Operations done right from start: what to look for from your investment technology platform

There are many opportunities for hedge funds to take advantage of in today’s market. The funds are experiencing strong inflows of capital, with net asset growth of 18.3% in the year ended June 30, 2018. Preqin studies suggest there is a resurgence of institutional interest in hedge funds, which may serve as a precursor for …

July 23, 2019 | SS&C Eze

There are many opportunities for hedge funds to take advantage of in today’s market. The funds are experiencing strong inflows of capital, with net asset growth of 18.3% in the year ended June 30, 2018. Preqin studies suggest there is a resurgence of institutional interest in hedge funds, which may serve as a precursor for still more growth. But this interest doesn’t mean merely hanging a shingle will necessarily send institutional investors flocking to your new fund. More and more, we hear about increasing investor due diligence among institutions, and much of that due diligence is focused on a hedge fund’s operations and their choice of technology backing it. Investors don’t just want to know their money will be safe; they also want to make sure you are running a tight ship.  

For instance, cybersecurity is almost a constant refrain. Institutional investors not only want funds to have strong policies, but also want to know how funds are managing the vendors that touch their data. Similarly, there is much emphasis on understanding how funds manage risk, as well as how information flows throughout investment management systems, and how the fund provider manages all of the connections that are part of the process. In short, institutional investors are much savvier than ever before, and to win, and keep, their attention, you should equip your business with a reliable platform and knowledgeable, supportive service, from the start.

Gone are the days when you could wait until after launch to implement systems for trading, accounting, reconciliations and other operations. In today’s market, you need institutional-grade infrastructure in place before you ramp up your institutional fundraising efforts. Having a well-thought-out system for taking care of your critical functions can be a valuable differentiator, both during fund marketing and capital raising, and as the fund grows.

We’ve covered elsewhere the qualities your critical vendors should have to help you attract institutional capital; now we’ll dive into the features your system needs to have in order for you to run the fund successfully, and economically from the start.


Many startup hedge funds are operating on a tight budget. Few start out with an extensive operations team; some may even have managing partners handling operations in addition to other duties. Robust and easy-to-use operations functionality is therefore crucial. Implementing operational processes that are automated, can easily integrate with existing systems, and provide accurate data throughout the enterprise is critical to any fund, but especially so for lean start-ups. Here are some salient points to consider:

Integration with third-party systems: Ideally, your investment management system should act as the central repository of your trade information, plugging into your portfolio management and trading workflows to facilitate information processing across the entire operation. This integration should be seamless, ensuring that the same data informs every part of your operation, and is delivered across the enterprise in a timely manner. The automation and scheduling of end-of-day reporting to prime brokers, administrators and portfolio accounting systems (as well as other common operational procedures) should be out-of-the box functionality.

Your system should work with the firm’s proprietary trading technologies as well as any third-party vendor systems. Depending on whether you’re planning to add new strategies, asset classes or markets, it’s plausible that you will need to work with specialist third-party vendor systems as your fund operation expands. Make sure you are working with a vendor that’s been successful in using and managing API connections, as well as one that’s experienced in working with the many third parties you may potentially use. This will minimize the disruption of building in new connections when you need them.  

Reconciliation: You should look for a system that allows for full reconciliation with your prime brokers, custodians and fund administrators. Strong reconciliation functionality should be part and parcel of your operations package, and should put you in a position to make reconciliation ongoing and painless. For instance, if your system can deliver reconciliation information for you overnight via automated reports, you may be able to address any trade breaks when you get into the office, so problems can be dealt with before market open. Look for systems that can help you automate much of the reconciliation process so you can lower collateral risk. For instance, being able to see all of your reconciled and unreconciled positions at a glance, as well as the ability to auto-generate any missing trades, can greatly simplify the daily reconciliation process.

Mobile access and the cloud: Unless you plan to be tied to your desk, you’ll want access to the most critical functions on-the-go. This means, ideally, that your system should be available via the public or private cloud. Whether or not you use all of your functions in the cloud, or use a hybrid approach, ideally, the features you find critical must be accessible on the go. Mobile access to view your P&L, review and approve compliance violations, and enter trades is a must. Ensure that the vendor you are working with is well-versed in the latest cybersecurity best practices, and is ISO certified.

Trade management and allocation 

Trade management and allocation is a key area where automation can help you simplify your processes and focus more on your bottom line. At the most basic level, you’ll need a system that can support trade creation, execution, allocation and processing across all asset classes in which you’re trading. But before you make your choice, consider asset classes and strategies you may invest in down the line.

There are several areas for consideration when evaluating a system’s trade management and allocation toolkit:  

Access to liquidity: Direct market access to exchanges and alternative trading systems across multiple asset classes and market regions is a must. To compete, most funds are diversifying their strategies and looking outside their local jurisdictions. So, your investment management system needs to connect everywhere quickly and easily. Consider broker-agnostic systems with vendors that devote a significant amount of time to building out their sell-side networks; above all, what you want is to be able to quickly gain access to liquidity, and you want your system to accommodate requests for new third-party connections fairly easily. Established broker-agnostic systems will likely have most connections you might need, and those vendors may be able to plug in third-party sources that aren’t part of their original network quickly.

Related to liquidity concerns is the ability of your system to provide for locates. Short-selling is at the core of many hedge fund strategies, so locates functionality is critical. Being able to manage locates well becomes even more crucial as your fund transitions to using multiple prime brokers. Ideally, you should have seamless access to locates within your execution engine so you can execute your strategies with confidence.

Best execution tools: It’s not just about finding the best prices for large or hard-to-work, illiquid orders, but being able to prove it. Whether due to regulations, or investor demand, the requirements for proving out best execution are only increasing.  Without the right tools in place, it’s challenging to address them. Some OMS and EMS vendors offer very basic best execution tools out-of-the-box, but for more advanced analytics you’ll need to bring in specialized toolkits. You’ll want a vendor that is not only capable of connecting to the more specialized providers but it’s even better when you can view critical best execution and TCA data alongside your trading blotter (instead of swiveling between systems).  

Sophisticated allocation methodology: Many funds underestimate how complex their allocation requirements can be as they grow and take on more assets. You need technology that can not only generate and allocate orders to multiple destinations, but also standardize the process and make it repeatable across asset classes, primes, custodians, and strategies. The ability to define custom, and automated allocation schemes to distribute block orders, for instance, can significantly speed up your day-to-day trading. Likewise, rules-based strategy assignments for trade allocations help streamline the entire allocations process, no matter what strategies you add to the mix.

For example, even if you aren’t planning to handle managed accounts on day 1, it’s likely you’ll need to at some point in your growth trajectory. Separately managed accounts require sophisticated allocation methodology to ensure the right allocations are delivered to the right third parties. Often, the fee structures may differ between the main fund and your managed accounts, so you’ll need a system that is flexible and can support varying fee structures based on the fund type behind the trade.

Commission management: In the last two decades, investors’ expectations of transparency have steadily increased. Moreover, various regulations such as MiFID II now require fund managers to set up sophisticated commission management engines that are capable of budgeting research dollars for clients, keeping track of both execution dollars and research spend, and delivering detailed reporting to the end customers. Strong systems that can combine research voting with budgeting and reporting information will ultimately save you time and money as you manage your broker relationships and clients’ execution dollars.

Portfolio management & accounting

Portfolio management capabilities should be at the core function of any investment technology platform. For emerging managers, this function is all the more critical because of their unique position: many are operating with a smaller staff, where the portfolio manager might also serve as the head trader. Investment decision makers should have a holistic view of their funds, both historically, and in real time. This means your system needs to be versatile, adaptable, and capable of delivering the investment data the way a fund needs to view it.

There are several core areas to keep in mind when choosing a system to handle portfolio management: 

Market data: Access to real-time market data and accurate reference data is a basic critical requirement for Day 1. At launch, your data needs might be pretty basic. You’ll want to be sure the system supports your market data provider of choice – your choice today, but also whatever providers you could consider using in the future. You may not need advanced analytics now, but should you need them, you’ll want to know the system can support that. Ideally, you should have the ability to launch with a low-cost alternative but be able to easily bring in data from the most sophisticated and extensive data providers should you need them.  

P&L and exposure: You’ll need to monitor P&L and exposure in real time, as events happen, as well as analyze it from a historical context. Depending on the assets you trade, how you view your P&L and exposure calculations might differ. You’ll want to choose a system that offers an extensive, rich library of analytics, but one that offers you the flexibility to add custom calculations of P&L and exposure, however you want to see it. Ensure that your system has flexible, events-driven alerts in place that you can set up to ensure you can address any issues that require your attention.

Shadow NAV: You might argue that fund administrators can take care of back-office operations, but in an era of increased investor scrutiny, even those hedge funds that can afford their services require a shadow system to ensure accurate reporting and operations support. More and more often, fund managers, rather than administrators, are being called on to explain their accounting, and a shadow NAV can be a great tool that aids you in that process. For instance, should your service provider suffer a failure, investors – and regulators – would be calling on you to reveal the missing data. Ideally, the capability to run a shadow NAV, along with the ability to put together streamlined reports for investors on the fly, should be part of your system’s portfolio accounting toolset.

Modeling: As your fund grows, so too will the sophistication of your investment models. You’ll want a system with flexible portfolio modeling tools and features. Choosing a scalable system at the outset will enable you to keep implementation and training costs to a minimum, ensuring that fund managers face minimal disruption in the workflows they’ve become accustomed to. Your system should be able to perform flexible ‘what-if’ modeling and analysis, model cash inflow/outflows, automate asset allocation and generation, analyze and manage tax lots, run foreign exchange exposure assessment and hedging, and park and hold orders for review before releasing to traders. This should all be backed by fully-integrated pre-, intra-, and post-trade compliance.

Cash management: As your hedge fund grows, you’ll want to find a system that can help you stay ahead of your cash requirements with robust cash management tools.  

Compliance & risk management 

Compliance and regulatory demands on hedge funds have skyrocketed, and with them the costs of remaining compliant. This means your system should come with a robust and flexible rules library that covers pre-, intra-, and post-trade checks that also provides you with the ability to drill down into positions contributing to a compliance violation. These rules should span a variety of compliance needs including, concentration, exposure, benchmarks, beneficial ownership and restrictions, and they should be automated where necessary. Even if compliance needs are light as a fund gets off the ground, there are a few key areas outlined below that your system should be able to cover at a minimum: 

Pre-trade compliance rules. Out of the gate, your system will need to support your critical compliance requirements such as warning you when you are approaching the maximum percentage limit for a particular position, or alerting you to any mistyped amounts so you avoid trades well outside position limits. Likewise, you should be able to automate alerts for restricted securities, brokers, portfolios, strategies and other parameters. Ideally, your pre-trade compliance rules should be seamlessly integrated into your execution engine, so your traders can act on alerts before routing to market. Integrating compliance into the execution engine allows traders to avoid ‘swiveling’ over to the compliance library for rule checks, saving time and minimizing the potential for errors.  

Managed accounts restrictions: Should you take on managed accounts, as most funds will likely find themselves doing, you need a system that will be able to monitor restrictions associated with such funds.  

Risk management: Evaluating risk should be part of your ongoing investment management process. Risk analysis and monitoring needs to be done holistically so risk management tools need to be closely linked with all your front-office investment data and not siloed in separate systems. The right system should be able to make risk analysis a seamless part of your daily workflow, in real time.  

Post-trade compliance checks: Your system should be able to handle any reporting needed by your compliance department. You should be able to automate compliance checks at any point in the trade cycle, across security, asset class, portfolio or portfolio group, as well as by strategy. Moreover, your system should allow you to immediately assess the impact of events such as corporate actions, market creep, and changes to security master data.

Rapid response to change: You don’t want a system that is hardcoded to current regulations. Your rule setup and configuration needs to support changing global regulations with flexible components that can be easily modified as needed. A flexible toolkit and rule library will make it much easier to stay on top of changes and ensure you’re adhering to them. 

What your system should be

In short, pick a system that’s strong, flexible and will help you run your operations as an extension of your staff. Rather than simply relying on a smaller, simpler system that meets your need today, consider whether it will be able to meet your needs in the long-term. From a total cost perspective, spending a bit more on a system today may just be more cost-effective than having to rip out your infrastructure a few years down the line because too many of your needs aren’t being met. With that in mind, your system should be:

Easy to use

Across your enterprise, your various business units will require functionality to address complex processes. At the same time, you may be operating with a smaller team, which means it’s more important than ever that everyone is on the same page and working together to get the job done. The investment platform you choose should simplify workflows across your enterprise. By automating and standardizing the handling of core tasks, and bringing them together on a single, streamlined interface, you can minimize errors, speed up daily processing and optimize the entire operation.

Highly configurable

Standardization will minimize errors and streamline your workflows, but that won’t make your life easier if you’re forced to change your workflow to fit your system’s requirements. Don’t let the tail wag the dog; choose a system that is built to help you achieve best practice, while meeting your unique business requirements. This doesn’t mean customization, which can be costly in the long-run; this means the ability of the system to be tweaked simply to accommodate your workflows. Real-time data should be able to be imported and analyzed from the sources you choose; calculations should be able to be set, modeled and manipulated with your guidelines; dashboards and reports should present data the way you want to see it (anywhere you want to see it, including mobile devices), and you should be able to rebalance positions, through simultaneous models, on the fly.

Designed for growth

As with every other area of your business, as your fund grows, your compliance, trading and operational requirements will only grow more complex. For example, as your investor profile evolves, so do the related restrictions and requirements. Your system should be able to easily scale to accommodate these changes over time. This also means your system should be able to address multiple asset classes, whether natively or through seamless third-party integration, so you can easily expand your business when you’re ready.

Seamlessly integrated

Standardizing core investment processes across business lines doubtlessly saves time, money and effort in the long-run, but what’s even more important is bringing the entire enterprise onto the same page. With siloed business units and technology, efficiency is lost as communication falters. Ideally, your system should unite the entire enterprise on a single platform, ensuring every part of the operation is operating with the same data. Meeting the unique needs of every single business unit, your system should deliver a seamless workflow that integrates execution, order management and accounting, helping to streamline the investment life cycle. This way, operations large and small can benefit by finding and automating important, but repetitive processes across the enterprise, so their investment staffers can focus on investments, and operations staffers can focus on making the operation even more efficiently.

Supported by top-notch service: Your system should be backed by a high-touch service model that offers a variety of managed services, especially around market and regulatory data automation. Your vendor’s implementation team should act as an extension of your own staff during install, and the vendor’s client service should always be available for questions or issues. For a more in-depth discussion of characteristics your vendors should have, read our “How To Pick Your Vendors” guide In short, pick a firm with experience getting funds like yours up and running, and supporting them through the stages of their growth. You, and your investors, will want to see a trusted, reliable team supporting your infrastructure.




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