Automating Investment Fund Operations to Overcome the New, Dramatic Challenges Facing Our Industry
Hedge funds, private equity, and alternative investment funds are poised to undergo several dramatic changes over the coming months and years. A fund’s operations, including functions such as regulatory and compliance, fund accounting, audit oversight, investor reporting, and tax requirements, are changing dramatically. Further, as we suggested in a recent blog post titled SEC Scrutiny of Hedge Funds will Increase Under the Biden Administration, the new administration will be examining funds in a way that they have never been examined previously. If fund management organizations are to navigate this uncertain period, they will need to further implement and embrace automation. Many of our clients successfully implemented positive structural and operational reforms to their front, middle and back offices, the majority of the industry still relies on legacy technology and manual processing. This ongoing dependency on antiquated systems exposes fund managers to potential risks and creates added costs.
The bottom line is that the funds management industry has been experiencing a period of structural change and market volatility which has left institutional investors re-evaluating their preferred operating model. There has been a global trend of bringing core asset and investment management activities in-house while leveraging technology to automate workflows and processes to effectively address the pressures of rising costs, shrinking margins, increased regulation, and rising asset complexity.
Legacy Solutions are Slowing Productivity and Effectiveness
Fund managers across the industry are often sticking with performing investor reporting, risk management, compliance tracking, reporting, and other operational activities using Google Docs, Excel spreadsheets, or rudimentary project management software. The data is often stored in an unstructured format across multiple systems, workflows, and databases. The result is operational risk and duplication; from our analysis, the likelihood of making a mistake or miscalculation is dramatically higher than those firms that have adopted an integrated software solution.
Further, manual processes are increasing because of the increased number and complexity of the tasks. Thus, the ultimate cost of using legacy technology can be significant. While administrators are critical to managing the data, workflows, and reports, the process of manually collecting, organizing, updating, compartmentalizing, and reporting the data is a lower level, manual process better handled by an intelligent software solution.
Fund managers across the industry are often sticking with performing investor reporting, risk management, compliance tracking, reporting, and other operational activities using Google Docs, Excel spreadsheets, or rudimentary project management software.
Institutional investors are demanding fund managers have a robust digital strategy and automated operational processes in place to increase accuracy, improve transparency and reduce costs. Clients are fully aware of the risks and pitfalls of running aging technology systems. A failure to automate could therefore be the difference between losing and winning a mandate. With competition for investor capital likely to accelerate, fund managers need to demonstrate that they have best-in-class technology.
We wrote three blog posts on the Archegos disaster, the GameStop short squeeze, and Infinity Q Swap Pricing debacle which provide interesting stories of funds that were literally blindsided when they lost visibility to risks, potential massive drawdowns, and the impact of equity price changes to margin. Providing visibility to risk, adding alerts, modeling potential black swan events or drawdowns is critical to delivering Alpha.
Investors and Regulators will Increasingly Scrutinize Funds
The past 18 months have shined a light on funds that resisted the move to automation and transparency across its operations. Covid-19 demonstrated how integral automation is, especially following the transition to work from home for all funds. It was largely the fund managers who failed to invest in their core technology infrastructure and automated processes who have struggled the most operationally since the lockdowns starting last March.
It is not solely clients who will be reviewing the veracity of the asset management industry’s operational processes. Regulators – including the US Securities and Exchange Commission (SEC) and UK Financial Conduct Authority (FCA) – issued strongly-worded statements at the beginning of the year telling investment firms to focus on their operational resiliency. The FCA said operational resiliency, namely the ability to adequately manage technology and cyber-risk, was one of its main priorities alongside liquidity risk, governance, and LIBOR reform. Consequentially, regulators will almost certainly examine how the technology and operational processes at asset managers performed during the peak of the Covid-19 crisis.
The FCA said operational resiliency, namely the ability to adequately manage technology and cyber-risk, was one of its main priorities alongside liquidity risk; governance; and LIBOR reform.
Why Automation Matters to the Bottom Line
Automation can net managers many operational benefits. It can facilitate enhanced STP (straight-through processing) and reduced manual intervention, thereby allowing for cost synergies to be realized. At a time when margins and revenues are under enormous pressure, these operational savings will be crucial. With institutional allocators likely to become increasingly selective when making investment decisions as equity multiples hit historic levels, asset managers will need to do all they can to be on the winning end of incoming RFPs.
By automating and integrating communication and collaboration tools with portfolio and risk management, fund managers may find they have a much richer picture of their investor journey, allowing them to identify better ways of attracting and retaining investors.
While we try not to use this blog as a vehicle to market RyanEyes software, clients mentioned several benefits of our software that we didn’t realize saved them so much time and effort.
For example, RyanEyes software can allow clients to:
- Copy and extract information from PDF’s; essentially giving them the ability to scrape PDF’s even through e-mail
- Extract data from excel so it can be added and stored in a data warehouse to be analyzed with other enriched data
- Conduct simple communication tasks, thus eliminating the need for back and forth between IT and business
- Monitor business controls, freeing up the information technology team to handle higher-level security and productivity tasks
- Business can control cloud-based resources rather than relying on IT in AWS and Azure
- Generate reports that have a built-in notification that signal to staff when they should be sent
These are simple capabilities that have saved our clients manual, painstaking cut and pasting, monitoring, and documenting business controls and generating reports to name just a few.
In our 15 years of Geneva consulting, implementing RyanEyes software, and consulting funds on how to leverage technology to improve operations and streamline workflows we have never seen technology make such an impact on fund operations as it has through Covid-19. Technology is impacting and even driving every part of the hedge fund, from the front office to the back office.
Funds are asking themselves more than ever how technology and specifically software can be used to make efficiency gains, do more with the same headcount, or actually drive revenue? Fortunately, we have found that there are a few key areas where firms can improve visibility, improve processes, and move ahead of the competition.
We look forward to sharing what we’ve learned.
To Learn More About Automating Fund Administration Tasks – Contact Us, We Are Happy to Help – 1 (347) 759 0105.
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