Technology advancements, shifting investor expectations, and evolving regulations have changed how hedge funds approach the market.
To gain an edge – an oft-repeated industry term – fund managers continuously seek ways to optimize their operations and investment strategies. Demands for advanced and tailored solutions now run the gamut of the investment lifecycle. From technology and data providers to compliance, reporting, and fund administration services, hedge funds are examining every bit of their operations.
Fund administrators must have sophisticated systems to capture and analyze vast amounts of data to meet the expectations of discerning hedge funds, private equity, and credit firms. Ensuring compliance while enabling quicker and more accurate reporting is also vital. In addition, hedge funds increasingly expect customized investment solutions and personalized experiences that deliver accurate, timely results.
By addressing fund manager’s expectations, nimble service providers can help managers gain an edge over rivals who remain encumbered with clunky processes, dated infrastructure, and disparate systems.
In today’s environment, hedge funds require new elements to fully support their ecosystem. So, are hedge funds on the precipice of change? Not so fast, says Ted O’Connor, Arcesium’s Senior Vice President, Business Development. Changing fund administrators is a massive undertaking, an experience O’Connor learned first-hand.
A hedge fund may change its administrator due to costs or a deteriorating service model. Client demands to address increasing complexity, such as new assets, vehicles, or distribution methods, may elicit change, explains O’Connor. Change may also come about if a hedge fund loses confidence in the admin’s capabilities. “When there’s real dissatisfaction – enough to make a significant change – that’s when firms start to re-evaluate their over-reliance on one provider,” says O’Connor.
“One of the biggest concerns firms have about switching administrators is making sure their data is captured and stored in a way that allows employees to continue to do their jobs,” explains O’Connor. “Whether an analyst needs fresh data to formulate new ideas, historical data to run analyses on inception-to-date returns, or wants to understand IRRs on vehicles and assets, continued access to data is key.” Managers considering a switch must have a comprehensive plan to migrate historical data. This may entail the new administrator taking responsibility for the history or the manager capturing it in their own warehouse. Both approaches have pros and cons.
The more that a manager’s workflows depends on the administrator, the more complex the transfer. Changing providers is an excellent catalyst for reassessing and redesigning operating models.
The struggle many funds encounter is they are beholden to their administrator for all accounting information. Data reconciliation at administrators can be lengthy, raising concerns about how quickly a fund is aware of troubled exposures. One essential capability of an administrator is investor-facing responsibility, such as receipt of capital reporting or processing redemptions. Without high-quality, accurate systems, hedge funds won’t have access to the data they need – whether for reporting or analysis.
A New and Better Way?
While fund administration has been around for decades, Bob Longden, Senior Vice President for Sales & Partnerships at Arcesium, describes it as an industry whose growth accelerated following the 2008 financial crisis and Bernie Madoff scandal. “Hedge funds needed a stronger oversight function and fund administrators were well-positioned to provide it. But since then, many firms feel like they’re limping along and saddled with this operational necessity,” says Longden.
For funds considering a new administrator, switching admins brings up worries about a potentially time-consuming and disruptive process. But it can be a smoother process with the right tools and integrations.
Robust technology can provide hedge funds with a platform designed to master historical data. These data-first tools enable hedge funds to incorporate incremental calculations or results for continuity. For example, a fund with requirements around investor reporting might need inception-to-date information. The migration becomes much smoother with the right tools to ingest, validate, and harmonize investment lifecycle data.
Technology that’s independent and offers control, flexibility, and scalability will be paramount.
Data warehousing is another important piece. The right tools to capture lifecycle data and infrastructure to store it make changing administrators less scary, says Longden.
With control over data, firms can efficiently reconcile information from one service provider to another. More importantly, moving administrators is less overwhelming when funds have control over their enterprise data management, reconciliation processes, middle-office and treasury operations, and a systematic way to shadow NAVs.
The Future of Fund Admin
According to O’Connor, the future of fund administration should be investor services and books and records.
When it comes to technology, hedge funds should be looking for service providers that deliver flexible solutions. Due diligence professionals need real-time access to operational, risk, and return data. Middle- and back-office functions require intra- and end-of-day access to critical trade, position, and accrual information. Internal systems that capture data and empower real- and near-time operations are also increasingly important.
As funds think about the asks of their fund admins, the list is getting longer. Multi-asset class strategies are challenging the traditional admin model. So is the demand to capture complex position terms, forecasting, and cash flows. Monitoring robust IRR calculations is another part of the puzzle that requires adaptive tech solutions to meet increased front-office demands.
Fund administration will remain a key component helping funds run operations, but it doesn’t need to be the hub anymore, explains O’Connor. In the new world, technology can be complementary to the more traditional fund administration services.
With a robust and scalable stack that enables fund managers to control their own data domain, firms will be in a stronger position to re-assess critical dependencies – from their technology providers down to their administrators.