How technology solutions can help hedge fund CFOs tackle increasingly complex data

Disruptive technology and outsourcing could create new opportunities for hedge funds, as demands from investors continue to rise

Identifying and implementing solutions to investor reporting demands cannot be solely based on technical considerations. Certainly there will be an assessment of the various technological processes. How can they fit into an existing tech framework? Or will they need to be supplanted?

But really it is deep understanding acquired through years of experience across all areas of the hedge fund domain that can truly add value. It is this that allows the best service providers, such as Intertrust Group, to apply these technologies in such a way that it optimises performance.

Technological fixes are often centred on the latest innovations in software and the investment industry has pioneered the successful application of artificial intelligence (AI) such as machine learning. The practical experiences and skills of outsourcers that have developed and applied technological tools in real-world settings, also bring a can-do perspective based on lessons learned and solutions delivered over many years. Technology is the enabler not the setter of limitations, as we work to enhance the performance efficiencies of our partners.

Grappling with data aggregation complexities

Strategy-level reporting is becoming a key area as hedge fund investors’ and managers’ expectations increase. As our recent report, The future hedge fund CFO: Preparing for disruptive tech and emerging asset classes shows, a hedge fund needs to know, in a clearly demarcated way, how each manager is performing for each of the strategies they run.

Strategy-level performance tracking is becoming much more technically involved; so it’s important that hedge fund CFOs source the best data management solutions to support them. Things are becoming even more complex as many more hedge funds adopt the multi-manager model, with the likelihood of an omnibus account used by all managers.

Automated back office and middle office systems can help track the cash that is generated by a manager, or allocated to them. They also show what exactly is happening with each buy and sell trade, where cash or stock is moving and give accurate allocations of borrow and financing costs.

Using automated systems on aggregated data is essential at the strategy level and can prevent issues from turning critical – in other words, avoiding mismatches and potentially costly errors.

Treasury functions also demonstrate the importance of data aggregation, where information is coming in from many directions, such as prime brokers, OTC counterparties and custodians.

There are likely to be external data sources too, such as Bloomberg, where the hedge fund might be pulling in risk-related information, market trends, pricing information and so on.

A firm must process all this data in a meaningful way to inform decision-making – what we call “actionable insights”. These are not necessarily trading calls, but can still help firms improve returns relative to the benchmark – their alpha.

Disruptive technologies in the real world

Our report survey revealed that 65% of respondents plan to invest in expanding their technology framework to meet the rising reporting demands from investors and 57% believe that AI and analytics will play a crucial role.

Robotics and Machine learning will also play a role in operations such as trading execution and reconciliation. In reconciliations, AI is particularly useful in pairing trades or other complex cash breaks and in implementing auto-matching. But it’s not viable for each hedge fund manager to do their own pilot projects. The machine-learning we use requires many iterations to obtain clean data – our models have been back-tested and designed with it.

Another potentially disruptive technology is distributed ledger technology (DLT). Nearly half (47%) of hedge funds said they would invest in this as part of their technology stack, suggesting that the promise of blockchain may finally be moving from pilots to deployment.

DLT has been seen as something of a fad, perhaps because of its association with cryptocurrency, but we should differentiate between the asset class and the technology behind it.

While cryptocurrency is something most funds will want to invest in, it is the underlying technology that most interests hedge fund managers in the context of our report. They want to know how DLT can improve operations and processes.

We expect to see DLT systems being used in the front-line within five years. For instance, we have pilot projects focusing on KYC processing and self-service platforms for private debt transactions. These have emerged from our proof-of-concept work and are being showcased to clients.

Blockchain has the potential to deliver seamless processing in many areas and even make some current processes redundant. The entire chain, from confirmation to reconciliation, could even be revolutionised by bringing counter-parties together in the future.

Perceived and real problems around interoperability and integration with legacy technology in the ecosystem seem to be one key factor holding back adoption. Nevertheless, our report shows that CFOs expect DLT to bring technological benefits and efficiency gains.

ESG: new thinking, new systems

Many respondents to our report survey said environmental, social and governance (ESG) awareness will increase assets coming into the sector, but we need to be careful how we interpret this.

Their answers probably relate to the possibility that some investors will be more ESG-focused, so ESG-compliant funds will clearly be able to attract them.

Either way, there is definitely a demand for ESG reporting: to get the fund classified as ESG compliant, publish metrics on an ongoing basis and align with upcoming regulatory reporting requirements.

Working out ESG KPIs and weightings for the portfolio investments will require some tech input for good reporting outcomes and to find the right investments. Also, compared with the private capital space, it will be harder for hedge funds to focus on ESG, given their larger trading volumes and the number of names they trade.

More standards and guidelines will be introduced on scoring ESG, so managers will have to negotiate a landscape that is evolving. It is easy to see a future where hedge funds need a manager specifically focused on ESG investment and strategy.

Indeed, an ESG strategy could well come into the mix, with a portfolio allocation trading only ESG-compliant investments. Such a development would naturally drive demand for more reporting.

Why Intertrust Group?

• From portfolio management to risk control and administration, we partner with hedge funds to provide efficient and cost-effective outsourcing solutions, delivering actionable insights.
• Our global team builds automated workflows that use artificial intelligence (AI) and automation to identify breaks and apply automatches to facilitate reconciliation and accounting in managers’ books of records.
• Comprehensive attribution reporting, including by sector, geography and strategy, ensures insights and health indicators arm clients with the data correlations and interpretations to construct meaningful outcomes for investors.
• Cutting-edge machine learning models – part of our bespoke hedge fund offering – underpinned by clean historic data amassed over many years.
• We specialise in both turn-key and bespoke solutions for back, middle and front office – from accounts and treasury to complex multi-manager externalities such as cash and position management, liquidity, exposure and risk.

Read the full report: The future hedge fund CFO: Preparing for disruptive tech and emerging asset classes