Key features the service facilitates include: online trade execution with post trade monitoring and reporting; position analysis with drill down to investment activity details and cash movements; cash forecasting/projection with future liquidity profile; and comprehensive investment information including withdrawal terms, lockups and optional exits, redemption holdbacks, gates, fee terms and side letters.“We believe this new technology represents a significant step forward in the fund of hedge funds middle office and reporting arena,” says Erik Jens, CEO of Prime Fund Solutions, commenting on the release. “Our ability to provide greater transparency, asset safety and robust infrastructure are key to the success of our fund clients as businesses.”
The aim is for PFS Horizon to bring funds of funds a full transaction-based custody portfolio and investment management system. It uses a single point of control to allow a manager to oversee the entire investment lifecycle, actual and hypothetical, from start to finish. The platform has been developed through the combination of PFS’ existing administration and custody infrastructure and sophisticated front-end IT systems developed in conjunction with Comada.
Single manger hedge funds have advanced their operational sophistication in recent years, but the greater operational complexity of funds of funds has mean that progress in this area has lagged. Indeed, many $1 billion-plus funds of funds still monitor liquidity and cash positions, among other operational functions, with Excel. “A lot of funds of funds have archaic operating models,” says Charlie Woolnough, UK regional director of sales and marketing with PFS. “The Horizon system pulls everything together and therefore reduces operational risk for fund of fund managers. The by-product is that they become more investible for institutional investors.”
For funds of funds the cost of an in-house operational solution in terms of software creation and system maintenance is prohibitively expense. For this reason, some institutional investors require a fund of fund to have several billion in assets, assuming that such scale is necessary to finance the infrastructure over the long term. The middle office functions of funds of funds can be particularly labour intensive.
As an outsourced function, Horizon is cost-effective since PFS has significant operational gearing and thus clear economies of scale from its fund manager client base. Fund of fund managers may find it not only cost effective to use Horizon, but also advantageous to tightening their focus on managing investment risk instead of operational risk. “We are crossing the boundary between a classic custody system and a classic front office system,” says Woolnough. “Horizon allows a lot more detail and functionality as it captures so much more information at trade execution. Previously these types of reports haven’t been available.”
PFS began developing the system from a blank canvas in September 2009. It launched into the market on 1st July after testing with a beta client who used it across seven funds of funds comprising nearly 400 underlying holdings. Now that the product is being market PFS is focused on back-off integration with client legacy systems such as Geneva and T24. Reflecting the expansion of UCITS III compliant funds, a pre-trade compliance function is also being incorporated.
A key benefit of Horizon is that it will streamline information gathering for funds of funds, eliminating a great deal of time spent on the telephone chasing up documents from different transactions. The product runs nine core functions for each portfolio, generating statements, for example, on pending orders, completed trades and bank ledgers. It also can create a variety of orders, covering subscriptions, redemptions and transfers using pre-made templates.
The impetus to develop Horizon came from the recognition that funds of funds and single manager funds had few, if any, standardised operating processes. With the influence of institutional investors the drive for standards, especially on the operating process, is intensifying. “The operations of funds of funds are generally not well developed,” say Usman Cheema, a senior research analyst with PFS. “We think this system will take away most of the operational risks. If we can drive out inefficiencies and improve service it will benefit the whole industry.”
PFS, which is being integrated into Credit Suisse but with its identity retained, has been a pioneer in the fund of hedge fund industry and took its first client in 1969. Its clients include around one-in-five fund of hedge funds with assets in excess of $1 billion.
Like other areas in the asset management industry, the administrator sector has been roiled by the credit crunch. The growth in managed accounts has seen a profitable business segment grow strongly, but traditional administration services have seen costs expand and cut into profit margins.
The scaling of services at the heart of PFS Horizon means that many smaller funds of funds can get a greatly improved service at a competitive price if they use most the platform’s capabilities. In turn, this allows smaller funds of funds to achieve levels of transparency and reporting previously only available to far bigger rivals.
“We have received positive early feedback from our institutional fund of fund clients and we are looking forward to rolling out the new technology across our global client base in the coming months,” says Cheema. “We are the only service provider that can provide administration, banking custody and financing to customers.”