Why are Hedge Funds Slow to Adopt Automation?
An increasing number of investment firms are embracing the benefits of adding automation technology to their front, middle and back-office solutions, but why is the hedge fund space yet to catch up?
Automation: What hedge funds need to know
Cutting-edge automation software solutions are now an area of priority for all investment firms, with the potential to provide visibility and control by connecting front, middle and back-office solutions. The value to hedge funds is eliminating manual processes and generating valuable administration efficiency and cost savings. Automation has become a key focus for many firms’ IT requirements, but adoption among hedge funds has yet to catch up.
To find out more about this, and what the hedge fund space can do to catch up, HFMWeek spoke with RyanEyes Founder Ted Ryan.
HFMWeek (HFM): Ted, can you tell us a little bit about yourself and RyanEyes?
TE: Sure. RyanEyes and the workflow automation software we provide hedge funds and private equity funds is an extension of the work our organization has done for the past 20 years. We started out as Geneva consultants helping hedge funds implement their industry-standard Geneva accounting solution, however, we saw the manual, painstaking tasks fund administrators and others had to go through to handle tasks like calculating NAV, maintaining compliance, managing risk, auditing internal processes, and more.
Our goal was to create transparency around these processes, connect the front, middle and back-office solutions and automate tasks wherever possible. That solution became RyanEyes software.
HFMWeek (HFM): How does automation software improve productivity for hedge funds?
TE: So, we’re a little different than most of the automation software solutions – RyanEyes SaaS solution integrates with the standard solutions that hedge funds use today like Bloomberg, SS&C’s Geneva Eze Castle. Further, it has standard links to Fund Administrators like SS&C, SEI, Citco, MSFS, and others.
RyanEyes aggregates these data points from these sources in our data warehouse called RyanEyes Collimate. RyanEyes leverages the data in Collimate to create workflows, dashboards, checklists, and e-mail notifications to measure and track accounting jobs, NAV calculations, various measures of risk, and the ever-expanding compliance requirements.
The benefit is administrators can save dozens of hours of spreadsheet maintenance, manual calculations, handwritten checklists, and the gathering of disparate information they need for tracking and reporting.
HFMWeek (HFM): In what ways can legacy systems risk holding hedge funds back?
Ted Ryan (TE): Legacy systems can hold back hedge funds because they have often been built to meet different rules and regulations. These may be defunct at this point, however because of the way the software was designed around these it makes it harder to apply new compliance standards to the firms using this technology.
Also, legacy systems will be ‘legacy’ for a reason. They are not built with the latest technology which makes them increasingly harder to support. This is exacerbated by the fact the internal IT developers at firms will move on overtime, meaning they are no longer around to help support these systems.
HFMWeek (HFM): Automation has been highlighted as a solution for many hedge funds – why is this critical to success? Further, how can automation be successfully incorporated in a hedge fund, given the multitude of systems many firms will have running behind the scenes?
TE: Automation is one of those tricky things. The predecessor to automation is actually having a system that can log and track all the items that actually happen within a firm. A very detailed audit trail is required before you can even begin to tackle automation. Most systems are pretty good at logging what they do, but they are not good at logging what they do with other systems. They are effectively blind to other systems.
Therefore, it is critical for automation that you have a system in place that can track the automation happening between various systems themselves and that is aware of which systems are actually engaging with that automation. There are quite a few step-by-step processes that are critical to the success of any automation effort, but systems have to be able to track each step.
Automation needs to meet people where they are, as opposed to assuming people will come to them. A lot of the automation tools on the market assume people will adopt the mindset of the automation tool, rather than embedding it with the workflow. For example, consider the design choices for a simple scenario; A fund administrator delivers a preliminary NAV to a hedge fund accounting department. Rather than forcing the fund administrator to manually mark that item as “done”, the hedge fund can set up automation to “watch” for the characteristics of that email. When sending approval back, the hedge fund accounting group can simply send the email as a sign-off without having to involve the tool. The tool “watches” the workflow in the background. “Status” is noted but it does not “interfere” with the workflow.
HFMWeek (HFM): What design considerations does this raise?
TE: Several critical factors are involved. Automation has an observation element to it. It has to watch before it automates. So, you have to separate the watching from the doing. And automation tends to treat itself as isolated from other pieces of work, meaning there is a transition between what is automated and what isn’t. To track that you need a good workflow processing engine that integrates with the actual automation of the firm itself.
HFMWeek (HFM): How can automation help satisfy regulators’ demands?
TE: Having something automated allows you to track items that are critical to regulatory compliance. For example, let’s consider SOC II compliance. A rigorous audit trail will allow you to ensure there is sufficient backup and detail to the regulator’s demands for seeing how items were signed off on.
Automation can also cue manual review processes, alerting the appropriate folks that an item needs to be manually signed off. The technology will also keep track of when these sign-offs are completed. Using automation systems like this can not only bring consistency to a firm’s compliance processes, and help evidence this, but alleviate some of the time pressures compliance personnel will be under.
HFMWeek (HFM): Automation is already changing how many sectors in financial services operate – why are hedge funds lagging in this field?
TE: There are issues in the design element which I’ve mentioned that are definitely part of this, but it goes further to the nature of hedge funds themselves. Hedge funds tend to be the leading edge in terms of investment activity. Automation, like many systems, can take a long time to integrate.
Meanwhile, a hedge fund could be in and out of a trade within a month, which means they tend to develop bespoke processes initially that are not automated as they have specific and time-sensitive needs to meet.
Because Hedge funds can quickly create instruments with novel accounting, trading characteristics, the systems to manage the reporting needs for these instruments cannot be coded, tested, and validated within the time period that the trade will be profitable. The hedge fund weighs the risk of having extra resources for accounting than missing out on an opportunity that may be gone within a short period of time. The same “expediency” bias” can also weigh heavily in the decision to build bespoke systems rather than looking for “off-the-shelf” products.
Hence, in the short term, hedge funds see “lagging” as a choice of being able to take advantage of an opportunity. In the long term, however, this “bias” towards expediency fails them as the accumulated weight of the choices of expediency over efficiency can seriously impede a firm to move forward. One bespoke process will not hurt you; several bespoke processes could kill the firm in accounting mistakes, trading mistakes, or other means.
HFMWeek (HFM): Automating a hedge fund’s back office may stand out as a bold undertaking for many firms, especially those concerned about maintaining ‘business as usual’ continuity during the entire installation process. What advice, or words of reassurance, would you have for these managers?
TE: There are two bits of advice I would give. First, automation seems daunting but if you start with it as a review of the process, and do a log review, which is in many respects a necessary precedent to the automation of a hedge fund. Doing an operational efficiency review will give you about 30% of the effort you need for automating a hedge fund.
The second thing is, as much as you’d like to be able to do it, you cannot outsource quality control. There are firms that can take on aspects of this but ultimately the quality of the automation has to come back to internal resources. If you think automation will take away your responsibilities for quality assurance, that’s a sure-fire way to set yourself up to be taken advantage of by unscrupulous vendors.
HFMWeek (HFM): Any final bits of advice around automation and increasing productivity?
TE: There’s still a lot of misconceptions out there with people often just looking for a ‘push button’ solution. This is not something that happens by accident, and automation should be regarded as a continuous process improvement rather than a one-time event. It is all about incremental improvements over the years. The biggest challenge is when firms start out, they do not have automation as a priority. This means they embed themselves in processes that are difficult to automate when scalability and volume really become an issue.
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