The introduction of ‘transparent funds’ marks the next stage in the evolution of the AlphaMetrix platform. An imminent technology upgrade will further expand the functionality of the platform.

Aleks Kins does not want Alpha­Metrix to be classified as a managed accounts platform. That may sound strange coming from the CEO of the fastest-growing managed accounts platform operator in the US. However, for Kins the future of AlphaMetrix extends far beyond the provision of managed accounts.

“Our goal is to help the hedge fund industry become more transparent and efficient,” says Kins. “Managed accounts are one way to do that, but they’re not the only way.”

In May 2011, AlphaMetrix introduced a new investment product on its platform called a ‘transparent fund’. With a transparent fund the manager retains their existing hedge fund structure and hires AlphaMetrix to provide intraday portfolio prices, risk analytics and reports to investors. Transparent funds are listed on the AlphaMetrix platform and can be accessed by investors in the same way as pooled managed accounts.

“Transparent funds provide investors with a managed accounts experience within a traditional hedge fund structure,” says Kins. He sees them as a way for hedge fund managers to meet investor demands for transparency without the additional costs and operational complexities associated with managed accounts.

Investors do not have the same level of control over assets in a transparent fund as they would with a separate or pooled managed account but there is greater choice and no performance slippage due to tracking errors, notes Kins.

The introduction of transparent funds has greatly expanded the range of strategies and managers that AlphaMetrix is able to offer to investors. The company has listed 65 transparent funds since May, more than doubling the number of products available to investors on its platform.

The launch of transparent funds follows AlphaMetrix’s acquisition in December 2010 of Spectrum Global Fund Administration. The deal gave AlphaMetrix a proprietary fund accounting and general ledger system that is capable of producing fully loaded net asset value (NAV) calculations on an intraday basis.

The Spectrum software receives trade information in near-real time from over 20 prime brokers and electronically reconciles this with hedge funds. The trade data is used to calculate profit and loss (P&L) and NAV statements. With Spectrum’s technology AlphaMetrix has the ability to price hedge fund portfolios every six to 12 seconds, according to Kins.

Spectrum trade reconciliation and portfolio accounting system is the engine behind the transparent funds. “Spectrum’s technology has helped us to expand our capabilities as a transparency provider beyond managed accounts,” says Kins.

Three allocation options
AlphaMetrix now offers investors the option of allocating to hedge funds through separately managed accounts (SMAs), pooled managed accounts (PMAs) and transparent funds via its platform.

PMAs account for the majority of the $6 billion invested in hedge funds through the platform. Kins believes this business “could quadruple over the next five years” as investors gravitate towards structures that offer greater transparency and control over their hedge fund holdings.

However, managed accounts are not a perfect solution, says Kins. “Investors have been willing to tolerate the shortcomings of managed accounts – tracking errors, the additional layer of fees, high minimums and limited choice – because they want the transparency and cashflow controls. The quest for transparency has made managed accounts popular, but that does mean they are a panacea.”

Kins believes transparent funds could have broader appeal because they allow investors to access a wider range of hedge funds with the same level of transparency as ­managed accounts.

Irrespective of the structure investors choose, AlphaMetrix provides them with a suite of portfolio construction tools, risk analytics, due diligence reports and background checks on managers. Once an investment is made, investors can track performance and risk exposures in near-real time. The level of transparency is controlled by managers but in many cases investors have access to position level information in real time.

Kins’s desire to improve transparency in the hedge fund business can be traced back to his time as an investment manager in the late 1990s and early 2000s.

A graduate of Brown University, Kins started his career in the research department at the Chicago Mercantile Exchange (CME). At CME he was responsible for identifying fragmented markets that could be moved onto an exchange.

He later joined Carr Global Advisors, a fund of hedge funds (FoHFs) subsidiary of Credit Agricole. As a senior investment manager and head of research at Carr, he oversaw the development of its risk monitoring systems. He also played a lead role in developing the Calyon Financial Barclay Index, one of the first indices to track the daily returns of commodity trading advisers (CTAs).

In 2002 Kins co-founded Access Asset Management, a partnership with Ramsay Quantitative Systems, a Chicago-based commodity pool operator. Access was an incubator and provider of seed capital, business advice and administrative services to emerging CTAs. Kins left Access and established AlphaMetrix in 2005 after Lehman Brothers acquired Ramsay.

Frustrated by delays
As an investor Kins was frustrated by the lack of timely trade information and analytics available from hedge funds. “It was difficult to get position level information from managers, and even when we did get it, we did not have the systems to process the data,” he says.

Drawing on his experiences at CME, Kins set out to build software that could bring transparency and efficiency to a fragmented ­marketplace.

In its first iteration AlphaMetrix offered a software tool that allowed investors to track and analyse position level data from hedge funds in near-real time. It initially focused on CTAs, the most liquid segment of the hedge fund marketplace, and offered investors access to managers through SMAs and PMAs.

AlphaMetrix started offering non-CTA hedge fund strategies as managed accounts in 2010 and has mostly recently expanded its services with the launch of transparent funds.

AlphaMetrix performs a broad range of functions in its capacity as the platform operator. The research team, led by Ranjan Bhadhuri, screens funds for inclusion on the platform and produces in-depth due diligence reports on the investment strategy and risk controls of managers. The reports are made available to investors through the platform.

AlphaMetrix Financial Investigations, the investigative due diligence arm of the company, headed by former US Secret Service agent David Fisher, conducts background checks on managers.

Once a fund is on the platform, AlphaMetrix uses its software to collect and reconcile trade information from the manager and its prime brokers and provides portfolio prices and position level transparency to investors in near-real time.

Finally, AlphaMetrix provides 24-hour risk monitoring of funds on the platform and ensures that managers stick to their defined ­investment parameters.

Boost to capabilities
The acquisition of Spectrum further bolstered AlphaMetrix’s capabilities and gave it the tools to reconcile trade information and calculate portfolio prices internally, rather than having to rely on external administrators.

AlphaMetrix continues to push the limits of its technology. In July, the company rolled out an electronic subscriptions and redemptions system for funds on the platform. Fund documents have been digitised and orders made through the platform will be electronically routed to the fund manager and administrator, reducing operational risks and ensuring faster turnaround of subscriptions and redemptions.

“The biggest operational risk for hedge funds outside of trading is the subscription and redemption process,” says Kins. “We have been able to greatly reduce the chances of lost orders by automating the process and implementing an electronic ­signature system.”

Kins views the ability to ‘point, click and invest’ as a natural evolution for the hedge fund industry. “A fund is a company. Investors are purchasing units of a company. It is a marketplace. It can be electronic.”

The launch of automated subscriptions and redemptions paves the way for the next stage in the development of the platform.

AlphaMetrix plans to release the latest version of its software before the end of 2011. The upgrade, which has been in development for five years, will transform AlphaMetrix into “an information superhighway” that connects hedge fund managers, investors, service providers and other stakeholders.

In September AlphaMetrix introduced a profile management application that allows hedge fund managers to share information on the platform with investors and service providers with different levels of granularity.

“Hedge fund managers can connect to the platform and control the information that goes to different destinations,” says Kins.

AlphaMetrix is also exploring the possibility of working with other stakeholders in the hedge fund industry, including regulators.

“We can help hedge funds to aggregate their data and provide reports to not only investors but also regulators. Once the platform is established, it can serve countless purposes,” says Kins.

The ultimate goal for Kins is to transform AlphaMetrix into an electronic marketplace and communications hub for the hedge fund industry. He sees the future of the company as a utility rather than a service ­provider.

This is why Kins is uncomfortable with AlphaMetrix being called a managed platform. He prefers the term ‘meta platform’ from Greek, meaning beyond or all encompassing.

“What we want to be is an operating system for the industry,” says Kins. “We’re inspired by companies like Google, Facebook and Microsoft. AlphaMetrix is an electronic environment where the hedge fund industry can operate in the most efficient and transparent way possible.”