In an era of volatile markets, growing investor demand, and increasing regulatory pressure, technology is key not only to running a business but also to growing it.
In the past two decades the world of hedge fund back offices has changed dramatically. Three key drivers for this evolution are:
- Increasing popularity of derivative investment products and complex strategies, requiring a robust middle and back office
- Sophisticated investors expecting better and more timely reporting
- Increasing regulatory demands
Shorter settlement cycles, quicker month-end closes, reporting on positions and cash before the next trading day, funds trading in three time zones. All of this has made the speed of outcomes as crucial as the performance of the fund.
Technology has taken center stage for its capabilities of handling scale and speed, as well as dealing with the complexity facing operations heads and chief operating officers.
We’ve witnessed rapid growth in the number of hedge fund back-office technologies in the market, all claiming to provide customized reporting and handle complex processes.
The back office has experienced a quantum shift–from dependence on fund administrator’s tech or in-house proprietary systems, to a marketplace that offers multiple options to choose from.
Technology: an age of evolution
The tech evolution requires managers to be prepared for the following:
- The need for in-house technology staff and third-party services to maintain licensed applications
- Dealing with a laborious implementation phase to get technology up and running
- Being prepared for the necessary cybersecurity spend
- Anticipating effort for upgrades and business testing
All the above could be ignored if technology took care of everything the back office wanted. But the reality is that even after implementing technology or multiple technologies, there are bound to be gaps the fund will have to navigate or fill by manual effort.
As much as licensing multiple technologies to handle different processes may be a smart idea, it comes with the challenge of making different technologies talk to each other.
While the overall equation seems to have been solved, in the process it’s added a new dimension for the back office to maintain. The brighter side of the equation is that over the past two decades, assets under management have doubled to $4 trillion[1]. Complexity has grown, the investor base has expanded and we’re in more markets–yet we’re able to handle the volumes, thanks to technology.
What is the right technology set-up?
Should one build, rely on fund administration, or buy third-party applications? Many argue that there is no one correct answer to this.
The core of hedge fund business is to raise capital, invest money, and generate returns for its investors. Any area that steers the fund’s focus away from the realm of its core function should be reviewed closely.
The fund should always consider how much commitment it makes in non-core areas. The right perspective of technology set-up is that it should enable the growth of the fund. In reality, of course, this varies from fund to fund.
Let’s look at two broad categories of funds
- Low volume, long and short equities, and cash investment in a handful of markets. The DNA of such a fund may be suited to leveraging the fund administration’s tech if it is sufficient to meet fund requirements.
- Mid- to high-volume fund with medium, complex asset classes in multiple markets, managing its own back or middle office. Such funds are ripe candidates for a set-up that allows the back or middle office to own the data or have control over reporting.
One way funds can maintain control is by building in-house tech or licensing third-party tech. Another is by engaging service providers who provide bespoke services as an extension of a fund’s back office.
A fund should qualify these service providers based on the daily or monthly, outcome or reporting they need. Service providers that lead with good technology and have service delivery models that ensure comprehensive deliverables are worth consideration.
Such engagement potentially allows the back office to retain focus on alpha generation activities. In such a case, the back or middle office is no longer responsible for maintaining the technology and sacrificing additional people to support the set-up.
How CSC can help
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com
[1] https://www.thenationalnews.com/business/money/2022/08/08/hedge-funds-post-best-gains-in-15-months-but-are-still-down-in-2022/