Global Head of Fund Sales
Our recent report explores how hedge fund CFOs are responding to rising investor expectations for more frequent, detailed and bespoke reporting
No hedge fund operates in exactly the same way, even though they have similar goals. However the business is run, it is typically the chief financial officer’s (CFO’s) job to deliver effective solutions that can respond to the demands of their clients.
This high-level professional must understand the information being requested, where to get it and what to do with it. These challenges are magnified by the emergence of new data sets and asset classes – such as ESG and cryptocurrencies – we see today.
Our recent report, The future hedge fund CFO: Preparing for disruptive tech and emerging asset classes, examines how the role is changing – and how to meet tomorrow’s challenges.
A bespoke approach is needed to confront these complexities, ensuring that the increased interest from investors in understanding the hedge fund’s underlying strategies is met. These investors will also want to see the factors behind its performance, volatility and pressure points; they want to know where the risks lie.
The growing importance of custom mandates
The first thing to note is that requests are likely to be ad hoc, from a due diligence and portfolio review perspective. This is centred on ensuring the fund manager follows the remit and investment thesis set down by the institutional investor’s investment committee.
The second key point is that since the financial crisis of 2008-09, we have seen the prevalence of custom mandates or managed accounts. They have become a feature because of their liquidity and transparency benefits. With custom mandates, the manager is in effect sub-advising to the managed account, which will be held at a custodian. This allows the investor to exert total control.
This has implications for the evolution of reporting: with greater visibility comes greater demand from a custom-reporting perspective. Customised investment vehicle offer customised fees and objectives – and these are likely to bring specific data reporting requirements.
For hedge funds the extent of the operational challenge naturally relates to investors’ expectations, and these in turn can change. Simply throwing technology at a problem won’t work; technology is a core part of the strategy, but not the only element. Building systems that can address every single investor query is obviously challenging. It means designing solutions not only for today but also future-proofing them.
How outsourcing can help future-proof hedge funds
This is where outsourcing enters the conversation, whether for a fund administrator or a hedge fund’s own back office data needs, workflow and operations.
Hedge fund managers want to be able to look at what adds value internally and focus on areas such as portfolio management, risk and treasury, optimising margins and cash. As hedge funds receive more queries from clients, it’s important to handle them in a timely and efficient way that shows clients they are valued. That’s hard if everything is done in-house.
In North America, in particular, we find firms will keep their own books and records, especially in complex areas such as credit. This is an institutional investor preference and necessitates allocating substantial resources to time-consuming reconciliation work. Such tasks are an example of the low value, labour-intensive “busy work” firms are looking to outsource so their talent can focus on value-adding tasks.
Outsourcing also allows third parties and forward-thinking, progressive fund administrators to provide the flexibility to adapt reporting over time, thanks to past investment in technology and the teams behind it. The best service providers evolve with a client’s needs.
The challenge of change management
Change is necessary. But what exactly do hedge fund managers need to know to successfully implement it, optimising operational efficiency and satisfying clients’ expectations?
We can best see how this plays out when a manager is launching and begins with a blank slate. In this situation we see them embracing the outsourcing dialogue and removing as many obstacles as possible to create a more scalable business. How to outsource certain functions and roles becomes a far more strategic and immediate concern.
Yet these “launch” issues are the same challenges that an established manager lives and breathes every day.
In that case the technology, workflow and operations teams are already built. They might have done things differently if they were starting from scratch, but an established firm cannot unravel everything. So managers execute transformations in pieces, for instance adding efficiency from a tech-centric perspective.
That’s where a provider such as Intertrust Group can not only provide a technological solution but also wrap a service around it. The latter is very important because it shifts the burden of technology management and subsequent change management – which can be considerable – from the hedge fund team to the third-party provider inherently through their services.
Our report reveals much about how firms are dealing with investor demands today and how they are preparing to do so in the future. It also finds that the best outsourcers will be not only service providers but also partners.
Why Intertrust Group?
- From portfolio management to risk control and administration, we partner with hedge funds to provide efficient and cost-effective outsourcing solutions, delivering actionable insights to firms of all sizes and strategies.
- Our global team builds automated workflows that, among other things, utilise artificial intelligence and robotic process automation to identify breaks and apply automatches to take the hard work out of reconciliation and accounting in managers’ books of records.
- With our comprehensive attribution reporting, including by sector, geographies and strategies, clients can be assured of receiving the insights and health indicators to arm them with the data correlations and interpretations to construct meaningful outcomes for investors.
- Over many years we have amassed the clean historic data that underpins our capabilities in training the cutting-edge machine learning models we provide as part of our bespoke offering to hedge funds.
- We specialise in both turn-key and bespoke solutions for back, middle and front office – from accounts and treasury to handling complex multi-manager externalities such as cash and position management, liquidity, exposure and risk.
Read the full report: The future hedge fund CFO: Preparing for disruptive tech and emerging asset classes
Insights | Private Capital & Hedge Fund Services
18 steps to futureproof your private capital operations
25 January 2023
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