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Hedge funds: is your technology set-up enabling growth?

7 December 2022

Roshi Singh Dandona

Global Head of Hedge Funds

Roshi Singh Dandona

Global Head of Hedge Funds

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In an era of volatile markets, growing investor demand and increasing regulatory pressure, technology is key not only in running a business but also in growing it.

The past two decades have seen the world of hedge fund back offices undergoing a sea of change. Three key drivers for this evolution have been:

  • Increasing popularity of derivative investment products and complex strategies, requiring a robust middle and back office
  • Sophisticated investors expecting better and more timely reporting
  • Increasing regulatory demands

Shorter settlement cycles, quicker month-end closes, reporting on positions and cash before the next trading day, funds trading in three time zones… All of this has made the speed of outcomes as crucial as the performance of the fund.

Technology has gained the centre stage for being able to handle scale and speed, as well as dealing with the complexity facing operations heads and COOs.

We have witnessed rapid growth in the number of hedge fund back-office technologies in the market, all claiming to provide customised reporting and handle complex processes.

The back office has experienced a quantum shift – from being dependent on fund admin’s tech or in-house proprietary systems, to a marketplace that gives them multiple options to choose from.

Technology: an age of evolution

The tech evolution requires managers to be prepared for the following:

  • The need for in-house technology staff and third-party services to maintain licensed applications
  • Having to deal with a laborious implementation phase to get the technology up and running
  • Being prepared for the necessary evil of cybersecurity spend
  • Not missing the effort for upgrades and business testing

All the above could have been ignored if the technology had taken care of everything the back office wanted. But the reality is that, even after buying technology or pieces of multiple technologies, there are bound to be gaps which the fund will have to find ways around or fill up by manual effort.

And as much as licensing multiple technologies to handle different processes may seem to be a smart idea, it does come with the inherent challenge of making different technologies talk to each other.

So while the overall equation seems to have been solved, in the process it has added a new dimension for the back office to take care of. The brighter side of the equation is that over the past two decades, AUM have doubled to USD 4tn. Complexity has grown, the investor base has expanded and we’re in more markets – yet we’re able to handle the volumes, thanks to technology.

What is the right technology set-up?

Should one build, rely on fund admin or buy third-party applications? Many would argue that there is no one correct answer to this.

The fact is that the core of hedge fund business is to raise capital, invest money and generate returns for its investors. Therefore, any area that steers the fund’s focus away from the realm of its core function should be reviewed closely.

The fund should always consider how much commitment it will make in non-core areas. To me, the right perspective of the technology set-up is that it should enable the growth of the fund. In reality, of course, this varies from fund to fund.

Let’s look at two broad categories of funds:

  1. Low volume, long/short equities and cash investment in a handful of markets. Such DNA of the fund may be suited to leveraging the fund administration’s tech (assuming that the fund admin has good tech).
  2. Mid to high volume fund with medium, complex asset classes in multiple markets, managing its own back/middle office. Such funds are ripe candidates for having a set-up that allows the back/middle office to own the data or have control over reporting.

One way funds can have control is by building in-house tech or licensing third-party tech, another way is by engaging service providers who can provide bespoke services as an extension of a fund’s back office.

A fund should qualify these service providers based on the daily/monthly outcome/reporting they need. Service providers that lead the outcome with good technology and have service delivery models that ensure comprehensive deliverables are worth consideration.

Such engagement potentially allows the back office to retain focus on alpha generation activities. In such a case, the back/middle office is no longer responsible for maintaining the technology and sacrificing additional people to support the set-up.

How Intertrust Group can help

Intertrust Group is a seasoned player in providing middle-office and back-office services to funds, with more than USD 850bn of combined assets. It has built its practice not only by creating a sophisticated technology suite but also by being a practitioner on a number of client-licensed third-party/client proprietary technology applications.

This bespoke service model, with an option for hybrid technology, makes a compelling proposition for a fund’s back office to be focused on alpha generation activities while benefiting from good practices.

Why Intertrust Group?

  • You get to engage with a solutions-driven partner.
  • We offer a flexible engagement model operating as an extension of your back/middle office.
  • Benefit from smart business practices developed over years.
  • You can select the optimum set-up for your business (choose from your tech, Intertrust Group’s tech or a hybrid)
  • Intertrust Group has 70 years’ experience providing world-class trust and corporate services to clients around the world. Intertrust Group has been acquired by CSC, the world’s leading provider of business, legal, tax and digital brand services, worldwide.
  • Intertrust Group offers a full suite of fund admin services (own tech only), shadow services and strategic outsourcing, both leveraging our technology-agnostic backbone.