As the fund-of-hedge funds industry witnesses a decline in assets under management, savvy managers and their service providers are quickly embracing greater automation to ensure they can aggregate tons of data on underlying funds and their managers, and deliver that data to institutional and individual investors.
Just last week Eze Castle Integration, a software and hardware integrator for hedge funds, launched a new subsidiary called Ledgex to sell technology to the market. "Spreadsheets and faxes simply won't cut it any longer. The amount of data is simply too great, leading to a high potential for error," said Mark Coriaty, managing director of Ledgex in Boston.
The goal of automation: to allow the fund-of-hedge funds manager to know just how each underlying fund is performing and prove to investors it can do its job. Many investors, including wealthy individuals, endowment funds and charitable organizations, invest in these funds, for the all-in-one service of researching funds, allocating assets, managing risk and tracking returns.
"It's a two-fold process in which data flows from the fund manager or its administrator, to the fund-of-hedge funds manager, and from the fund-of-hedge funds manager to the underlying investor," said Jeff Hendren, co-president of Pertrac, a fund-of-hedge fund (FoHF) technology provider in New York.
Fund-of-hedge fund platforms, such as those offered by Ledgex, Pertrac, youDevise and Cogency Software, receive data every day, ranging from the estimated net asset valuations of underlying hedge funds, subscriptions and redemptions into the FoHF itself, to performance results.
Coriaty says that Ledgex's workflow tool allows business analysts at the fund-of-hedge funds to know whether or not they have received NAV reports on time, whether the hedge fund has received the subscription or redemption forms and whether the transactions have been made.
As FoHF managers try to differentiate themselves and increase their transparency to investors, many are turning to third-party administrators to validate their NAVs. "A fund-of-hedge fund significantly increases its transparency by using an independent administrator," said Richard Koppel, managing director of youDevise, in London.
Some hedge fund administrators, in turn, have begun to bundle their services into a technology offering for FoHF clients.
Northern Trust's fund administration arm relies on youDevise's Hedge Fund Information Provider (HIP), launched in 2006, to provide FoHF clients with front-, middle- and back-office data and information on underlying fund holdings, current values, performance, liquidity, hedging and a detailed breakdown of assets and transactions. FoHF clients can access the data online on the bank's Passport Web portal, said Ian Headon, Northern Trust's director of hedge fund administration.
While Northern Trust is relying on an enterprise-wide version of HIP that is integrated with NT's own systems, small- to medium-sized hedge funds can use a standalone, web accessible version of the HIP to perform all their front office analysis and middle office accounting functions, as well as liquidity and hedging, on a single system, eliminating the need for error prone spreadsheets.
In addition to providing post-trade information, there is also a place for electronic recordkeeping when it comes to due diligence. That's the process whereby fund-of-hedge funds managers keep track of the rationale for selecting the underlying hedge funds.
Collins Capital, a Coral Gables, Florida- based FoHF, says it has utilized a fully integrated investment management platform from Cogency Software since 2007 to capture and analyze extensive due diligence on a proprietary database of over 800 fund managers.
PerTrac's CMS software also stores information on the identities and track records of investors and fund managers. CMS can then match that data with the risk profile of the FoHF manager and the investor. The CMS service links to PerTrac's Analytical Platform, which provides the investor with over 900 performance and risk metrics such as value at risk, conditional value at risk (cVAR), expected tail loss (ETL) and Omega appropriate for investment in funds with non-normally distributed returns.
While funds-of-funds managers are trying to automate many of their front- and back-office operations, there is still plenty of inefficiency because not all single hedge fund managers or their administrators are automated. "We continue to see plenty of reporting and wire transfer errors from our managers' administrators. Our technology helps us identify inaccuracies early on and follow up with managers accordingly," said Pete Windhorst, chief financial officer for Collins Capital, which also uses Cogency's complete general ledger accounting system to generate financial statements, investor reporting, bank reconciliations and other financial reports.
Zeroing In on a Process
Among the least automated processes for FoHF managers: processing subscriptions and redemptions in hedge funds. While Maples Finance's proprietary workflow management software can track the status of subscription and redemption requests of fund-of-hedge funds managers, it cannot automatically generate or complete the required forms because of the different policies of each underlying fund manager.
"Hedge fund subscription documents are complex legal agreements that require diligent review and authorization by designated signatories. We complete the documents manually and send them over by either fax, email or mail to each administrator of the underlying hedge funds," said Tyler Kim, chief information officer in Montreal for Maples Finance, a fund administrator servicing FoHFs.
For FoHFs investing in managed accounts rather than individual hedge funds, the operational onus is even more challenging than with individual hedge funds. "The investor is entitled to knowing a lot more detail about the positions of securities in each of their managed accounts and all of its subscriptions and redemptions," said Jim Cass, managing director at SEI. The Oaks, Pa., funds administrator offers FoHFs the ability to aggregate data on managed accounts through a separate platform than they would use for hedge funds.