Strategy-Based Portfolio Manager Reporting 101
Expense allocation for hedge fund and private equity fund managers is a task largely avoided, even at some of the larger hedge funds. Small and medium-sized investment managers of all strategies may well benefit by implementing an expense allocation process, and/or system, to ensure they are not only maximizing ROI regarding expense management but also creating profit and loss transparency within their individual funds.
The challenge for many hedge funds and alternative investment shops is to allocate expenses and costs to each portfolio manager in order to measure real performance. Shared expenses and costs including margin fees, subscriptions, research expenses, and others are often shared equally among managers, however, rarely are those costs incurred equally.
Direct costs are simple to allocate, however administrative and other shared costs have proven to be difficult to allocate accurately because accounting software programs such as Geneva do not easily adjust.
Strategy-Based Performance Reporting and P & L from Geneva Accounting
Ryan Eyes was created to solve some of the most difficult problems in the financial services industry for our clients which include asset managers, private equity firms, hedge funds and sell-side firms. For over 20 years, the Ryan Eyes team has worked side-by-side with our clients to provide them greater visibility into provide rich internal reporting for Hedge Funds. One of the most difficult problems that a multi-strategy hedge fund faces is allocating profit and loss to internal fund managers.
We leverage our team’s deep industry expertise and our proprietary software to develop transparent, optimized, proactive strategy report that allows you to:
- Allocate Capital to an individual manager in order to track their performance
- Account for shared expenses (financing or otherwise) to properly attribute the expense to Profit and Loss
- Allocate margin balances properly to the individual manager to determine how much capital they are using
- Calculate performance over time to determine apples to apples comparisons to manager benchmark requirements
With our sophisticated data management toolset that integrates with Geneva and the downstream reporting toolset Hedge Funds will have the ability to create a clear transparent view of portfolio manager performance within the context of one or many funds. Our clients tell us that our integration with Geneva provides unique benefits when it comes to strategy-based reporting. Just as activity-based costing attributes true costs to each product to create a P&L for each product, Ryan Eye’s software and Geneva provide that same insight to evaluate the P&L of each portfolio and more importantly, the ultimate performance of the portfolio manager.
Strategy-based reporting in the asset management industry is comparable to activity-based costing in a manufacturing environment. With Ryan Eye’s software and Geneva, costs are allocated by portfolio and a true P&L is generated.
Key Considerations for Strategy-Based Reporting
Our expertise in Geneva in combination with our experience in the financial services industry provides unique insight into the critical aspects of operations at the leading asset management organizations we serve. Several of the benefits of reconvert include:
- Properly accounting for Margin Balance requirements for Swaps to allocate across portfolio managers based on actual trades of particular security types
- Properly accounting for Financing Charges and Borrow Costs for the amount of financing that an individual portfolio manager uses based on their attributed borrow activity
- Managing Individual Contributions and Withdrawals and how their effect on a portfolio manager’s balance
- Properly account for Sidepockets and their effect on a fund’s capital vs. capital allocated to Sidepockets
Compensate Portfolio Managers Accurately Based on Objective Performance Criteria
- Benefit 1 – Accurately determine Fund Level Detail in terms of who is meeting or not meeting benchmark performance
- Benefit 2 – Accurately attribute expenses to managers who incur those expenses; saving firms millions of dollars in overcompensation annually
- Benefit 3 – Accurately attribute the cost of capital to each individual portfolio manager
- Benefit 4 – Accurately calculate manager performance based upon hypothetical capital attributed to each portfolio manager
- Benefit 5 – Determine counterparty exposure per manager in order to tailor individual investing decisions
Expense allocation can help with capital allocation by providing Hedge Funds with an overview of how different expenses incurred are mapped to revenue-generating activities. Thus, the fund can arrive at a view on the cost-effectiveness of its various fund strategies, and instantly determine where the marginal returns for every unit of expenditure are the highest. This allows the fund manager to maximize their capital allocations appropriately with the capital being deployed to higher-performing tasks and less to lower-performing tasks.
In addition, as we emphasized in this blog post, Hedge Funds create additional visibility to the performance of each portfolio manager by allocating share expenses by use or consumption. Geneva accounting software is a critical asset in our industry and our clients leverage the technology for countless tasks. Ryan Eyes software enriches the Geneva data to deliver new solutions and use cases like Strategy-Based reporting so that our clients can evaluate their funds and fund managers on real performance. The benefit to our clients is accurate reporting by portfolio and portfolio manager. The real value is that firms can compensate managers accurately, deploy capital appropriately, and calculate expenses precisely by portfolio.
To Learn More About How to Create Strategy-Based Reports for your Firm – Contact Us, We Are Happy to Help – 1 (347) 759 0105.
You Can Also Fill Out Our Contact Us Form Here to Talk with a Ryan Eyes Consultant – https://www.ryaneyes.com/contact-us/