11.20.2013

Operational Issues Preoccupy Hedge Funds

11.20.2013
Terry Flanagan

Hedge funds are preoccupied with operational issues, in particular post-trade processing.

“The most significant operational trend that we expect to continue to impact the hedge fund community in 2014 is the concerted push to implement post-trade automation capabilities to reduce operational risk and total costs while better positioning the firm to meet increased investor due diligence requirements and elevated regulatory demands,” said Matthew Nelson, executive director of strategy at post-trade services provider Omgeo.

The financial markets have changed quite significantly in the last few years, post-Madoff and the financial crisis.

“Fund managers have become even more focused on managing risk and being able to demonstrate that capability to investors while satisfying regulators,” Nelson said. “Automation has played a big role in this area, particularly in a multi-prime broker model, which has added complexity around managing middle and back office processes.”

Operational Due Diligence (ODD), is an increasingly important element in the decision making process of institutional investors. Investment performance without robust infrastructure is unlikely to convince investors to entrust their money to funds where doubts exist over operational systems and procedures.

“The investor due diligence process has also become much more stringent in the last few years, with investors looking farther under the operational hood than ever before,” Nelson said. “Funds need to demonstrate robust operational processes in areas like post-trade processing. Through automation of the post-trade process, funds can dramatically decrease risk of trade failures tied to manual processes and human error.”

Cor Financial’s Salerio, a post trade processing provider to hedge funds, asset managers and third-party administrator firms, has published a whitepaper examining how post-trade processing as an example of a business critical area where proving the robustness of systems and procedures can deliver significant commercial benefits.

The whitepaper also reports that there is increasing evidence that prime and executing brokers are beginning to examine the relationship between risk and reward across their customers, with particular attention to operational procedures and the quality of information provided by clients.

“AIFMD is occupying the minds of many fund managers right now,” said Ken Skehan, head of business development at Cor-FS Salerio. A general requirement of the legislation is that the information flow between all parties in the trading cycle is effective. So an example of appropriate investment in technology would be confirming trades at the earliest point in the trading cycle, to ensure all subsequent flow of information is accurate and trustworthy.”

Many hedge funds still place huge reliance on their prime brokers for what the fund managers see as their middle and back office operations. “What new industry wouldn’t be delighted that the world’s biggest banks created the concept of prime broking to provide them with access to global money markets that enabled leveraging of the fund’s assets? Is it enough now though, to give institutional investors the comfort they seek?” said Skehan.

“Some might argue that prime brokers have an opportunity to extend their services to offer Electronic Trade Confirmation to their clients and do the job themselves,” Skehan continued. “That’s certainly a perfectly feasible possibility. However, it seems to me that if you want to solve a problem permanently, treat the root cause. Which means as early in the trading cycle as possible – and with the hedge fund taking responsibility itself.”

Pension funds, sovereign wealth funds, endowments and other institutional asset owners are sitting on vast troves of data -- but extracting value from that data is more challenging than ever.

#AssetOwners #DataQuality

Technology costs in asset management have grown disproportionately, but McKinsey research finds the increased spending hasn’t consistently translated into higher productivity.
#AI #Fiance

We're in the FINAL WEEK for the European Women in Finance Awards nominations – don't miss your chance to spotlight the incredible women driving change in finance!
#WomenInFinance #FinanceAwards #FinanceCommunity #EuropeanFinance @WomeninFinanceM

ICYMI: @marketsmedia sat down with EDXM CEO Tony Acuña-Rohter to discuss the launch of EDXM International’s perpetual futures platform in Singapore and what it means for institutional crypto trading.
Read the full interview: https://bit.ly/45xRUWh

Load More

Related articles

  1. Daily Email Feature

    Asset Owners Increase Outsourcing

    Segments of the market that have typically been closed to outsourcing middle office services are now open.

  2. This makes a traditionally hard-to-access market available to crypto-native investors and institutions.

  3. UK Launches Asset Management Review

    They will create 1,800 jobs across London, Edinburgh, Belfast and Manchester.

  4. From The Markets

    U.S. ETF Assets Reach Record

    Year-to-date net inflows of $798.77bn are an all-time high.

  5. The ETF gives exposure to euro sovereigns through a climate transition-focused investment strategy.

We're Enhancing Your Experience with Smart Technology

We've updated our Terms & Conditions and Privacy Policy to introduce AI tools that will personalize your content, improve our market analysis, and deliver more relevant insights.These changes take effect on Aug 25, 2025.
Your data remains protected—we're simply using smart technology to serve you better. [Review Full Terms] | [Review Privacy Policy] By continuing to use our services after Aug 25, 2025, you agree to these updates.

Close the CTA