The recent hedge fund white paper published by Truss Edge earlier this summer has shed some interesting light on the priorities of smaller hedge funds.
Speaking to both fund managers and key service providers, we were presented with a picture of smaller fund managers who want to focus specifically on the day to day management of their portfolios. Additional tasks, including running middle and back office functions and dealing with many of the data related tasks fund managers are presented with, all this is considered a distraction from the critical job of generating returns.
We seem to now be entering an era where the COO function within a hedge fund is becoming less of a part time role and more of a zero time role, as fund managers look for solutions that can take a lot of that operational work load off their desks.
Hedge funds at the start up or early stage phase of their life are looking for IT solutions that are cost-effective and easy to implement. Our research demonstrated that two thirds of hedge funds see their IT systems as either a manpower burden or a cost burden. Starting a hedge fund can be expensive enough without the extra costs that can come with IT.
How do hedge fund managers view the use of multiple software applications?
So what does an outsourced COO look like?
These findings point to a demand for modular solutions grouped around a central technology pillar, solutions that a manager can adopt from a single source. The goal is to find an out of the box solution that can replace much of the functionality of an expensive middle office, but which can grow as the investment firm grows larger and more sophisticated.
The outsourced COO function is expected to take a lot of the manual, time consuming work off a hedge fund manager’s desk. And it is expected to assume this work at a lower price point, and probably with a higher degree of efficiency.
This requires a high degree of automation. Luckily firms like Truss Edge are in a good position to offer such automation technology to fund managers, using systems that have processed millions of transactions and are independently certified.
The chart below illustrates how many small hedge funds are still relying on Excel spreadsheets to manage their day to day data management and reporting tasks.
Hedge fund use of spread sheets
Early stage funds reach for Excel as the cheap panacea for many of their day to day data processing tasks, but it is no replacement for the automated alternative.
An onsite COO juggling spreadsheets can quickly create data processing issues for an investment manager as manual errors creep in. These errors can be an indication for investors that a fund manager is not coping with their data load.
The outsourced COO should bring the following to the equation:
- Cost effective
- High degree of automation
- Efficient and error free management of data flow and reporting tasks
- Experienced enough to integrate even the most sophisticated strategies
- Comprehensive reporting for investors, regulators and administrators in an out of the box format
- Independently certified, including for data security