Growth brings obvious benefits. These include bigger management revenues, more bargaining power and potentially less resistance in investor fee negotiations. There is also greater investor awareness to ease the fundraising process, and the prospect of heightened profitability.
Yet for hedge funds that lack an efficient and professional operations function, growing can also bring significant difficulties—and potentially business-crippling dangers.
The key to efficient and profitable growth is scalability. That scalability comes in two broad forms:
i) Size and throughput capacity
Scalability is achieved by employing automated systems and processes to handle a rising volume of trades, tick and tie the reconciliations, and generate accurate and timely reports. This is better than relying on ramping up headcount linearly.
ii) Supporting an expansion and/or diversification of the business
Expansion could include adding new funds, asset classes or strategies, or moving into new geographic or client markets. A hedge fund using a legacy platform, any capability-limited system or, worse, spreadsheets will encounter difficulties. It will be next to impossible to recreate the accounting calculations, generate reports and maintain a robust audit trial each time they want to add a new fund or trade different instruments.
Of course firms may not always need or want to grow. But they do need to evolve. Launching new products, and remaining responsive to investors’ demands is crucial to staying relevant. Yet fund managers will struggle to cater to those demands if they have to change or replace their systems or functionality every time the business expands or shifts in a new direction.
For hedge funds that lack an efficient and professional operations function, growing can also bring significant difficulties—and potentially business-crippling dangers.
Start-ups or smaller funds often opt to rely on spreadsheets and manual workarounds, or buy a lightweight system in a bid to keep costs down. Typically this proves a false economy. Large firms without a comprehensive, automated processing environment will suffer many of the same issues.
A lack of scalability in either capacity or business diversification potential severely constrains a firm’s ability to grow. The consequences can take multiple forms and will be profound. They include:
Cost pressures—Firms that overly-rely on manual processes lack the economies of scale to expand profitably. They will either need to increase their headcount and thus their cost base to cope with any growth, or put their existing staff under added strain, with the enhanced risk of errors and service mishaps that will produce.
Lost potential profit — Capacity limitations, and the resulting service constraints, mean firms will struggle to support additional investor inflows. Turning away new investors because of an inability to provide the level and quality of service expected is a galling prospect.
Failing investor due diligence — Allocation processes can take years, and competition to attract subscriptions is intense. As a basic minimum, investors need to know their money will be safe and accounted for correctly. One missed checkbox on the allocators’ operational due diligence report is all it takes for a fund to be vetoed.
Missed opportunities to move into new strategies/markets/asset classes — Firms need to pivot to meet investor demands and remain competitive. But while a fund may have the front-office expertise to move into a new strategy or market, they will be unable to take advantage of those opportunities if they lack the necessary middle- and back-office capabilities.
Reputational risk — Manual processes and creaking systems result in operational errors and delays, and sometimes complete gridlock. Any subsequent compliance issues, or concerns about a fund’s ability to produce an accurate and timely NAV or reliable performance reports may damage the firm’s reputation, with significant repercussions.
Lack of cash position and trading clarity — Clean, structured data is the foundation of a successful investment business. Firms need an accurate and constantly updated picture of their positions and how much cash they have to trade with to ensure they comply with investor mandates and optimise performance. Risk and trading systems fed by inaccurate or unreliable datasets will result in poorly-informed decisions.
Replicating infrastructure investment — Technology transformation projects tend to be expensive, disruptive and have a major impact on a business’s day-to-day running. It is not just about replacing the core system. Integrations into all the upstream and downstream order management, risk, reconciliation and reporting systems also need to be rebuilt. Undertaking this process multiple times, as firms outgrow their cheaper, capacity-constrained platforms will be a huge drain on a firm’s resources.
The key is to plan for growth from the outset. Of course it is impossible to predict years in advance the markets in which you will operate, the asset classes you will trade, fund structures you will adopt or clients you will target. But smart firms can prepare.
Successful, profitable growth demands a stable operational foundation, with the built-in functionality and flexibility to support your business, whatever direction it takes.
It is a waste of valuable investment resources to rip out redundant systems and replace them with the next cheapest alternative, not to mention the time and disruption involved in training staff on the new systems. Ramping up headcount to cope with an increase in transaction volumes or to meet investors’ service demands is similarly inefficient. So there are major advantages in getting the firm’s infrastructure set up right from the off.
It won’t just save money, time and effort internally either. In today’s competitive fundraising climate, part of a hedge fund’s story to investors should be to demonstrate the firm has made the right investments into its business to support all its clients properly, and that it is ready and equipped for success.
Geneva® by SS&C Advent has long been regarded as one of the leaders in global portfolio management and accounting platforms. Geneva has the proven functionality to meet an extremely wide range of business needs and future aspirations for an investment firm, ensuring users never outgrow the system.
Scalability and speed have been architected into the Geneva platform. Whether a firm manages a large amount of assets, trades high volumes or complex asset classes, has many users or high demand for accurate and granular data on tap to power the entire organisation, Geneva has the built-in capacity to support them.
Geneva also meets firms’ ever-growing demands for real-time data, empowering fund managers with instant performance, P&L, position and exposure information. Because of its strong foundations, Geneva can feed risk, order management systems or any internal system or dashboard with accurate and reliable datasets so the front office can monitor and manage its positions.
As well as any AUM or client number growth, Geneva is in a strong position to handle whatever asset class diversification or market expansion a firm decides to pursue. The system’s best-of-breed capabilities include accounting and position-keeping support for any instrument, in any structure, in any region. Because Geneva excels at the extreme ends of the complexity and scale spectrum, it is now seen as a premier solution both for traditional and alternative asset managers.
New deployment options make Geneva highly cost-efficient and accessible too, regardless of a hedge fund’s size.
Whatever a firm’s existing infrastructure is, our flexible deployment capabilities mean we can normally find a delivery model to suit. One option is to leverage Geneva’s functionality by deploying the solution within an existing environment. Alternatively, users can take advantage of SS&C Advent’s cloud delivery, giving clients access to a highly available and secure solution with no need for a vast IT function.
SS&C Advent also offers managed services around our products to augment our clients’ teams. By utilising Advent Outsourcing Services (AOS), we can take on time-consuming and manually-intensive tasks, such as reconciliations processing, that prove such a resource drain on hedge funds’ middle and back offices.
Ultimately, the question is why opt for a solution that, if business goes well, you will eventually (and even quickly) outgrow? Geneva has worked to make sure that is not a problem.
We are proud that Geneva is used by many of the hedge fund industry’s leading players—managers, as well as administrators. The fact that so many large firms trust their operations to Geneva should be testimony enough for any hedge fund that is looking to expand and provide their clients and prospects with the assurances they need too.