How will technology requirements change over the next 12–24 months? What are the technological challenges facing hedge fund administration?

Technology is becoming ever more important as fund administrators need to meet the increased demands of clients for faster and more accurate reporting, sometimes on a 24/7 basis. As the industry itself evolves, the use of managed accounts is increasing, bringing with it specific challenges for reporting. As technology evolves, administrators will be able to offer more efficient and cost-effective services.

Technology in the hedge fund industry is always evolving, according to Richard Ernesti at Citi. “Changing fund structures and increased regulation require increased technology investment. The most successful administrators will be able to demonstrate full integrated platforms which cover the fund’s entire life cycle,” he notes.

“Many administrators grew by acquisition, inheriting disparate systems and applications. Very few have managed to standardise their platform and provide true straight-through processing (STP) across their back-office services. Citi has been an industry leader in this regard,” adds Ernesti.

Fund managers are demanding integrated service models that can offer a range of services to hedge fund and fund of hedge fund (FoHF) investors, such as cash management, collateral management, securities financing, and lending, says Ernesti.

Peter Hughes at Apex Fund Services is seeing a shift towards more managed account platforms and more frequent valuations. “It is important to have the technology that can deliver the service levels required by clients and their investors,” he concludes.

“An over-reliance on spreadsheets has been replaced by sophisticated technology solutions, which has led to increased operational efficiency, tighter controls and greater transparency as a result of better reporting capability,” notes Liam McNiffe at Bank of Ireland Securities Services.

“Over the next 12–24 months technology will evolve further linking middle- and front-office processes. It will be capable of supporting the increased requirements of investors and regulators as well as investment managers. Web reporting will become a prerequisite,” he predicts.

Technology must use industry standard programming languages in order to be able to import and export data from/to a variety of systems including custodians, investment managers, reconciliation software, regulators and institutions, he notes.

At Butterfield Fulcrum, Akshaya Bhargava says the technology used by hedge fund administrators has historically been geared towards provision of a basic month-end net asset valuation (NAV) calculation service. “With all the additional services that some administrators are now providing – daily reporting, middle office, risk reporting – the technology will need to keep pace,” he notes.

“Many administrators will be employing a combination of proprietary and vendor-supplied systems and the challenge lies in integrating these systems in order to ensure a global technology infrastructure is robust enough to support operational risk management, yet flexible enough to enable customised solutions for customers,” advises Bhargava.

“Future regulation and reporting requirements may also drive technology developments,” he adds.

Oliver Scully at Citco Fund Services says investors and managers will continue to demand greater online reporting and flexibility.

“Technology will continue to evolve at a rapid pace over the next 12–24 months,” predicts John McCann at Trinity Fund Administration. “There will be greater demands towards real-time systems, to greater frequency of valuations, to middle-office servicing that will demand technological automation in terms of portfolio analysis and risk reporting.

“There will be greater involvement in the areas of middle office and compliance as the investors scream for transparency on a more frequent basis and the hedge fund managers will expect their service providers to produce the information required,” he notes.

The demands to meet regulatory change and some new investment products will undoubtedly occur during the next 12–24 months, according to Dermot Butler at Custom House Global Fund Services. “These will equally require some increased technology in order to be able to service the client effectively. First-class technology is critical and the main technological challenge is to be nimble-footed and meet the demand as soon as it occurs or very shortly thereafter,” notes Butler.

State Street’s Deborah Yamin believes there are several major technology developments and enhancements that fund administrators will continue to implement over the next 12–24 months. “As fund managers seek increased access to their data, administrators are building a data warehouse that integrates information from front-, middle- and back-office systems and delivers online access to this data through upgraded client web portals,” she notes.

The key benefits, according to Yamin, will be faster and direct access to client data. Next is the development work under way for administrators’ technology platforms to support 24-hour trading. This responds to increased global trading activity by fund managers.

“Administrators are also developing enhanced investor transparency reporting that aligns with current trends for increased disclosure of portfolio holdings,” Yamin says. “Administrators are busy building a technology bridge with fund managers that will allow for more interactive and transactional activities by fund managers’ investors, similar to today’s retail fund environment where investors can access, view and make changes regarding their investments.”

“It would take a clairvoyant to describe what those technological challenges will be. In the meantime, we are continuing to develop automated solutions to various tasks that we have to deal with every day,” he says.

Stephen Castree at Equinoxe Alternative Investment Services says technology solutions have improved significantly over the past decade and the majority of these solutions are available off the shelf. “The manner in which these are used is key and therefore the operating model applied and the people element of the business is critical at this stage,” he concludes.

Hans Hufschmid at GlobeOp expects data growth and demand to increase exponentially. Fund managers, investors and regulators will require significant data management expertise and capacity, he believes.

“Real-time data integration and reporting demands will accelerate. Fund administrators will need robust technology platforms: resilient and capable of high-volume transaction processing, data integration and customised reporting,” predicts Hufschmid.

“To meet operational and investor due diligence requirements, their technology and facilities will require best practice business continuity management and disaster recovery, as well as annual SAS 70 Type II audits,” he adds.

“In the next 12–24 months we expect more emphasis on frequency of valuation as institutional investors and regulators push for more transparency into their investments, quality and frequency of pricing delivery and more focus on the robustness of service provider technology, including disaster recovery,” reveals Paul Stillabower at HSBC Securities Services.

Stuart Feffer at LaCrosse Global Fund Services says administrators need to continue to invest in technology to keep up with market developments, “particularly if they provide middle office and operational support.” He says LaCrosse is one of the few operation providers able to support fully over-the-counter clearing on Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE).

Hedge funds and investors will continue to demand increased flexibility and transparency into their portfolios, leading to a need for automation by administrators, advises John Buckley at Omnium. “Technology is an ever-growing differentiator among administrators; for those whose offerings do not have a solid technology foundation, it will become increasingly difficult to remain competitive,” he warns.

Staying at the forefront of industry developments is a key differentiator, according to David Morrissey at SEI. “Our technology focus remains on items that increase transparency and improve risk mitigation. For example, our recent bank loan enhancement brought increased automation to the process,” he says.

“We will continue to expand our workflow technology across our business, focus on data analytics and reporting, and continue to work with the industry’s leading providers to create the best possible solutions for the market,” Morrissey says.