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Hedge Fund Transformation, Part 1: Evaluating Outsourced Solutions & Leveraging Technology

By Jennifer Odence | Thursday, May 29th, 2014

Earlier this month alongside KPMG, we hosted a seminar in New York on “The Transformation of IT and Hedge Fund Operations.” We asked experts to examine the changes impacting hedge funds today and the future of this industry transformation. Our distinguished panel included Vinod Paul, Managing Director, and Steve Schoener, Vice President, at Eze Castle Integration, John Budzyna, Managing Director, and Dave Messier, Director, at KPMG, Timothy Ng, Managing Principal at Clearbrook Global Services, Jon Anderson, Global Head of OTC Derivatives at SS&C GlobeOp and Sheldon Rubin, COO/CFO/CCO at S Squared Technology LLC.
Below is a brief recap of the topics discussed during the lively event. To listen to the full audio podcast of the event, click here.

What do you see as the greatest transformation the hedge fund industry has undergone or is currently in the midst of?

  • There is more acceptance of outsourcing. Many firms are leveraging outsourced service providers for front office support, for example, and leaving their in-house departments to focus on the core business. Outsourcing

  • Many firms starting today don’t even consider building out a middle and back office – they immediately look to outsourcing. The quality and opportunities provided by outsourced service providers, including administrators, are much better than they have ever been before.

  • Third-party software and service providers continue to improve and many firms are attempting to fully integrate the back office as a result. With systems designed effectively, firms can yield benefits including reduced costs and increased efficiencies. 

  • Allocators are being more frequently asked to take on the role of consultants and analyze underlying risks within fund portfolios – something many investors today don’t understand fully. 

How do you see fund managers utilizing technology to address the call for greater portfolio transparency by institutional investors and consultants?

  • Investment firms are using technology to get a better view of the inner workings of the portfolio. Funds who utilize portfolio or risk software are often asked to provide risk metrics to investors. A fund should focus on getting the transparency, understanding it and translating it for the investor so that they are comfortable with any current or future allocations. 

What are some opportunities for fund managers – particularly those with modest budgets – to leverage technology for strategic and/or operational benefit?

  • Firms should conduct a cost-benefit analysis to evaluate the importance of any implementation. If you can justify the effort needed to ensure a successful project based on the benefits outlined, it is a project worth moving forward. 

How can emerging managers, in particular, cope with limited resources and personnel and still compete on an institutional level as well as meet the increasing amount of regulatory oversight and pressure?

  • One approach for emerging managers looking to compete is to avoid hiring internally for a variety of functions. Firms can outsource technology, back office, administration, etc. as long as the service providers are reputable and institutional-grade. If allocators can see that firms are set with due diligence, compliance and other services and are utilizing the high standards of a service provider, they will be more likely to invest with emerging managers. 

What are some of the best ways to apply transformation or operational improvement efforts to such a rapidly-changing area, like compliance, for example?

  • The idea of operational improvement is a continuum: from incremental, tactical opportunities to transformational opportunities. Compliance tends to lean more towards the incremental side. There are many well-integrated, efficient solutions in the marketplace to satisfy needs relative to personal trading, securities, brokerage and execution, legal compliance, etc. Firms need to look closely at individual compliance needs and find a solution that will satisfy both the firm itself and investors. 

Is there some particular pattern to when a firm undergoes the transformation process and goes from analyzing the problem to fixing the problem?

  • When struggling with a problem, you often reach a critical point where the complexity or volume of the problem has outstripped your capacity as a business. This is a critical situation. The problem might start to cause mistakes or money if not resolved. This is often a significant driver for change. 

Read Part 2 of our Hedge Fund Transformation Recap here! In the meantime, you might find these resources valuable:

Guide to Technology Outsourcing
Photo Credit: Istock
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