It seems that New York and London are seeking to emerge from their COVID-enforced estrangement and the world is getting busy with finding new managers to invest in. We hear of – admittedly outdoor – hedge fund manager networking sessions starting in London later this month. But there remain many perennial challenges facing the small to mid-sized hedge fund, which automation can assist with.
Most hedge fund firms will have figured out how to manage working from home, but now they are back to dealing with the challenges of a year ago, which include responding to client expectations!
One of the issues still facing hedge funds is investor expectations for oversight and control of their allocation. This is frankly an old problem, but it is not going away. Let’s look at some of the issues here.
A managed account is often the solution for early-stage hedge funds or those with very large clients who can ask for one, and we find many managers trying to support separately managed accounts for their clients. But there are significant operational challenges here for hedge fund managers with several SMAs alongside each other who are also running open-ended funds. These challenges are highlighted when managers look to control the cost of investment operations, and firms should ensure they have the technology that properly supports their activities.
Operational costs – how can a hedge fund stay efficient?
Dealing with operational costs – how can a fund manager stay efficient while handling several client accounts? Here are some tips from our team.
Trading – trade allocations need to be managed so that a single shape traded in the market is allocated appropriately to SMAs and funds in multiple shapes (and fees), and the steps are audit logged. This level of equal treatment of investments has become a key plank of governance policy in recent years. Automation plays a key role, as it can ensure making sure allocation policies are followed and streamlined without the need for intervention.
Matching and settlement – automation can ensure that settlement for each client account is correctly processed – this is the data the manager must be sure is correct before trading so that breaks are avoided. Incorrect standard settlement instructions are one of the most common problems and causes of breaks.
Reconciliation – when a trade ticket is split to multiple clients (SMAs and funds) you need to ensure that the data from that trade is faced off to the counterparty correctly. The clearing account for each SMA and fund needs to be reconciled against the appropriate records the manager retains for that trade, and at the same time the whole trade that is facing the broker needs to be reconciled without a break.
Quality data management and smart automation is the solution for most of the operational challenges that we have mentioned above. Taking on a client SMA is enticing, especially for early-stage fund managers and can be very important for ongoing development and fee generation, but the hidden costs of ineffectively automated operations can be a serious problem. Get this right and operations can actually help drive success through cost efficiency. And you may be willing to engage more mandates.