Can the smart tech that asset managers use really be a differentiating factor?
How do managers meet the different expectations of their clients whilst simultaneously generating Alpha and growing AuM? Exploring how innovation and smart tech are shaping the hedge fund industry provides some valuable insights.
With so many different client expectations, how can a manager keep their focus on not being distracted by the noise of running their business? By understanding how innovation and smart tech are shaping the hedge fund industry, managers can streamline their operations and meet client demands more effectively.
One of the issues still facing the hedge fund industry is how to meet investor expectations for oversight and control of their allocation. This problem is “old as time” but needs to be addressed at the setup or as the manager begins to scale and take on more SMAs. (Single Managed Accounts)
A single-managed account (SMA) is increasingly the solution for early-stage hedge funds, but it is not the sole providence of the emerging manager. Any investor who commits sufficiently large capital can expect their funds to be managed through an SMA vehicle. The job of the COO/CIO is to simultaneously support the requirements of each SMA, possibly combined with a fund structure, and deliver the returns that his/her investors expect. The COO/CIO can leverage outsourced service providers to help achieve operational success, see our article about this here.
Hedge fund managers running several SMAs alongside each other, who are also running open-ended funds, face significant operational challenges. These challenges are exacerbated when managers look to control the cost of investment operations. Firms should have the technology that properly supports their activities and growth trajectory.
Operational costs – how can smart tech shape the operational efficiency?
Dealing with operational costs – how can a fund manager stay efficient while handling several client accounts? Here are some tips from our team. The following solutions demonstrate how innovation and smart tech are shaping the hedge fund industry:
- Trading – trade allocations need to be processed automatically 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 audited. This equal treatment of investments is a key requirement of good fund governance. Automation plays a key role in ensuring allocation policies are followed and streamlined without the need for manual intervention.
- Risk – Each SMA may have specific risk or investment thresholds. How does a manager handle this? Again, automation is the solution. Pre-defined rules and limits ensure that the investment policies for each SMA and/or fund are adhered to.
- Reporting – Does SMA 1 have different reporting requirements from SMA 2? How about the fund’s investors? Creating bespoke automated reporting ensures that investors see what they want when they want it, and the PM can focus on the market.
- Matching and Settlement – Automation can ensure that settlement for each client account is correctly processed. The manager must be sure that this data is correct before settlement so that breaks are avoided. Incorrect standard settlement instructions (SSIs) are one of the most common problems and causes of breaks.
- Reconciliation – When a trade is split to multiple clients (SMAs and funds), you must ensure that the data from that trade matches the counterparty correctly. The clearing account for each SMA and fund must be automatically reconciled against the appropriate records the manager retains for that trade. At the same time, the whole trade facing the broker needs to be automatically reconciled. Preferably, trade execution happens on t0 and settlement on t+1.