provide it to end users on the go as and when they need it. We were one of the first to support real-time position management, exposure and P&L," says Hutner.
"That ability to drill down to determine the fund's P&L and liquidity, and the way that data can be visualised in graphical format, is proving of great value to our clients; it's highly intuitive and far more powerful than continued reliance on spreadsheets. In addition, Eze Mobile allows the end user to send orders in to the trading team whilst remaining in full compliance; if you breach a certain exposure limit, we will not allow you to execute the trade. We'll basically put it into a holding bin where a compliance officer can remotely review the data and override the trade if needed."
This is where there are clear advantages to hedge funds when using technology solutions in a mobile device. The majority of hedge fund managers have fairly small teams so anything that can extend the capability of how they run the fund, without using up valuable internal resources, is going to be welcomed.
From a security perspective, Hutner says that all of the fund's data stored on an iPad and/or iPhone is RAM memory and that there are firm-controlled timeout settings to clear the data; in other words, you get logged out after a certain amount of inactivity. Also, there's an ability for the client to wipe the data remotely if someone accidently leaves their iPad on a train or has it stolen.
"Security is probably one of the most important parts of what we are doing. Everything in the application uses SSL, TLS encryption with signed certificates. Everyone today wants to have information at their fingertips. But it has to be as secure as possible," stresses Hutner.
Administrators need to be agile
It isn't just hedge fund managers that have to prove their technology prowess to investors. Equally, hedge fund administrators must do the same, both to managers and their end investors. This is especially true when one considers that over the last few years there has been significant convergence between the long-only and alternative funds industry, as demonstrated by the rise in popularity of `liquid alternative' funds; be they '40 Act alternative mutual funds or alternative UCITS funds.
This is an exciting trend but the inevitability is that reporting requirements are only set to increase with SEC modernisation, part of which is the N-PORT reporting rule, which is expected to be approved in the second half of 2016, after which there will be a 24-month window for asset managers to get prepared. This regulation is significant for the US '40 Act mutual fund market and can best be thought of as the long-only equivalent of Form-PF and Annex IV reporting in the alternative funds space.
One firm that has moved quickly to support both hedge fund managers and administrators in this endeavour is Confluence.
"We're been actively working with clients to address this development by sourcing data and getting it normalised to be able to report on it. It's not something that managers can wait on, even if the first filing will not be for another 2 years or more. We are focusing on this intensively to help our clients," says Todd Moyer, Executive Vice President of Global Business Development, Confluence.
"The current proposal is a monthly filing; the first ever monthly reporting requirement to such a scale in the US fund industry. That is going to change the way managers approach their operations. They won't be able to rely on manual processes. It's a tipping point. Managers will need technology support."
In response, Confluence has spent two years developing the Unity NXT" Regulatory Reporting platform, which has just gone live.
Normalising data for re-use
To cope with the broader data management and reporting challenges, Moyer believes that the burden will be placed firmly on administrators and technology companies as they will be best placed to help normalise large volumes of data for re-use.
"Re-use is going to become a critical feature because not only do managers want to be able to access data in a consistent fashion, they also want to make sure it is accurate across different reports as regulators pay close attention. You don't want to file one set of data for Form-PF and then use a different set of data for Annex IV under AIFMD, for example. Technology solutions should be able to help automate data flow in order to provide consistency across those filings," comments Moyer.
He says that administrators who demonstrate the ability to provide "mutual fund-like services" to the hedge fund market will win "the lion's share of the business". With even more regulation expected in coming years, the industry can expect increased reporting on the largest sets of data to be a significant, long-term trend impacting their operating models.
"Overall, I would say that administrators who can provide consistent and transparent reporting will be in a better position to garner assets as they win mandates from the larger fund management groups," comments Moyer.
Relying on Confluence technology, clients already retain a lot of the data needed within the Unity® platform. Confluence services a large share of the financial reporting, both for alternative and traditional funds across the globe. Moyer estimates that the group holds approximately 70% of fund data to handle all of the current regulations. "We then gather and normalise the remaining 30% and bring it in to our platform.
"This is mainly counterparty and risk information. We work directly with the client and their third party providers to source data and onboard it in its native format. There is no need for the data sources or providers to comply with any specific data formatting requirements on the Confluence stack. We are able to take the raw data from them and tag it for multiple reuse within our application to support clients' transparency reporting needs, not just today but as regulation evolves in future," explains Moyer.
As operational timelines are condensing there's less time to do more work and there are fewer internal resources to cope with the increasing speed and complexity of data reporting. That is what Confluence hopes to address with the Unity NXT" Regulatory Reporting platform.
Things to consider when outsourcing operations
In this last section, it's worth drawing upon some of the considerations for hedge fund managers who are looking to update their operating models by outsourcing some of their functions to managed service providers.
The adoption of both technology managed services (infrastructure-as-a-service) and operations managed services has grown in popularity across the industry as fund managers look to trim the fat by reducing their headcount. There has been a shift in mindset whereby having large, unwieldy internal IT frameworks is no longer regarded as representing a competitive advantage in the market.
But if the manager selects an inappropriate managed services provider, it can definitely become a competitive disadvantage.
The following are some key considerations:
- First, managers should check that the managed services provider has experience in implementing a governance model to support managed services; if so, what are the Service Level Agreements it uses?
- Second, look for someone that is committed to offering managed services as their livelihood as opposed to one who is providing managed services merely to earn a few extra basis points.
- Third, they should look to those who can provide both the operations and the technical solutions because the way you get the best operating scale is by consolidating people on common platforms. If someone is doing managed services across 10 different platforms, that is 10 systems that need staffing.
"If you provide both the technology and the operational managed services you have greater control when it comes to committing and adhering to SLAs," suggests Bennett Egeth, President of Broadridge Investment Management Solutions.
- Fourth, if your provider offers many similar products, either built or acquired, make sure that there is a long-term commitment to support the products you are using, or seek to use.
- Fifth, assess the balance sheet of the vendor; you don't want to introduce more vendor risk. The idea is to reduce vendor risk.
- Sixth, look for someone that is willing to pass on some of the benefits of mutualisation. You want to be able to participate in the economies of scale of the provider as this will reduce costs over time.
- Finally, select someone who is willing to convert your fixed costs to variable costs that align with your business drivers. For example, if you were once a US10bn fund and you built the internal IT architecture, but you've now shrunk to an USD5bn fund you are going to have to figure out how to reduce the fixed costs.
"With operational managed services, it is possible to structure costs and expenses to a variable model, which can help better align with the manager's business model over time," advises Egeth.
Not only can using managed services lead to significant savings to the management company and the fund's investors, it can reduce the operational risks and remove the potential threat of `key man risk'.
More importantly, it can free up the brainpower of those running the hedge fund to focus on optimising the investment strategy, raising assets, without worrying about all non-revenue generating activities. It will keep the CTO and COO motivated and not feel weighted down by operational commitments, allowing them to feel more integral to the future growth of the business.
Hedge funds are built to trade and pit themselves against the market. Regardless of what the solution – a regulatory platform, a comprehensive CRM system, a managed services solution or dynamic reporting solution – technology in all its guises is playing a critical role in making hedge fund managers' lives easier and focus on what really matters; and that's generating returns for investors.
