With the increase in regulations and costs within the asset management industry, the alignment between Front and Middle Office functions has been a key focus point for managers. This increased regulatory burden has also led to a formalisation of responsibilities within the middle office. As the complexity of products grows with the proliferation of data, it has become essential for managers to build scalable infrastructures whilst remaining cost efficient. It is now fund investors who are pushing for managers to adopt outsourced solutions which offer access to quick to adapt open architectures. Choosing the right solution can be a lengthy and challenging process. We take a closer look below at some of the key points to take into account when considering both operational hires and technological solutions.
Choosing your Middle Officer: What to look out for
As a portfolio manager, choosing a team of experts who will face the market for you and manage your service provider network allows you to focus on alpha generation. Your middle office should be able to understand your requirements and priorities to reach efficient portfolio management. Additionally, your middle office has the evolving task of managing data in an environment where onerous amounts of information is being generated and investors are seeking greater frequency and detail of reporting.
When I joined HedgeGuard at the beginning of 2015, our outsourced Middle Office service was composed of 4 people (including myself). Now, a couple of years later, the growth of our activity has seen the team expand to 10 people with members in Paris, London and Beirut.
We work with a variety of asset managers and hedge funds, covering a wide range of strategies. One of the challenges met by the portfolio managers we speak to is the hiring of operational staff. They are the first to admit that they are skilled investors but not necessarily the most experienced middle office recruiters.
As our activity has grown and evolved so has our recruitment process. Here are some of the key points we look out for when looking to hire new members to our middle office team:
Yes, it sounds obvious but it is sometimes easy to focus on a candidate’s personal strengths and demote their capacity to interact with the team to second place. Team spirit is particularly important within a middle office team as individuals are faced with a continuous flow of information that leads them to interact with other team members, departments and market counterparties. Therefore, our hiring process is not handled solely by the hiring manager but by the rest of the team as well, recruiting is everyone’s business.
A desire to challenge and build
As a fintech firm focused on the buy-side, automation, scalabilty and process improvements are at the heart of our operational activity. In this respect, experience in various coding languages and financial skills are always strong advantages. However, in addition to these technical qualities, it is a team member’s ability to challenge and constantly refresh their perspective on things that is key. Both funds and middle offices teams are confronted with a proliferation of data that is more and more complex to handle. We are looking for people who aim to improve efficiency by pushing themselves outside of their comfort zone, challenging the processes in place and bringing new ideas to the table. The ability to conceptualize but also build and execute these ideas is key.
Failure and Analysis
A page straight out of the Silicon Valley Hiring Book here, and it’s true, a valid diploma from the school of Hard Knocks and the failure(s) that led to it are at times the most productive learning experiences. On and beyond the failed result, it is the path that led to it that we focus on when meeting candidates. The Middle Office team faces a multitude of challenges each day. These can be purely operational or technical but there are also, as underlined previously, human challenges as well. How can a candidate call upon his/her past experiences to better address these? What result have they visualized and how efficient are they in their path selection to reach it? At the end of each interview I like to observe a candidate’s own introspection by asking them to assess their own interview, apply a rating and explain their reasoning behind it.
Outsourcing the middle and back office of your fund can take place with a few different approaches:
In-house This is where post-trade functions such as investment book of record reconciliations, trade management and asset servicing is kept in-house whilst minimal investment operations are outsourced.
Mix & match When a selection of post-trade and investment operations where the asset manager has gained economies of scale are outsourced whilst the remainder is carried out in-house.
Fully integrated Middle Office and investment operations are performed by a third party team of experts utilising their seamless platform of front-to-back technology.
Selecting the right technological solution
Selecting the right technological solution to ensure alignment between front office and operational functions is key. Full Front to Back software is now available to portfolio managers but the challenge here is choosing the one that best fits your fund infrastructure and investment strategy.
Technology is fast changing and new functionalities are rolled out frequently. The tools to ensure competitiveness and scalability are now accessible; there is a real opportunity for managers to innovative. Before we explore some of the general functionalities to consider when selecting your portfolio management software solution, the key aspect to examine is the humans behind the technology.
Complex solutions such as PMS require a skilled workforce to maintain the system. The best technology is supported by a team of agile and proactive individuals to ensure the fluidity of system implementation and project success.
Several years ago, the promise of cloud technology was to change the way buy-side functions interacted. This technology is now fully in production and has undoubtedly brought with it significant operational efficiencies. Cloud technology in the context of portfolio management software has allowed front office and operational teams to work closer together. Remote access and cloud shared databases have notably allowed for teams to work at identical rhythms.
Well-connected to counterparts
Through tested API and FTP connections, your software is a member of the third party eco-system and has established relations with your custodians, prime brokers and administrators. Trade data is therefore easily interpreted by execution platforms to reconcile trade, margin and cash positions. Ensure that these connections are well monitored to manage the work flow of your portfolio.
Capacity to upgrade
On-going integrations and upgrades on the software will protect your competitive and regulatory positions. As the industry continues to evolve, your strategy or financial instruments may change and regulations will expand. Ensure that your software has the flexibility to adapt to this rapidly evolving investment and regulatory environment.
The development of automated and unitary testing ensures the software is stable and expert support is available to address any issues.
Finally, when selecting your third-party vendor conduct the necessary due diligence, review of disaster recovery and business continuity plans and cyber-security standards. Don’t be afraid to ask for a demo to ensure the software is the correct fit for you prior to implementation.