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  • Strategic Advantage of Outsourcing Middle Office Ops

    Gone are the days when the middle office is maligned as being strictly a cost-center dragging down investment performance. Today more fund managers are concluding that more effective management of their middle office can not only reduce operating expenses, but also give them a competitive edge with investors and keep regulators at bay. Fund management operations experts and technologists also tell FinOps Report that it’s clear that better management does not mean slogging along with inefficient legacy systems. That doesn’t necessarily lead to massive investments in new technology. Instead, outsourcing as many operational functions as possible is becoming the standard modus operandi, say research studies. US fund management firms contacted by FinOps also acknowledge the trend and say that their European and Asian peers have already taken the plunge. Deciding which function must be outsourced, to which firm and how the relationship is managed is generating a lot of talk among compliance, legal, operations and technology managers. While the chief executive, chief financial and chief operating officer may be the ones who sign off on the big decisions, the specialists are the ones that have to live with the outcomes and make them work. “The middle office is the engine driving functions that fall after the front-office pre-trade analytics and trading,” says Gary Kaminsky, head of regulatory compliance for asset managers and broker-dealers at consultancy BDO in Philadelphia. “It is also where all of the critical regulatory enterprise risk-management work is done.” That risk management work involves consolidating, validating and crunching a whole lot of data quickly to meet reporting requirements, not just for internal managers and the board but also external clients and regulatory authorities. Compliance with regulations such as the Dodd-Frank Wall Street Reform Act in the US, and MiFID, EMIR, UCITS and AIFMD in the European Union require disclosure of transactions, asset holdings and more granular risk metrics — no small task. Outsourcing middle office functions mitigates the risk of being unprepared for regulatory deadlines and allows big-set up investments to be effectively mutualized among multiple outsourcer clients. Institutional investors can be reassured that an independent third-party is monitoring the post-trade process and mitigating operational risk. The better the middle office is handled, the greater the potential for higher investment returns. Cleaning up too many mistakes can wipe out hard-earned profits. “While middle office functions may once have been seen purely as a cost center, there is a growing realization that it is an area where a fund manager can extract value and enhance its competitiveness,” says John Alshefski, managing director of the investment manager services division at fund administrator SEI in Oaks, PA, which released a report in May entitled “Middle Office: A Hidden Source of Competitive Advantage.” To determine the merits of outsourcing, fund managers need to calculate all of the expenses involved with a particular function such as research and development costs and overhead costs related to manual work and overtime. Do they? Not always. “Sometimes, we don’t include research and development costs or employee training costs in our calculations,” acknowledges one US fund management operations executive. “And we probably don’t give enough attention to projecting the costs of adding new products or growing trade volumes and assets.” When asked why not, the operations executive at first wouldn’t respond, but ultimately acknowledged the potential conflict of interest. “We just don’t want management to know how cost effective we are or aren’t. Outsourcing is supposed to result in greater efficiency, but it can often cause layoffs,” he admits. As a result, sometimes fund operations specialists are taken out of the decision-making process for outsourcing providers, though they will still have the responsibility for monitoring the service providers and evaluating their performance. On the Block What is being outsourced? Anything from post-trade confirmation and affirmation to reconciliation and everything in between. When SEI asked 80 US asset managers which middle-office functions their firms might consider outsourcing over the next 12 to 18 months, 30 percent of diversified asset managers and 20 percent of private equity or hedge fund managers say they would be interested in outsourcing corporate actions and income processing functions. Data management and governance was more likely to be outsourced by alternative fund managers than diversified managers. Trade capture, transaction settlement and regulatory reporting were the next three most selected functions for both types of managers. Also on the outsourcing horizon: risk reporting and performance attribution. “As service providers continue to invest in their technology capabilities to offer more sophisticated analytics and enhanced reporting, fund managers will want to outsource those functions as well,” predicts Alshefski. With the exception of custodian/prime broker selection and management, and expense management, every middle office function was under consideration to be outsourced. Some functions are already handled externally to a large degree, but this latest wave of outsourcing will mean that virtually every aspect of middle-office operations will be outsourced by more than 50 percent of firms, according to SEI’s study. An additional factor that may accelerate the outsourcing of the middle office is the scheduled introduction of a two-day settlement cycle in the US in September 2017. Asset management firms will need to change operating processes and workflows to reduce settlement time from the current three-day cycle. Many asset managers are facing the fact that their existing systems and staffing levels are not going to meet the challenge. In modifying post-trade processes, they are finding that some outsourcing will be critical. What isn’t being outsourced? Client reporting is the biggest category. Institutional fund managers could decide to outsource this process, but not alternative fund managers who want to pay closer attention to customized reports for far fewer investors. Likewise, processing of swaps contracts and collateral management will likely be kept in house. Fund managers that want more than just the basic mechanics of margin calculations and calls will need to confirm that their administrators and custodians can handle collateral optimization and transformation. Not all are geared up for this work. Working Relationship Although third-party service providers do offer a modular approach to outsourcing — pick which functions you want — most fund managers can’t afford to rely on a best of breed approach. “In a choice among multiple providers, using a single holistic regulatory ERM driven solution for as many services as possible will end up being far less costly and more operationally efficient,” says Kaminsky. “The fund manager won’t need to address additional reconciliation and oversight costs.” However, the provider selected must be able to handle not only current products, investment strategies and scale but future ones. The most common error made by fund managers is not thinking ahead. “The service provider needs to be with the fund manager for the long haul,” cautions Kaminsky. Switching providers can be time-consuming and operationally costly because of cleanup costs related to processing mistakes in the transitional period — which could take weeks or even months depending on the function involved and size of the book of business. Yet another mistake: thinking that an outsourcing provider can provide a “signature-ready” answer for regulatory reporting. A third-party can provide a robust suite of services but someone within the fund management organization needs to own the project, explains Kaminsky. Ultimately, the fund manager is liable for any mistakes. Once the outsourcing contract is signed and sealed, the hard work begins. “Oversight is critical in outsourcing arrangements,” says Michael DiScipio, an executive in the capital markets practice of global consultancy Accenture in Boston. “Asset managers are asking that key metrics be provided as part of a standard reporting package which will enable them to measure the effectiveness of the outsourced solution.” The metrics include the timing of reports and services, the accuracy and consistency of data, and how well volume peaks were handled. Periodic meetings — typically quarterly — with the service provider may also be useful to discuss service level concerns, the status of the technology roadmap and the impact of pending or anticipated regulatory changes, according to DiScipio. Bottom line: the asset management firm should always keep tabs on the service provider. Fund management operations executives who are worried about being displaced by outsourcing their functions, shouldn’t be. Outsourcing shouldn’t be viewed strictly as a way to cut headcount. Fund managers need multiple pairs of eyes watching the middle office to implement a system of checks and balances against errors and delays, suggests Alshefski. There is no such thing as too many cooks in the kitchen. Courtesy- Finops

  • What are Crypto Funds? List of Top Cryptocurrency Funds in 2019

    A crypto fund is an adaptation of traditional funds that makes it easy for new investors to navigate this enticing new asset class. In a nutshell, cryptocurrency fund will buy and trade coin instead of you directly purchasing and trading them. Portfolio managers and traders will decide which ICOs to enter and which to avoid, which currencies to buy and sell, and they promise to produce gains on your investment. In return they take a percentage of the profit as management and performance fees. Early crypto funds had a huge success and that has spurred other players, including traditional financial experts, to enter the crypto industry. According to a recent report by financial research firm Autonomous Next, there are now more than 100 funds, big majority of them launched in 2017 and 2018. The funds manage a total of more than $2 billion which is a considerable amount for a nascent industry that still has yet to see the turn of a decade. Below is a list of top 25 crypto funds, ranked in no particular order: 1 Polychain 2 Galaxy Digital Assets Fund 3 Blueyard 4 ICONOMI 5 Logos Fund 6 Pollinate Capital 7 Metastable 8 Pantera 10 ConsenSys Ventures 11 BB Fund 12 Tezos 13 FBG Capital 14 Blackmoon Crypto 15 BlockStack 16 Finshi Capital 17 Alphabet Coin Fund 18 Flipside Crypto 19 Target Coin 20 Mirach Capital 21 Science Inc. 22 BitSpread 23 Astronaut Capital 24 Blockchain Capital 25 Auryn Capital Courtesy: captainaltcoin

  • Hedge Funds – the Next Frontier for Automated Reconciliation

    The recent regulatory mandates and the increased flow of institutional money into hedge funds have created a growing demand for automated reconciliation systems from the asset management community. Global institutional investment in hedge funds will increase 56% to $2.3 trillion by the end of 2017, from the end of 2012, according to a Citi Prime Finance research report released earlier this year. This will force hedge fund to compete for institutional assets on a playing field that’s new to them. Hedge funds will be required to demonstrate better organization and more transparency around their investment strategy, including their security positions and management fees. To meet these demands, managers need to deploy solutions that are capable of efficiently aggregating, reconciling and accounting for both fund and investor level data. For example, the US Commodity Futures Trading Commission (CFTC) considers documentation of swaps to be a critical component of the bilaterally traded, over-the-counter (OTC) derivatives market and portfolio reconciliation has been recognized as an important post-trade processing mechanism for reducing risk and improving operational efficiency. Many hedge funds will be labeled Major Swap Participants (MSPs), by CFTC’s definition, and will be required to reconcile at specific frequencies given their swap trading volumes. DANGEROUS CONSEQUENCES Historically, the quality of counterparty information has been a major challenge within the hedge fund community. In many cases, counterparties do not provide all of the important terms associated with OTC derivatives transactions. For example, the reference obligation or maturity date on a CDS could be excluded, causing issues down the line. Coupled with issues similar to this, and the increasing regulatory burden, investor pressure to provide greater transparency and reduce fees creates “a new operating reality for hedge funds,” according to Deloitte’s “2013 Hedge Funds Outlook” report. According to Deloitte, hedge funds “may be able to alleviate this pressure and level the playing field by turning to partnership strategies that incorporate a blend of outsourcing and technology.” Hedge funds that do not go down this road and decide to keep manual reconciliation processes or continue to use antiquated software should expect to face the following issues: Exposure to operational risk from manual oversight, which can lead to significant loss or missed opportunitiesLack of accurate information around the cash or securities that are available to trade, which leads to missed opportunities in the markets, overdrafts and other opportunity costsLess than ideal reconciliation frequency due to a lack of resources, which could result in daily investment decisions that are based on outdated informationInability to scale to meet growing data volumes, which reduces the amount of new business that can be supported operationallyLack of auditing around the reconciliation process, which exposes the firm to difficult questions during an external auditIneffective use of staff time, which leads to employee dissatisfaction and potential turnover CLEAR SOLUTION FOR THE WHOLE BUSINESS In order to avoid the aforementioned operational and personnel problems, hedge funds need to implement a solution that helps them improve efficiency, promote transparency and minimize operational risk. Implementing the proper automated reconciliation solution also helps facilitate a smooth, monthly financial close process that supports every area of that investment manager’s business. The financial close process helps establish key performance indicators (KPIs) around all participants in their investment management processes, including custodians and prime brokers. An efficient reconciliation solution also helps with the root-cause analysis, as well as identifying potential solutions for those custodians and prime brokers with KPIs that indicate below average performance. At the end of the day, an automated reconciliation solution plays a major role within any internal control environment that is looking to improve accuracy and eliminate barriers to the timely completion of the financial close process. POSITIVE IMPACT Automating the reconciliation process not only helps the hedge fund’s back office with improving efficiency and reducing overall operation risk, but also supports the activities of the trading desk by providing reliable position/cash information, as well as accurate profit and loss figures that are shared internally and with investors. Hedge funds can also use an automated reconciliation solution to support non-traditional reconciliation activities, such as identifying stale pricing, synchronizing an order management system (OMS) with an accounting system and reconciling security master information across multiple systems. Hedge funds, as all of the players in the financial service space, need to evolve and adapt to the ever-changing economic environment. Faced with tough mandates from regulators, and even tougher demands from investors, hedge funds are turning to automated reconciliation systems as a way to improve their operations, mitigate risk and reduce costs.

  • Fund Accounting Essentials

    Open-ended investment funds are funds that allow individuals and institutions to invest in, or take their money out of, the fund on an ongoing basis. Funds might permit this on a daily, weekly, monthly, quarterly or less frequent basis. Let’s assume we have here a daily dealing fund. This fund allows the investor to invest cash today and withdraw cash any day after today. The investor could have money in the fund for years or could withdraw cash next week. If I invested $100,000 a week ago and want to withdraw all my money now, how much do I get? What is my investment worth now? This daily dealing fund must be able to tell me, the investor, what my investment is worth on any given day. So the value of the fund must be calculated on a daily basis. The fund must sum up the value of everything it owns, subtract the value of everything it owes and so calculate a net asset value, a NAV. The NAV calculation determines how much the investor gets when they withdraw some of their investment. How we get from that total fund NAV to my share of the fund depends on how the fund is structured. If the fund is established as a partnership, partnership accounting will allocate gains and losses to my account and on any day the net asset value of my account can be ascertained. If the fund is set up as a company or as a trust it will be unitised. This means that investors are given units or shares in the fund at the time they invest. These shares have a value, a NAV per share. The NAV per share changes over time. The NAV per share at the time of my investment determines how many shares I’m allotted. The NAV per share at the time I withdraw my cash determines how much I get paid. The NAV is the basis upon which investors invest or withdraw cash to or from a fund. It ensures that investors share the gains or losses equitably. Therefore its accuracy is hugely important. Fund accounting refers to the maintenance of the financial records of an investment fund. Accounting records must be kept for the investor activity, the portfolio activity, the income earned and the expenses incurred by the fund. In addition, the instruments held by the fund must be valued regularly and fund accounting records these changes in value. The fund accounting for this activity forms the basis for the net asset valuation and for the preparation of periodic financial statements. Our focus is on the NAV calculation. What is the NAV cycle? Cash is invested into a fund. The fund issues shares to an investor. The fund then makes investments in various financial instruments, earns income and incurs expenses. The net asset valuation is calculated. The NAV per share is the basis upon which subsequent investments and withdrawals are processed. So the NAV per share determines the number of shares issued to investors and the amount of cash paid to investors. That is the NAV cycle. The NAV is the assets of the fund minus the liabilities of the fund. It’s calculated so the fund knows how much to pay investors when they withdraw their investment; and to know how many shares to issue to new investors. It is also used to report fund performance.

  • When Should Hedge Fund Outsource?

    Strategic outsourcing of functions such as administration and technology is an issue that fund managers face throughout a lifecycle, beginning with earliest seeds to full maturity. Cost is a factor when deciding on a service provider, but think long term when outsourcing. Investors will scrutinize your choice of service providers as closely as they will your strategy. Without an institutional-grade administrator and technology provider, you’ll never be able to attract the level of institutional investors you need and you’ll also have a hard time growing beyond family and friends’ money. Administration: The success of a fund depends on engineering the proper split of responsibilities for running the firm: investment management activities, day-to-day operations and outsourced administration operations. The fund administrator is usually responsible for: remarking the portfolio; maintaining quality control over valuation; calculating NAV; providing third-party valuations; calculating the fund’s income and expense accruals; preparing reports to shareholders; and maintaining and filing the fund’s financial books and records, including reconciliation of holdings with custody and broker records. But some administrators may offer other services, including: trade order management, confirmation and settlement; collateral administration (the day-to-day oversight of collateral, calls, payments and challenges); and risk measurement. Choosing the right administrative provider is crucial to the success of your fund. But assessing an administrator is never simple. Some of the questions to ask a potential administrator include: Expertise: Do you have an understanding and familiarity with the fund’s strategy?NAV: How frequently can you provide NAV calculations? Can you offer daily or weekly estimates if necessary?Reconciliations: How often do you do reconciliations?Scalability: Do you have the capacity to scale upwards as the fund grows and its strategy evolves?Infrastructure: How robust is your technology platform? Technology Regardless of strategy and size, all firms seek the same core IT requirements: a robust, scalable, fully tolerant system—essential for their business-as-usual operations. Outside the core requirement are variations that differ between funds based on strategy, order management systems, portfolio management systems (PMS) and risk management systems (RMS). By breaking up the outsourcing of core IT infrastructure and RMS/PMS into separate components, you segregate service-provider risk, thereby reducing overall risk. Outsourcing saves money upfront but carries other risks that must be managed. Funds must pay attention to the technology provider’s security, privacy and data-recovery capabilities. And, remember: you can have the most robust IT infrastructure, but if the personnel and SLAs behind that infrastructure are lacking, then it means nothing. Another important consideration in outsourcing is to find a provider that can connect you to a community of experts and professionals that will help you grow. Things to consider when outsourcing core IT infrastructure include: Public (cloud-based services) versus privateAssessing the Support and Service Level AgreementsAssessing provider’s security, privacy and disaster recovery capabilities Choose wisely when deciding on a provider and remember: you are responsible for everything your supplier does. You still need to have someone in-house monitoring things. Think long and hard about whom you outsource to since investors will be examining your decisions closely. Courtesy- Bloomberg

  • Legal Issues Of Structuring The Fund

    Building a solid legal and tax foundation is essential for your hedge fund. The fund’s documentation and tax structure are some of the main building blocks in its creation. Documentation: More than Boilerplate Setting up a hedge fund entails more than 100 legal documents. One of the most important is the offering memorandum or private placement memorandum (PPM), which is central to the success of the fund. It spells out the fund’s strategy, the risks and constraints of the strategy, the team members and their histories, the fund’s governance and its legal underpinnings. It outlines the guts of the fund: how it will function as a legal entity; how to subscribe to the private placement; redemptions; and risk warnings. It’s tempting to think of it as boilerplate, but investors spend a great deal of time going through the offering memorandum because it lays bare the framework, discusses the rights of investors and addresses such matters as founder shares. And, when the PPM gets reviewed, if the risk warnings are out of sync with the alpha proposition or the redemption mechanics don’t square with the liquidity, then it’s unlikely to pass muster with investment consultants and advisers. Balancing the rights of the investors against the tools needed by the manager to steer the fund requires experienced counsel. So, when choosing a lawyer to draft the PPM, make sure to hire someone with experience. Tax Structure In thinking about your tax structure, you need to take a two-pronged approach: What works best for the manager side and what works for the fund side? Fund side: The tax structure must start with the investors. Accordingly, knowing your investors is critical: Are they U.S. or non-U.S. investors? Are they U.S. taxable or tax-exempt investors? Is the fund structured as an efficient vehicle from the investors’ perspective? The three categories of investors all have competing needs. The non-U.S. investor wants to avoid paying tax on a current basis, while the U.S. taxable investor has to pay income tax on a current-year basis. Finally, the U.S. tax-exempts wish to accumulate gains and pay tax only upon redemption of the shares. A master fund fed by an offshore corporate fund for non-U.S. and U.S. tax-exempts and an onshore partnership for the U.S. taxable investors is able to satisfy the competing tax needs—with the partnership set up in Delaware and offshore fund domiciled in the Cayman Islands. Manager side: The limited liability partnership and the partnership agreement are the cornerstones of any manager’s legal infrastructure. The LLP serves to future-proof the fund against changes in the regulatory or tax landscape and retain fees for marketing shares in the fund. The partnership structure also allows for a lower tax rate. If the LLP can be thought of as a kind of marriage license, the partnership agreement serves as the “pre-nup,” spelling out the terms of the dissolution of the partnership, covering everything from a falling out between partners to retirement to death. Arguably, from the manager’s perspective, it’s the most important document—and it’s important to have the discussion at the beginning. Courtesy- Bloomberg

  • Why do Hedge Funds fail?

    Yale Strategist Reveals The Truth About Hedge Fund Failures By now you’ve begun to notice a pattern in the news about hedge funds: Nobody is making money anymore, so managers are returning millions to disappointed investors. The latest to close is Eton Park Capital. But the decision by that fund’s managers is hot on the heels of epic losses by previously high-flying funds. A few of the notables include Pershing Square Capital (run by activist investor Bill Ackman) and startling declines reported by John Paulson, the manager who famously bet against the housing market before it collapsed. There has been a lot of interesting analysis as to why this is happening. As my MarketWatch colleague Howard Gold concludes in a recent column, mostly it’s a problem of supply and demand. Essentially, the ability to consistently beat the stock market is a vanishingly rare talent. Investors who were early in the hedge fund game saw some distinct advantages, which only drew in more investors.The resulting f