HedgeServ
AST talks to Justin Nadler of HedgeServ about the investor’s best line of defence, and why the factory model just won’t cut it
HedgeServ supports all alternative investment structures—how do you differentiate your offerings for each?
We’re customising applications to be specific to the fund of funds, or hedge funds, or private equity funds, and the requirements of particular managers, as opposed to legacy models that are simply trying to take one system and force them on each of the different types of funds.
In addition to doing core administration services, our tools are really built to service the investment manager in its day-to-day operations of the business, and not simply striking a NAV and providing accounting reports. Each of these product types has their own nuances that require you to build unique applications for each.
As a growing number of investment managers are trading multiple asset classes, you need to be able to provide an integrated and consolidated reporting from a firm-wide level. On top of legacy systems, firms have tried to solve the problem of supporting different classes by having different systems, so they don’t have the necessary consolidated reporting or the ability to handle products natively. We’ve solved that by integrating all of our applications and operating on a single database platform.
It does not matter if you’re a hedge fund or a fund of hedge funds, the marketplace continues to get more complex. With a lot of traditional fund administrators, the technology core is legacy custody or accounting systems that might have been very good 10 years ago at debits and credits, but product types that people are investing in now didn’t exist at the time. Unfortunately, the solution for many has been a manual work-around, or a spreadsheet, to either fudge the security type or to tie all of these disparate systems together. As soon as you have people touching the keyboard or doing things on spreadsheets, that’s when controls break down, and that’s when you see some of the newspaper-worthy items hitting the press.
We want to make sure that everything we do is with process integrity. This means reflecting internally on our systems and really looking at what’s going on; whether we’re processing a trade, valuing a security or creating reports for an investor—we want it to be an accurate process. A good example is that even within the long/short equity sector, the majority of fund managers now have the ability to invest up and down the capital structure, so even things that used to be very simple workflows are becoming very complex, so the less manual work that is done, the better. Due diligence has become a lot more intensive and on-site, so many manual processes that have been hidden behind a web-based reporting layer are now starting to be discovered by investors. Manual work equals a big red flag for investors.
Bill Kelly is your new global head of sales and he is tasked with building relationships with hedge fund managers of all strategies—what are you hoping his expertise will bring to the firm?
We are certainly excited to have Bill Kelly join us. We currently have a great problem to have right now, in that we’re getting a tremendous amount of business enquiries from all over the globe, especially growing demand in Europe and Asia. Traditionally, we’ve tended to have a smaller sales team that has focused on particular regions, and we’re looking to address business demand by growing out the sales team globally. Bill Kelly has more than 30 years of experience that he has spent building and leading teams.
Do you think consolidation will improve or reduce competition?
One thing that we have been seeing in the press when people talk about the M&A level within fund administration is an emphasis more on quantity, ie, how big an administrator can get in terms of assets under administration, without really focusing on creating a new and better model through the merger, or raising the quality of service within fund administration.
We think that there’s a real dichotomy going on, because we’re starting to see institutional investors push managers to de-couple the administrator from the prime broker or the custodian. They’re starting to put real importance on independence, and the feedback that we get from fund managers and investors is that people are starting to become negative on the traditional bank model of fund administration.
Traditional fund administration has been focused for a long time on the lowest cost of production, and not on improving the quality of services. You’ve seen the by-product of what I would call that ‘factory model’; it’s junior staff that are located in remote locations such as India, legacy technology, and overall very slow responsiveness to the current needs of managers around investor and regulatory requests.
It’s a huge driver of why Goldman Sachs exited the marketplace recently. It was simply becoming too prohibitive for Goldman Sachs due to its desire to underinvest in the business to meet things such as Form PF support services or investor transparency reporting. We feel that competition will inherently be reduced, because there simply will be a smaller amount of administrators, and I think a large number of the boutique shops will really struggle, because of the ‘check-the-box’ influence in the marketplace.
Barriers of entry to starting a new fund are becoming higher and higher. The small administrators are going to see their potential business—the small startup funds—start to become more challenging to launch. But we’re really focused on the idea that independent fund administration is becoming a very valuable commodity, and having a very high quality service in terms of a strong data model and very experienced people is going to become more important as fund managers and institutional investors are looking for the administrator to be a real partner, not just a vendor.
Will it be essential for fund administrators to become 24-hour providers?
We do believe that fund managers will need 24/7 access to their data. Whether that’s accounting, portfolio, risk, or investor data, administration is becoming more and more about having a very high quality and flexible data set, because no-one has any idea of what’s coming up next in terms of regulatory challenges. But we know that managers are going to need evermore flexible and on-demand reporting. What we’ve done is create a technology platform that is very open and transparent in terms of the accounting, portfolio, and investor data, and we provide fund managers with the same reporting tools that our own employees have to create customised reports on the fly. We’ve moved away from traditional batch processing, and the strict accounting software hierarchies that limited a manager’s ability to get customised reporting.
In the past, fund administration was typically a monthly or end-of-day type service, and we’ve really seen best-practice move from T+1 to T+0 or real-time in terms of the importance of the controls underpinning the technology and the people needed to provide very critical information when the investor/manager needs it, and in the format that they need it.
We’re coming back to the theme of not just striking an independent NAV—hedge funds now expect administrators to help support the business of investment management and they are really part of the day-to-day operations.
What’s the outlook for the hedge fund industry and the administration business in particular?
Hedge funds are truly going to look to partner with their administrator. This means supporting their regulatory and compliance efforts, providing them with technology, reducing costs or switching costs to a variable cost model, as well as reducing their time to market for new strategies and products.
One phrase that everyone is seeing everywhere when it comes to the hedge fund industry is institutionalisation. I’ve seen studies saying that the alternative space will grow to 5+ trillion in the next few years, as pensions, endowments and other institutional investors increase their allocations significantly to the space.
Also, I saw the recent Corgentum survey saying the administrator is now viewed as the most important service provider to hedge funds. In terms of administration and how it fits into an institutionalised alternatives industry, with increased opportunity needs to come increased responsibility. Administration really needs to migrate away from that factory model and invest in people and technology to the level where they can become a real, legitimate extension of the fund manager and frankly, a great first line of defence for the investor.
