Like it or not, hedge funds will most likely face more regulation in 2009. It may come in the form of the government’s forcing hedge funds to register. Or it could be less direct, coming under the guise of new self- or government-imposed limitations on how pension funds can use alternative-investment vehicles.
Regardless of what happens, any additional regulation will probably entail much stricter data management standards.
Hedge funds that ramp up their data management now will have a leg up once the regulatory landscape shifts, asserts Greg Woolf, CEO of Boston-based Vantage Software, a maker of systems that integrate deal pipelines, customer service and portfolios for hedge funds, private equity firms and investment advisers. Woolf says the simple act of centralizing data storage can provide the foundation for future compliance — and vastly improve investor relations in the meantime.
Mark Coriaty, director of professional services at Eze Castle Integration in Boston, a financial services technology firm, says data management is already a hot topic as funds today find themselves answering far more investor calls than usual. “Our clients need a better way to streamline their data within the firm, and they are looking for ways to pull data together from different systems,” Coriaty explains. “In the past, when they could do monthly reporting, they had a month to pull together their information. Now they find they need real-time numbers on a daily basis.”
Typically, data on trading, operations and accounting are not very well synthesized and are sometimes completely out of sync, a circumstance — common as it is — that is fast becoming anachronistic because of the increasing speed of the market and investors’ growing expectations of their money managers.
The first step in turning antiquated information systems into a modern network is to create a central repository on a database with security controls, data protection and audit trails. Such centralization gives hedge funds a single source of truth across all their holdings and is an especially important tool for multistrategy firms that are investing in different instruments and using different software products to support different types of trading.
Because Microsoft Excel spreadsheets and Microsoft Access databases are powerful and flexible, traders, analysts and portfolio managers love to create new applications and data stores based on them. That may be fine for individuals conducting their own analytics but can pose problems on a bigger level, because such packages lack common controls and audit trails, making it difficult for risk managers to know if and when data or formulas have been altered.
“Excel and Access are common tools within the hedge fund space, but when you have 50,000 or 60,000 documents and records, you need to make sure the data are secure,” notes Woolf, the Vantage CEO. “So if someone is working on the data and makes a mistake, it doesn’t corrupt the entire file.”
When a firm lets separate groups maintain data, cautions Chris Momsen, senior vice president and co-head of global operations at San Francisco–based Advent Software, it runs a huge risk that only grows bigger when day-to-day volatility goes wild. “You can tell it’s bad infrastructure,” Momsen says, “when you can’t get the operations people into the same room as the accounting people.”
Woolf says using a spreadsheet as a database invites error and wastes time: “You see people hit a space key to delete a cell in a spreadsheet, and they have to spend hours three days later tracking back to find out why some numbers are not reconciling.”
As auditors have gradually become aware of such vulnerabilities, they have begun insisting on better controls. These can be installed by companies like London-based ClusterSeven and Prodiance Corp. in San Ramon, California. Both make software that can detect and monitor spreadsheets in a firm’s internal system.
Hedge fund firms can also step away entirely from spreadsheets to industrial-strength alternatives that let administrators lock down data and track changes to it. Vantage has built its business around tying together disparate systems. “We can integrate other packages and bring their values into a centralized data warehouse,” Woolf explains, “so users can view their portfolios on a consolidated basis with unique keys to define positions and companies.”
Hedge funds used to try to fix their data clutter by hiring more people to reconcile the numbers, notes Eze Castle’s Coriaty, but the industry has realized that this approach has its limits and that technology is the answer, in both the short and the long term. His says his company’s sales pitches are met with great interest, even when a fund can’t afford an upgrade.
Momsen says that Advent representatives present the case for his company’s powerful Geneva software or its smaller Axys package almost every day to one hedge fund or another. He says bigger funds that are better positioned to weather this year’s market collapse are more apt than smaller ones to accelerate their technology upgrades. Momsen points out that the most common data management problem at hedge funds is a tangle of uncoordinated platforms that fail to synthesize trading, accounting and operations. Such setups typically rely on some combination of Excel, Access and QuickBooks.
Advent’s Geneva software offers overall fund and specific investor accounting in a single system that also tracks corporate actions, coupons, dividends and interest. “We have one set of data that can be viewed in real time, daily or in a closed period,” Momsen says.
The hopeful news is that many of the steps regulators may require in the next year or so are operational improvements that funds should probably undertake anyway to improve client service and retention. In bull markets investors aren’t inclined to worry about the details of reporting or how a fund collects and disperses information, but when the market winds shift, they understandably become more demanding. Hedge funds that have centralized data can tap it for automated client communications, sending out monthly or even weekly statements and advisories.
In times like these, Woolf notes, the ability to keep investors informed is more valuable than ever. “Keeping the wires straight and making sure your investor communications are bulletproof,” he says, may be what it takes to stay in business.
