The team at Ryan Eyes has been working with Hedge Funds and Private Equity Funds for over 15 years and the primary goal for our organization is the increase the productivity and accuracy of the employees in our client firms. In this blog post, we want to clarify the roles and responsibilities of what is commonly known as the front, middle and back-office employees at these funds. The value of going through an exercise like this is to not only clarify the responsibilities and goals of these extremely critical roles in the firm but also provide insight into how to streamline the operations of the firm and ultimately improve productivity and profits. We’ll even provide a few screenshots of Ryan Eyes software so you can envision how we add value to our clients.
Let’s start with a fairly broad definition and work our way into the various roles. There are many groups at a large Hedge Fund, however, they are still commonly divided into three main categories: The “front office,” the “middle office,” and the “back office.” If you earn revenue, research how to make it, trade it, or directly manage it, you’re likely in the front office. Typically, the middle office applies to any role that supports those people in the front office. Specifically, in the Hedge Fund industry, middle office refers mostly to accounting roles. The back office roles typically support the trading and accounting groups with pricing, settlements, cash and collateral management, and other similar tasks.
The Roles and Responsibilities of Front Office Employees
As we suggested, the front office of a Hedge Fund or Private Equity Fund can be thought of as the group of employees that directly drives revenue. That is, the group serves clients directly, offering them financial products that they can buy or helping them trade in these products. This includes researching investments, trading, or directly managing assets.
Depending on the size of the Fund, the portfolio manager might be the person at the top or simply one of several portfolio managers. Their job is to create the overall strategy for their assets under management or more simply, manage the money in their fund. Portfolio managers create different complex trading strategies, using the rise and fall of share values to make the maximum profit.
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To broaden the scope of front-office professionals; they can be and often are experts in wealth management, sales, trading, private equity, investment, and research. Front office careers outside of a Hedge Fund or Private Equity Fund include financial trader, commodity broker, and corporate investment banker. To be specific, they should be adept at making investments that earn the highest returns, buying and selling financial products such as stocks, bonds, and commodities for their clients, and in many cases, raising capital for the fund.
Another role in the front office is traders. These are the professionals who actually buy and sell assets according to the portfolio manager’s strategy. This is a complex responsibility because trading involves putting in the right orders to make the most money – market orders, time orders, limit orders, stop-loss orders, and so on. Traders are judged on the speed, efficiency, and certainly the profitability of their trades.
A critical role in the front office of a fund is the analyst. A hedge fund analyst is tasked with providing guidance to a portfolio manager on how to best structure the hedge fund’s investment portfolio. Analysts are tasked with finding investment opportunities based on research and due diligence, recommend them to portfolio managers, and then monitor risk and performance.
Finally, also in the front office is sales. The role of a fund salesperson as you can imagine is to go out and find potential investors. The typical hedge fund investor is wealthy and often has some relationship with the firm and its employees. That said, traditional and online advertising has become a more significant part of a fund’s sales strategy.
The Roles and Responsibilities of Middle Office Employees
The middle office staff is responsible for ensuring that the deal negotiated by the front office is accurately booked, processed, and paid for. This can include managing a wide range of International Swap Dealers Association (ISDA) agreements, tracking deal profits and losses, and ensuring that all required internal and external compliance documents have been completed. Many funds have specialized legal support teams as part of the middle office as well.
Accounting is a critical responsibility of the middle office. One of the main challenges of accountants at a fund is work with the specialized accounting software Advent Geneva to update, review, and create standard reports on a periodic basis including:
- Preparing daily flash P&L
- Reviewing all MTM changes and pricing variances
- Understanding hedging issues on P&L
- Reconciling daily P&L with fund administration
- Understanding the P&L effects of all open items with the brokers or clients
- Preparing of P&L attribution for internal and external clients
- Assist in checking testing results for all in-house system enhancements
In addition, typically, the middle office supports the front office in the areas of technology, compliance, law, and risk management. It checks whether deals negotiated by the front office conform to the agreements. With the increased focus on compliance and risk management following the 2008 financial crisis and now again with the “GameStop/Reddit Short Squeeze, the middle office has risen to essentially become the voice of reason when it comes to risk.
In a nutshell, the middle office supports the front office, looking after risk management, corporate treasury, finance control, and strategic management. The middle office also includes the information technology department, a growing and integral part of the middle office. Responsibilities include managing contracted systems to designing software to managing the firm’s proprietary data.
As the middle office has evolved, some firms continue to look at the middle office as just an outgrowth or extension of the back office. Others feel it links the front office and the back office. Many firms include only risk, credit, and strategy management under the back office while others also bring operations, corporate treasury, and risk and strategy management into it – so it’s not always perfectly defined across funds.
One of the most important points to take away from an explanation of the middle office is as transactions and technology have grown more complex in funds, other functions have developed and while they have traditionally been part of the back office, the middle office has taken them on and has subsequently grown in scope. Most of these functions are technology-related and often include the data sources and the management of the data. We’ll expand on this a bit later.
The Roles and Responsibilities of Back Office Employees
The back office is the backbone of the overall operations of the firm. Back office employees are involved in settlements, clearances, records maintenance, accounting, human resources, technology, and regulatory or organizational compliance. The back office is often referred to as the engine room of a fund and helps organizations function smoothly. Additional functions of the back office may include that payments get processed in settlements, salaries are paid, technology systems are functioning properly, and even ensuring that employees are following internal compliance and not trading in forbidden securities.
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Traditionally, back-office operations have included the areas within fund administration. We’ll get into the term “fund administration” because it is a term that encompasses a variety of responsibilities and one that has evolved over the years. Many fund administration responsibilities are thought of as being back-office tasks including fund accounting, shareholder servicing besides billing, invoicing, and post-trade compliance.
Fund administration involves the valuation and pricing of the various assets that the fund trades in and budgeting for redemption. Financial instruments are getting more and more sophisticated because of the emergence of new types of fund structures. A sophisticated portfolio of investments requires a higher degree of fund administration, thereby making it a highly resource-consuming activity.
The central service is monthly or quarterly accounting of investor contributions and withdrawals and computing the profits and losses for the accounting period. The administrator may also provide other back-end services such as transfer agent services. The transfer agent records transactions, cancels and issues certificates, processes investor mailings, and handles a host of other investor problems, including reissuing lost or stolen certificates.
We gave you quite a bit of information about the roles of Hedge Fund and Private Equity Fund employees as they pertain to front, middle and back-office responsibilities. We also provided a variety of screenshots of Ryan Eyes software along the way as an introduction to a solution to the problem of operational and workflow control. As you likely gathered in the blog post, there are dozens of responsibilities in a fund and each is critical as they are tied to performance, compliance, risk, accounting, and investment research.
Ryan Eyes software integrates with the tools and technologies in a fund’s operations to provide transparency, graphical insights, proactive checklists, e-mail tracking, notification, and more. Ryan Eyes leverages the data in Advent Geneva, Bloomberg, proprietary data warehouses, and more to automate manual, time-consuming tasks. The benefit to employees in the front, middle, and back-office is higher productivity with intelligent insight. The real value to the fund is higher returns, productivity, profit, effective risk management, and compliance.
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