Back Office Is Big Business

Terry Flanagan

Back office operations, once viewed as a purely administrative function, are now being viewed as an integral part of an alternative fund’s success.

Alternative managers are increasingly looking to their operations staff for improved efficiency, increased transparency and greater accuracy to manage risk and enhance performance.

Funds, however, often lack the dedicated expertise and appropriate technology platform to maximize their operational procedures. They are therefore looking to capable third-party providers to help customize and integrate back-office processes such as custody, banking and cash management.

“We look at clients as a partner, whether it’s technology, back office or innovations,” said Nicholas Gialanella, global head of operations at BNY Mellon Alternative Investment Services, at the Linedata Exchange conference on Wednesday. “Technology allows us to do things that were unthinkable 20 years ago. If you’re having a C-suite conversation with asset managers, you have to be cognizant of the tools in your arsenal in order to effectively service your clients.”

BNY Mellon is a leading administrator of alternative assets, including single manager hedge funds, funds of hedge funds, and private equity, with more than $600 billion of alternative assets under administration and/or custody.

New business models are emerging for the safekeeping of cash and securities whereby
alternative managers are turning away from prime brokers and moving toward custody banks. Such financial institutions have the demonstrated scale and scope to meet operational needs, ensure liquidity and facilitate transparency for alternative investment funds.

BNY Mellon saw its FoHF assets under administration (AUA) rise to $133.4 billion for the six months ending April 2013, up two percent from the prior period.

In keeping with their often secretive investment processes, alternative funds have traditionally preferred to keep most of their operations in-house. Fund accounting, reporting and reconciliation were all handled by a fund’s back office, which was not typically at the forefront of alternative manager concerns.

This all changed during the financial crisis when it became clear that many portfolio managers underestimated the operational capacity needed to run an alternative fund.

“For technology and service providers, the error rate is zero,” said Chris Anci, co-founder and managing member of M3Sixty, a Kansas City-based provider of fund accounting, transfer agency, distribution, fund administration, broker/dealer, and trade execution.

“Asset managers want to manage money and raise assets. We are offering support in areas like product distribution, in addition to back office.”

M3Sixty uses Linedata Mfact, to handle a high volume of trading and complex investments, including hard to price securities, derivative instruments and multi-currency funds.

BNY Mellon’s Alternative Investment Services provides middle and back office operational support such as custody administration, portfolio servicing, and execution services.

“We are administrators,” said Gialanella. “we want to help our clients do what they do best.”

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