Asset managers are rethinking their treasury management infrastructure and operations to increase efficiency, reduce operational risk, enhance decision-making processes and provide value-added services to their organizations. Technology is one key component to maximizing the potential of a firm's treasury function.
The financial crisis highlighted significant and widespread weaknesses in treasury management among asset managers. Consequently, many hedge fund and private equity fund managers are seeking to overhaul their treasury management function with a focus on the use of technology. With a careful and thoughtful approach, organizations can reap huge benefits.
Of all the challenges posed by the financial crisis, one of the most pronounced and pervasive in the asset management industry remains treasury management. As periods of market turmoil-especially in 2008-battered investment returns and valuations, many asset managers discovered that their approaches to cash management and operations supporting cash flow forecasting, investment management, liquidity and counterparty/bank relationship management were not optimal.
Today, executives are re-examining the cornerstones of good treasury management. As they discovered, during times of stress, problems with treasury management can prove especially costly-perhaps necessitating an unwanted liquidation of portfolio positions, or even the winding down of a fund. Clearly, much is at stake. The financial crisis not only highlighted a wide range of challenges in treasury management, it also dramatically shifted thinking on the issue among institutional investors, regulators and bank counterparties. Having an appropriate organizational structure and process in place supporting treasury management is now viewed as essential by these stakeholders.
One key component to an effective treasury management function is having the right technology in place. Supported by the appropriate systems, a successful overhaul of treasury management can result in tangible operational efficiencies, cost savings and operational risk reduction for most firms. But executives must give much forethought to their decisions related to treasury technology to ensure success.
Treasury management in the crisis: Historically, achieving sophisticated treasury management has not been viewed by most asset managers as something of vital importance. Bank relationships were established, utilized and judged largely on the basis of cost. From 2003 to 2007, when the sellside extended credit plentifully and cheaply and large amounts of investor capital flowed into hedge funds and private equity funds, relaxed attitudes were perhaps understandable.
However, the alternative investment industry's traditional approach to treasury management was challenged during the extended periods of elevated market, credit and liquidity risk that occurred during the credit crunch. During this time, many hedge fund and private equity managers had to scramble to understand all of the dimensions of their exposure to counterparties. Irrespective of the particulars of their exposure, many firms turned out to have an inaccurate, incomplete and out-of-date assessment of their treasury risk exposures. Many firms found themselves unable to accurately and quickly answer basic questions about their liquidity, such as the size of their cash position, how accessible it was and even its precise location.
For those asset managers that have sought to understand how to change their treasury management strategy so that they are more likely to better weather any financial and economic conditions, there are two key themes to consider: organizational structure and technology.
Structure and responsibility: Before delving into any discussion of treasury technology, it is vital to note that without an appropriate organizational structure in place, any attempt to improve treasury-related technological infrastructure and processes will be less than fully effective.
It has become clear that the root of many firms' treasury management woes is the absence of a centralized and/or dedicated treasury function. For many of these firms, treasury was typically an afterthought. Often, portfolio managers and/or controllers were juggling their regular responsibilities alongside performing treasury duties. In calm market environments, such an approach can appear adequate and cost effective. But in times of market stress, when portfolio managers should be focusing on investment management, reality bites: treasury management is, and should always be, a full-time job.
Certainly, one size does not fit all when it comes to creating a treasury function that is right for a firm. For smaller firms with simpler operations, a lone treasurer may suffice. For larger and more complex businesses, a treasury team is likely the more appropriate answer.
In any case, without an authoritative and empowered treasurer who has clearly defined responsibilities, the effectiveness of treasury management can be compromised. Without someone at the top of the organization thinking holistically, treasury management has a tendency to become fragmented and incomplete. This tendency is especially evident in the inefficient patchwork of back-office systems and functionality that all too many firms have been using to perform treasury functions.
Pivoting on treasury technology: In recent months, it has become evident that those firms looking to potentially overhaul their treasury technology fall into one of two broad categories: asset managers that do not have a treasury system but instead use a collection of disparate spreadsheets and databases to attempt to perform basic treasury functions; and those that have some form of treasury system or module implemented that is inadequate in terms of its scope and/or functionality.
Irrespective of which camp a firm falls in, it is likely that many executives have had the unfortunate experience of finding themselves unable to see real-time information, having to reconcile data inconsistencies between systems and having to re-key data because different systems are unable to communicate with each other directly.
While some firms may be able to fix such problems with a more targeted solution, many others are coming to the conclusion that a complete revamp of existing systems with an eye toward an integrated treasury solution may be more sensible. There are clear operational risk mitigation and efficiency benefits to starting with a clean slate. However, executives must be careful to balance the adequacy of their current technology and their future business plans with the challenges of making large-scale changes and the related costs involved.