Special Report

www.hedgeweek.com special report

A Global Fund Media Publication | February 2019

US Hedge Fund Services 2019

Active intelligence Increased volatility AI & robotics for cloud security should favour drive greater US stock pickers efficiency KEY STEPS TO SUCCESS Managing a Start-up or Emerging Hedge Fund in 2019 WEDNESDAY 29 MAY 2019 THE UNIVERSITY CLUB, NEW YORK

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GFM-US-HF-Event AD 2019.indd 1 29/01/2019 11:38 CONTENTS In this issue…

04 Higher volatility should favour specialist stock pickers By James Williams, Hedgeweek

11 Time for active managers to prove their worth Interview with Jack Seibald, Cowen Prime Services

14 Standardising digital communication for fund data Interview with Joanna Babelek, HedgePole

17 Applying active intelligence to cloud security Interview with Jed Gardner, Linedata

20 Hedge funds to regain their shine in 2019 Q&A with Frank Napolitani & Jaclyn Greco, EisnerAmper

23 Using AI to better visualise complex data Interview with Mike Megaw, SS&C GlobeOp

25 Make your cloud environment a fortress By Mary Beth Hamilton, Eze Castle Integration

28 Robotics migrates into the desktop Interview with Christine Waldron, U.S. Bank Global Fund Services

30 Standardising the fund administration industry Interview with Robin Bedford, Opus Fund Services

32 Residency of independent directors more important in current market Q&A with Karl O’Reilly, IMS

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Published by: Global Fund Media Ltd, 8 St James’s Square, London SW1Y 4JU, UK www.globalfundmedia.com ©Copyright 2019 Global Fund Media Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 3 OVERVIEW

Higher volatility should favour specialist stock pickers By James Williams, Editor in Chief, Hedgeweek

The market correction that ripped through Q4 macro factors and was, in many respects, 2018 was perhaps a pre-cursor for increased a necessary event to release valuation volatility this year, and if that is the case, pressure that has been building in US equity active fund managers – especially specialist markets in one of the longest bull market sector-focused stock pickers and short rallies since the Second World War. specialists – could make substantial gains for The question for investors in 2019 is their investors. whether hedge funds can step up and The volatility index (VIX), which some like deliver sustained alpha in a higher volatility to call the ‘fear and greed’ index, spiked environment. above 36 on Christmas Eve while the Some of the most famous managers Dow Jones crashed below 23,000 on 20th continued to shine such as Ray Dalio’s December: a 4,000 point decline from its Bridgewater, whose flagship Pure Alpha October peak. strategy generated 14.6 per cent net of fees, This shake-up was largely driven by as reported by CNBC. D.E. Shaw produced

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 4 OVERVIEW similar returns for its Composite Fund, “I do think it’s a good time for returning 11.2 per cent in the year, while another titan of the industry, Renaissance hedge funds. The small and Technologies, saw its RIDGE Fund generate mid-sized space looks really returns north of 10 per cent. attractive. We are allocating These managers are the apex predators, accessible to only the largest institutional to a number of strategies investors and as such represent a tiny including equity long/short, percentage of the overall industry. Not that they all did well. Some funds, event-driven and global macro such as Dan Loeb’s activist-focused Third and I’m positive on 2019.” Point had a challenging year, reportedly Kieran Cavanna, Old Farm Partners down 6 per cent in December alone, according to CNBC. The influence of passive investments, could be another couple of months before whose popularity has skyrocketed since we see those redemptions being met.” the Global Financial Crisis, has created real Kieran Cavanna is the co-founder of Old problems for hedge funds. Those who trade Farm Partners, a New York-based FoHF the markets based on deep fundamental manager that focuses specifically on small research were swept into the vortex in Q4 as and mid-sized managers. Cavanna previously ETFs and other passive products recorded managed the hedge fund selection team at losses. Hedge funds who operate perfectly Soros Fund Management. sound trading strategies designed to He says that while no one can ever know generate uncorrelated returns could not help how the markets will perform, “I do think but be buffeted by index moves. it’s a good time for hedge funds. The small As CNN reported, the S&P 500 was up and mid-sized space looks really attractive. or down more than 1 per cent nine times We are allocating to a number of strategies in December and 64 times for the calendar including equity long/short, event-driven and year. “In all of 2017, that happened only eight global macro and I’m positive on 2019. times,” it reported. “You saw big dislocations in Q4 but risk Hopefully, what this shake-up will do is assets have ripped back up in the last few bring markets back to earth and operate weeks; biotech as a sector is up 11 or 12 per on fundamental principles, rather than be cent alone. Things are more volatile, it could artificially inflated by years of central bank go either way, but I think a lot of managers intervention. who are geared towards volatility and thrive, If it does, this could augur well for come what may, could do very well this specialist hedge funds who operate in the year,” says Cavanna. middle-markets, away from the titans referred In his view, the markets have gotten to above, and allow them to demonstrate distorted because of the market cap- why, in more challenging markets – rather weighting of all the money that has gone in than a one-stop bull market rally – hedge to passive funds and index products. funds can deliver good risk-adjusted returns, “I can’t say whether that will persist or that passive investments simply cannot. end but I do think the flood of passive “Some of the new managers we were money has slowed and many distortions working with in Q4 have now either launched that have been built up could unwind to or are preparing to launch,” comments Jack some degree… I’m not hearing the whole Seibald, Global Co-Head of Cowen Prime ‘Well, I can just buy the S&P 500 for 5 basis Brokerage and Outsourced Trading. “I think points’ argument from investors at all any we will see more funds close this year that more. Nobody knows whether we will enter have long outlasted the patience of their a recession in 2019, how much further bond investors. The downdraft didn’t happen until yields might tighten. I do think selective deep into the fourth quarter. Many funds allocations to specialist active stock pickers have 90-day redemption periods so even if could be on investors’ minds this year,” redemption notices were filed at year-end it he says.

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 5 OVERVIEW

Seibald notes that the drops in market “A good 80 to 90 per cent values in December were both “precipitous and sustained”. “Yet in the first four or of hedge fund managers five trading days of January, some of our today probably haven’t seen managers were up substantially: a few as a bear market. We’ve been much as 20 per cent. The selling pressure abated and stocks found their footing again,” in a bull market for the past says Seibald. eight years or more. It is “The question is, do investors judge hedge fund managers on interim results a time to be more nimble or the realised value of the investments and thoughtful around they’ve made? It’s the USD64,000 question. trading than it is to be a How patient is the hedge fund allocator community going to be? I saw funds down steadfast investor.” 10, 15 per cent in December alone and John Rende, Copernicus Capital they’ve nearly recovered those losses in Management January. They haven’t reached their high watermarks of three months ago, but they’ve haven’t seen a bear market. We’ve been certainly regained a good percentage of the in a bull market for the past eight years or drawdowns we saw in December.” more. It is a time to be more nimble and Much of the volatility in Q4 was macro- thoughtful around trading than it is to be a driven and linked primarily to fears of what steadfast investor.” the US Federal Reserve would do regarding This nimbleness and dexterity could interest rates and the impact that Chinese benefit smaller hedge funds more than their tariffs could have on the US market. larger, billion dollar peers who do not have “When you have a correction that the capacity to trade opportunistically as aggressive, in terms of the speed and doing so would be too big a signal to others, magnitude of volatility, correlations go up,” causing the markets to move against them. says John Rende, founder and portfolio As such, if there is a return to volatility manager of Copernicus Capital Management, and more fundamental trading activities, US a specialist equity long/short healthcare fund mid-sized managers could be well positioned based in San Francisco. to capitalise. “I was quite concerned about the impact Ben Axler is the founder and CIO of that these macro events would have with New York-based Spruce Point Capital regards to the correlation effect. I brought my Management, LLC; a specialist short-focused gross and net exposure quite far down and hedge fund. “Uncertainty and volatility go basically had a flat fourth quarter; ending the hand in hand,” Axler tells Hedgeweek. “The year overall with double-digit returns.” main drivers of that uncertainty remain in Rende has been running healthcare play. In our view, one of the causes of that portfolios for more than 18 years. He has volatility has been a miscommunication lived through two severe bear markets, yet or misunderstanding regarding the path still managed to generate positive returns in of interest rates here in the US and what both: from 2001 to 2002, and 2008 to 2009. the Fed plans to do. And secondly, the His historical strategy has been to manage continuing trade war and the inability gross and net exposures around just the to resolve the dispute between the US kind of volatility events seen in Q4 2018. and China. He says the market backdrop has become “Our strategy is predicated on doing more unpredictable and risky “so staying in-depth research on companies and reasons defensive is warranted”. why we think investors should sell or “I’ve told my investors that there are underweight their shares. We find investors markets to invest in, and markets to be more are increasingly interested in hearing about nimble in; and I believe we are in the latter,” the risks of investing in a company during explains Rende. “A good 80 to 90 per cent periods of higher volatility. To some degree of hedge fund managers today probably we see 2019 as a continuation of last year.”

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 6 OVERVIEW

Despite the Fed’s willingness to raise “We find investors are interest rates, on an absolute basis they are still quite low. If the Fed is committed to increasingly interested in raising rates in 2019, however, Axler thinks hearing about the risks this will lead to valuation compression. Last of investing in a company Nov/Dec was a wake-up call that investor complacency was finally put on notice. during periods of higher “The easy money people have made volatility. To some degree we over the last number of years is going to be harder to replicate and investors are going to see 2019 as a continuation need to be more discerning and careful with of last year.” where they place their bets,” suggests Axler. Ben Axler, Spruce Point Capital Asked if it has become harder to trade Management with a short bias in a market that has been dominated by passive investments, Axler considers for a moment, before responding: of hidden gems out there if you look hard “It’s a fair question and something we enough – I think huge start-ups signify to think about at Spruce Point. There has been me that there is simply a lot of money trying a clear move towards passive investing to find a home and when you don’t have and on the margin that hurts hedge funds a track record but you have an amazing that do fundamental analysis. Some of pedigree, it helps to entice investors. the companies we’ve written about are “At Old Farm Partners, we look for index owned, and they don’t seem to care proven managers running USD100 million to whether or not management teams are USD1.5 billion. There is a huge opportunity behaving poorly. All the index cares about for managers in that AUM range. They can is maintaining an appropriate weighting of react and move to the market. If you’re a that stock. lot bigger than this range – running several “We’ve had to therefore refine our billion dollars – that’s not possible, especially investment strategy. We’re looking for on the short side. They just can’t change companies that have a more engaged course quickly enough, the way smaller shareholder base and are willing to listen. managers can. The smaller managers can That is more powerful to us than attempting really move with the opportunity set faster, to engage with an unengaged shareholder and in a world where everything is moving a base…large asset managers or ETF sponsors lot faster this is critical to good risk-adjusted who might own 20 per cent of a multi-billion performance.” dollar company who we know aren’t going to read our research.” Management fees drive behaviour For Cavanna, it is as simple as getting the Alignment of interests right alignment of interests. A hedge fund 2018 saw a couple of significant US hedge with USD5 billion in AUM that charges 2/20 fund launches led by D1 Capital and earns USD100 million a year in management ExodusPoint Capital, both of which raised fees… that’s not what Old Farm Partners is several billion dollars. looking for. In Cavanna’s view, these launches are “My best fund is USD280 million, the somewhat anomalous, coming at a time manager charges 1/20, meaning he earns when other larger hedge funds are closing. USD2.8 million a year to run the business “In general, I’m not seeing a lot of hedge and employ a team of four people. But if he fund start-ups other than the mega start-ups, has a good year of performance, he benefits which is really interesting,” says Cavanna. from the upside. The incentives for a much “I think you’ll see a number of large hedge larger hedge fund running say USD5 billion funds going out of business this year is clear to me; it is the management fee that because performance hasn’t been good drives their behaviour.” enough for some time. I’m not seeing the He says that the portfolio, which next big wave of talent yet there are still lots consists of 17 hedge funds, currently holds

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 7 OVERVIEW

three specialist healthcare funds and two instruments space – companies such as technology-focused funds, all five of which Illumina (ILMN), Thermo Fissure Scientific made positive gains last year. (TMO), even Intuitive Surgical (ISRG) “I think healthcare is by far the best sector that have little macro risk and are not for equity long/short strategies – there is correlated to overall economic concerns. such a wide range of things going on in I don’t want to take binary high beta risk. that sector from technology disruption to I’d rather invest in businesses that are scientific advances, as well as great short well diversified, generating cash and have opportunities coming from drugs that lack little or no correlation to the overall macro strong commercial potential. Technology has risks that exist in the wider marketplace,” similar dynamics. Those two sectors are our explains Rende. biggest allocations and will continue to be,” At Spruce Point, Axler believes that the asserts Cavanna. US technology sector is “fertile ground” to Whereas the HFRI Fund Weighted seek out certain technology companies Composite Index ended 2018 down -4.49 per that have received high valuations yet don’t cent, the HFRI Sector – Healthcare Index was make money. up 2.62 per cent. “One of our successful shorts last year Specialist hedge funds like Copernicus was 2U (TWOU),” says Axler. “Seemingly, the benefit from exploiting opportunities in the more money it was losing the higher its stock broad array of stocks within US healthcare price rose. It was trading at 10x revenues and and biotech, limiting the impact of global even though the price has dropped into the macro headwinds that might otherwise affect fifties, it is still trading at 5x revenues. generalist equity long/short funds. “We currently see several pockets of As Rende articulates, “as a sector opportunity in technology to find companies specialist, it provides a lot of variety in where that have structurally flawed business to invest and trade”. models that will never make money and are, He says that while there are a lot of high in fact, burning through a lot of money as risk, high beta biotech stocks, there are rates slowly rise. As the equity risk premium equally plenty of trading opportunities in increases, the cost of equity rises too. lower risk, lower beta healthcare services, “On the other side of the spectrum, we and to a lesser degree medical devices. are also looking at low growth companies “What I’ve done with my portfolio that have the potential to transition to is emphasise higher quality stocks in declining growth. There are a lot of cyclical companies with less of a macro exposure companies that can swing quite meaningfully in sub-sectors such as the tools and and if you lay on the debt component as

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 8 OVERVIEW

Rende confirms that the book currently has a low net short exposure. In his view, it is important to know not only when to put on short positions but also to know when to take them off. “Various studies have shown that portfolio managers are good at putting on positions but they’re pretty bad and taking them off. It’s an important characteristic of my portfolio and how I view short opportunities. I’ve done this long enough to hopefully limit the cognitive bias in respect to how I think about putting on short trade positions. “If I look ahead for US healthcare in 2019, I’m optimistic, particularly for cash flow- driven businesses that can take advantage of the large wave of financing that has taken place in biotech. Approximately USD81 billion was raised last year in biotech (from IPOs, secondary offerings and venture capital). That was the third largest year in history. The companies that benefit the most from that, broadly, are those in the instruments and tools space supplying US laboratories,” argues Rende. As opposed to making a single bet in the biotech space, being invested in the wider tools and instruments space is a more diversified, lower risk way “to capitalise on the wave of financing we’ve seen over the last 12 months”, he says. US hedge funds have the possibility to well that can lead to significant changes in make serious returns for their investors market valuations. if 2019 ends up becoming a higher “So we’re taking a bar-bell approach: volatility regime, favouring those with the companies where growth targets may never stock picking skills of Spruce Point and be hit and companies which are moving from Copernicus. Shorter-term tactical trading low growth to no or declining growth.” could well end up working to managers’ Spruce Point tends to be more bottom- advantage, relative to passive long-only up than top-down but having said that, from strategies. time to time the investment team looks at As Bloomberg reported, one of the the wider macro picture, with Axler adding: original ‘big name’ hedge fund managers, “If we can find industries under more Paul Tudor Jones, founder and CIO of Tudor pressure than others, it makes the shorting Investment Corp, believes 2019 might be component easier: especially if you have a better time to be a trader than to just an industry under pressure and a company hold. “I don’t know if we’re going to have a within that industry which is being fast and huge amount of trends. It could just be an lose with its financial numbers. It’s always enormously volatile period with a lot of back easier if we can overlay a weak company and forth,” he said. with a weak industry sector.” “I tend to agree,” Cavanna tells Shorts are, by their nature, always going Hedgeweek in conclusion. “The last 10 years to be more trading-oriented because they are you could have just tilted your book 80 per a riskier part of the portfolio. At Copernicus, cent net long, charged 2/20 and look like a short opportunities have increased although genius. Those days are over.” n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 9 COMPREHENSIVE SOLUTIONS FOR INVESTMENT MANAGERS

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While hedge funds struggled in Q4, so did “Returns were very bifurcated, however, so passive investments. Could higher volatility in one should not generalise too much.” 2019 help active stock pickers shine? The HFRI EH Fundamental Value Index The fourth quarter of 2018 culminated in ended December down -5.19 per cent, a substantial market correction. Everywhere underscoring the challenges that active stock one looked, it was a sea of red. Far from pickers faced in the market. Overall it was bringing festive cheer, on Christmas Eve down -8.84 per cent. both the Dow Jones and S&P 500 fell 2.5 Looking more specifically, however, at per cent before a rapid rebound a couple of sector-specific hedge funds, those in the days later. healthcare and TMT space fared materially At one point the Dow was down 18.8 per better. Whereas the HFRI Fund Weighted cent from its October high, while the S&P Composite Index ended 2018 down -4.49 per had fallen 19.8 per cent. cent, the HFRI Sector – Healthcare Index was Volatility is often the friend to hedge up 2.62 per cent, whereas the HFRI Sector – funds, historically, as market corrections Technology Index was up 3.84 per cent. are precisely when active managers “Hedge fund managers in these two can demonstrate their alpha generating sectors were considerably ahead of most capabilities; and by inference, not hide strategies for the year even with the difficult behind market beta in a trending bull market. ending. Funds that were exposed to Asia But Q4 proved a challenge for hedge and to emerging markets, on the other hand, funds, with some high profile names were badly hurt,” says Seibald. enduring a terrible year. Indeed, the likes of Indeed, the MSCI Emerging Markets Index Leon Cooperman’s Omega Capital decided ended 2018 down -14.58 per cent. enough was enough while funds such as “It was a tough period and there was a Dan Loeb’s Third Point recorded losses of 6 wide dispersion of results among hedge per cent in December, as reported by CNBC. funds, but it certainly seems to me that “The Oct/Nov period for hedge funds, relative to market averages, equity-centric broadly speaking, was quite bad, particularly hedge fund managers did not do as badly for those focused on the energy sector, as I would have expected back in early financials and industrials,” says Jack Seibald, December. Global Co-Head of Cowen Prime Brokerage “Among some of the larger established & Outsourced Trading. hedge funds, you saw some outrageously “What transpired in December, however, good performances as well as others that did may have levelled the playing field. The terribly. Based on early results, it seems that fact is, long-only funds suffered sizable there was a wide dispersion of performance, losses that were worse than those incurred with fewer than typical returns hugging the by hedge funds. I think this market sell-off mean; managers either called them right or probably helped put hedge fund performance wrong in 2018,” comments Seibald. in Q4 into a clearer context from the What originally started as a rally that investors’ perspective. If you look at the anticipated better times ahead because overall averages for hedge funds, relative to of deregulatory activity undertaken by the the broader markets, they came out of the current administration, ended up creating an year in not too terrible shape. environment of higher earnings growth. Now

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 11 COWEN PRIME SERVICES

the question is whether 2019 will continue to support strong earnings growth. Back in September 2018, the S&P 500 was trading at a 16.5 multiple but by October that multiple had fallen to 15. CNBC reported on 24th October that whereas some think earnings growth will be 7 to 10 per cent, the markets are pricing in tighter earnings such that the growth figure might be half what the bulls think. “The market appears to have concluded at the end of 2018 that the combination of the Fed’s activities, the US/China trade war, the US/Canada/Mexico trade dispute, and the US government stalemate that resulted in a shutdown, would result in a material slowdown in economic growth and therefore a headwind to earnings growth in 2019. Some market participants have even begun to talk about a decline in S&P earnings,” says Seibald. “I’m not sure it’s that simple, however. Unless there’s a serious external shock, I just don’t see how you go from 3 per cent plus GDP growth to negative growth so Jack Seibald, Global Co-Head was relative to the US. After what happened of Cowen Prime Brokerage & quickly. I still think there are some lingering in December, if you’d stayed in emerging Outsourced Trading benefits from the relaxation of the regulatory markets, you would have gotten hurt just as environment and the tax changes that were bad, if not worse, than the US. introduced, but we will have to see whether “In the US energy sector valuations that results in sustained capital investment. compressed materially as oil prices dropped. As it relates to monetary policy, it already As a result, we’ve begun to increasingly seems that fewer rate hikes than previously hear the same relative value argument from anticipated by the Fed in 2019 are being market participants about 2019.” more widely discussed. Though I’m not in The meaningful increase in volatility the forecasting business, it seems to me that during the last few months of 2018, though the conventional wisdom might be migrating not unexpected or unprecedented, has put to the notion that one might be enough if managers back on their heels. The volatility slower growth expectations are confirmed by index spiked at 35.50 on 26th December economic data.” 2018 and although markets have settled in Record earnings growth combined with January – the VIX is currently 17.80 – hedge the US stock markets falling in December fund managers would certainly welcome led to a dramatic compression in market more volatility to prove their trading prowess multiples. This has created specific to investors. investment opportunities for managers “Overall, I am a somewhat less concerned who focus on fundamental investing. about the outlook for hedge funds in 2019 “The groundwork has been laid for that than I might have been at the beginning opportunity in 2019, whether hedge fund of December. Most investors got hit hard, managers capitalise on it remains to be whether passive or active, so there shouldn’t seen,” comments Seibald. be too much finger pointing at hedge funds. “All I kept hearing from market On a more constructive note, it seems commentators throughout much of the that the increased market volatility we’re back half of last year was that heading into now experiencing ought to provide active 2019 you had to be invested in emerging managers another opportunity to assert markets because that’s where the value themselves,” concludes Seibald. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 12

HEDGEPOLE Standardising digital communication for fund data Interview with Joanna Babelek

Much is written about the operational assets are held across multiple custodians challenges that hedge fund managers and registered with various transfer agents, face today but when it comes to data each one having their own reporting collection – i.e. reference data, pricing, tools in place. Nothing is standardised or portfolio valuations – and trade execution consolidated in order to put together an or standardised reporting, service providers (institutional) investor’s aggregated fund and investors have to contend with plenty of holdings reporting.” pain points. With HedgeData, HedgePole overcomes Of course, managers must stay on top these data flow challenges. Fund managers of operations in the current regulatory and investors can achieve much greater and compliance environment, leading to Joanna Babelek, CEO at ease of communication and importantly, focus more on the front-office. However, HedgePole every piece of data remains confidential for investors, fund administrators and although transparent for the managers custodians, they are crying out for an who have full control over who sees industry-standard electronic data exchange what information on their funds and how for middle- and back-office tasks; one that their service providers communicate delivers an automated efficient flow of fund with investors. data that they can all access at the same “Every investor, upon authorisation, has time at the click of a button. access to pricing data, monthly reports and Cognisant of this lacuna in the the manager can see all of the statements marketplace, three years ago Swiss-based and other supporting documentation they HedgePole set up a dedicated platform, receive from the transfer agents. Everything HedgeData, to facilitate the flow of fund flows through the same platform. Everything information between fund managers (both is digitised. Our task is to make sure the hedge and private equity) and their interested security master data for each fund is held parties, and in doing so has established as a golden copy and that there is no a unified model of digital communication duplication of securities, no missing data, and data exchange whilst maintaining each errors or omissions. Interested parties can party’s authorisation, privacy and secrecy. only see what they are authorised to see “In my view, this industry needs and investors know that all of the data fund managers to help standardise and is up-to-date, clean and verified by an digitise data flow, for which our platform independent party” explains Babelek. provides all the necessary tools and HedgeData tracks 20,000 funds opportunity” comments Joanna Babelek, (approximately 8,000 of which are active CEO, HedgePole. “Hedge fund managers hedge or private equity funds) and provides usually require electronic interfaces from full fund reference data on more than 4,000 their service providers, such as prime individual funds and is linked to some brokers, administrator(s), custodians and 200-plus transfer agents. By sitting in the so on, but if you are a pension fund or an middle, between fund managers and their insurance company you might be allocating administrators on one side, and investors, to a large number of hedge funds whose custodians and other service providers

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on the other, HedgeData basically strips out the myriad challenges of sourcing and distributing accurate up-to-date reference and pricing data. It can even provide the bridge between the manager and administrator to the press and data publications to ensure all of them have the correct data at the same time. The platform uses HPID, a standardised identifier for funds, share classes, series, capital accounts, equalisation factors and so on, to overcome one of the larger reporting and reconciliation challenges on the investor and service provider side that arise when different sources report different prices for the same security leaving investors confused and incapable to consolidate without manual interventions. Inaccurate pricing also exposes fund One of the issues investors face is managers and investors to potential knowing where to get hold of the right regulatory risks when meeting their documents before they invest in funds many regulatory reporting obligations. By leaving analysts spending much time on improving the data quality, timeliness and data collection rather than focusing on due level of transparency, investors who use diligence. As there is no electronic reporting HedgeData are better equipped to perform or consolidated document library, also their compliance checks, generate regulatory most custodian struggle to obtain the latest and tax reports or conduct performance subscription documents and they have to attribution and liquidity analysis on their figure out who is the administrator to each underlying holdings. hedge fund. “Because we track thousands of hedge HedgeData is home to 60,000-plus fund funds and all of the underlying share classes documents to overcome this problem. and securities on behalf of multiple investors Something that is especially helpful for we process all of the data once, which all prospective investors, their custodians and interested parties are then able to access. fund dealing houses who have yet to commit It saves time, reduces risk and everybody the first tranche of capital to a manager. only has to pay a fraction of the cost of “Investors will agree on the investment processing, updating and maintaining all the with the fund manager but it is then their data – it avoids each party having to do it custodian who might not have the fund individually and manually. listed in the system and they will not have Our platform means that nobody the subscription documents, wire details has to waste time chasing statements, or contact details of the transfer agent. We latest subscription documents or fund take apart the prospectus and populate 200 prospectuses. With HedgeData it is all individual data fields, which we can feed to digitised, centralised, verified and, if you are any custodian, investor, administrator or fund authorised, available on-line 7 by 24.” manager so that they can have it in their “We are the equivalent of a Bloomberg own system. We currently also connect to terminal in terms of hedge and private equity large data distributors, so institutional parties fund pricing. By making the data more can be up and running within weeks linking sanitised, standardised and more accessible to the information through an API. to investors and yet keeping it confidential, “The goal is to achieve full process we think the platform is facilitating the way standardisation and data digitalisation and fund managers can communicate in an allow interested parties to source all the efficient and electronic manner with their information from our secure and independent investors and custodians,” says Babelek. HedgeData platform,” concludes Babelek. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 15 At Linedata, we humanize technology

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In 2018, there were over 1200 publicly takes operational risk extremely seriously disclosed security breaches globally with and applies an active, intelligence-driven the number of exposed records more than approach to security. The single tenant doubling from 197.6 million in 2017 to 446.5 architecture leverages industry-leading million last year* as reported by Fortune. The technology from Cisco, NetApp and number and scale of attacks has been rising VMware, and can be used to support year on year for the past decade and with the needs of fund managers of all sizes. general data protection regulation (GDPR) Security is a constant focus at Linedata: now in force in Europe, the number of from third party and proprietary application reported breaches is likely to continue rising. hosting to disaster recovery and cloud With the cloud environment becoming a Jed Gardner, SVP, backup, the aim is to maintain each client’s ubiquitous feature of the fund management Infrastructure Cloud & security posture as robustly as possible at Security Services at Linedata industry as managers seek to benefit from all times. scale and efficiency gains, the migration into A key part of this is how Linedata thinks cyberspace has increased the threats of data about vendor risk. breaches. Over 1.4 billion records were lost In the view of James E., who leads to data breaches in March 2017 alone, many Linedata’s Security Consulting practice, one of which involved cloud servers according of the biggest problems that persists today to Tripwire. Insecure APIs is one way for is a genuine lack of understanding related cybercriminals to exploit cloud security, as is to vendor and third-party risk. It is critical to poor vendor selection and oversight. be able to understand and support anything “There is a lack of understanding of your clients are looking to do, and this how to properly secure a cloud-based process starts with vendor selection. environment, which is providing a driving It is not the fault of any one vendor but force for a lot of the larger breaches we’ve is more a systemic problem in the way seen over the last 12 months,” comments companies approach it. A hedge fund Jed Gardner, Jed Gardner, SVP, Infrastructure manager will send a detailed due diligence Cloud & Security Services at Linedata. questionnaire (DDQ) with 400 data points The problem is not that companies and assume it’s going to solve all their don’t know what they are doing. They problems. However, a completed DDQ, no either leave a lot of the cloud security to matter how detailed, will not provide clarity development operations teams, or they into the risks or potential problems that go with providers who may or may not might arise with a particular vendor. have a full understanding of what they are Linedata steers clear of this. The modus looking to accomplish. Moreover, a lot of operandi to minimise cloud operational cloud providers like to perpetuate the “all or security risk, is to use active intelligence to nothing” model, assuring clients they can fully assess vendor risk and to let the numbers contain security risks within their own private do the talking; something any CCO or CFO cloud environment, all the while ignoring would doubtless welcome. the benefits of partnering with public cloud The DDQ is subjective in nature. You providers led by Microsoft and Amazon. need objective, quantifiable data and that is the Linedata approach to risk management, Active intelligence both as a company and regarding its clients. The Linedata Gravitas Private Cloud team This includes social media exposure,

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 17 LINEDATA

reputational risk, legal risk, technical uncovered with a DDQ alone. By applying vulnerabilities, etc. an array of intelligence techniques and “Some of the client assessments we have tightly integrating new technology tools carried out revealed people have limited into the platform, Linedata can make the understanding of who their vendors are. One conversation easier for all parties concerned, client Linedata visited thought they had 13 using metrics that everyone can understand. different vendors. Having advised the CFO to “In the alternative fund management go through every vendor they had paid for space especially, people like to see the past two years, it was quickly concluded numbers. They don’t want to be burdened that in fact they had 47 different vendors,” with verbiage and detailed reports – they just reveals James. want the hard facts based on quantifiable data,” emphasises Gardner. Fourth party risk Linedata is driven across all avenues The point of security is to provide the client of security and risk management to make with actionable intelligence and to explain things more objective: providing actionable it in such a way that they can make their intelligence and sustainable metrics that own informed decisions. Rather than make clients can use to make informed decisions. suggestions to clients on vendor selection, In this current regulatory landscape, Linedata will present them with a point in actionable intelligence and sustainable metrics time, which shows whether their security is where Linedata sees everything trending. posture is improving or not, month after month, year after year. Changing perceptions James has an intelligence background, In the last few years, it is less that cyber providing a sound understanding of what to breaches have evolved and more the fact look for when assessing vendor risk on the that people’s perceptions have changed. Linedata Gravitas Private Cloud. Using the In short, there is markedly more situational information gathering skills he has refined in awareness of the threats, as fund managers an operational intelligence capacity, James, migrate key parts of their business together with the Cloud and Cybersecurity operations into the cloud and C-suite Consulting team, evaluate all publicly executives begin to take more ownership. available filings, any dark net exposure from As an example of how firm leadership’s breaches, fraud alert identifiers and other views on the importance of security has data sources to find as much information on changed, the Linedata team recently companies as possible. visited one client to explain this concept of The reason for doing this is to limit the third- and fourth-party risk analysis using operational risks that result not from third an intelligence-led approach, for which party risk but fourth party risk; this is a key they spent six hours with one the senior differentiator in terms of how Linedata thinks principals. “Our aim is to get across these about cloud security. issues to C-level executives within fund “There are some unique third parties that management groups – the CCO, CIO – and clients work with, but there is also overlap we are engaging with them today at a level not only between clients, but between not previously seen,” explains Gardner. one client vendor and another vendor for “We believe our approach is gaining the same client. Third party vendor risk traction as senior leaders increasingly view is something people are beginning to cybersecurity as a core measure of a firm- understand, but what about the fourth party wide risk.” risk or the risk that bleeds over when two or Most vendor risk programmes are more vendors of one client rely on the same designed to monitor risk through DDQs and company or service? If that vendor‘s vendor other methods of self-attestation, lacking presents a risk, it stands to reason the client both transparency and defined, actionable will be subject to the same risk from anyone metrics. Transitioning from subjective self- of their vendors using the impacted service,” assessments to objective and actionable explains James. operational intelligence is an important and This is not something that can be growing trend. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 18 Understanding the Markets. Understanding Your Business.

EisnerAmper LLP is among one of the nation’s largest accounting firms, with a dedicated and well-established Financial Services Practice that provides audit, tax, and advisory services. Our Financial Services Practice, comprised of the Asset Management and Capital Markets Groups, is the largest industry group within EisnerAmper servicing more than 2,500 financial services clients.

EisnerAmper.com/FS EISNERAMPER Hedge funds to regain their shine in 2019 Q&A with Frank Napolitani & Jaclyn Greco

Last year witnessed a number of landscape of launches that we see: whether notable billion dollar launches, including they are fundamentally driven or quantitative, D1 Capital. How would you sum up generalist or sector specific (e.g. financial, 2018 in respect of US start-up activity, TMT, consumer, etc). generally speaking? It was the year of the big launch, with Have you noticed a change in the ExodusPoint, D1 Capital, Kirkoswald dialogue you are having with start-up Capital and the relaunch of Point72 Asset managers compared to five years ago? Management (formerly SAC Capital) – all For example, are they more cognisant of listed in the public domain. From what the compliance and ODD requirements has been published, these firms gathered Frank Napolitani, Financial that need to be in place on day one? approximately USD20 billion-plus of new Services Practice, The conversation has changed dramatically. launch capital from leading global investors EisnerAmper LLP Managers are very much aware of the in 2018. Beyond these large launches, the changes in the market over the past five new launch space is slower than prior years years, and more so since 2006; the heyday given that so much of the new-launch capital of hedge fund capital raising. has been allocated to these larger launches. Conversations today focus on operational due diligence being performed by institutions From your perspective, what are the and how dramatically it has increased post- main concerns/challenges facing the Madoff, albeit the fact we are ten years start-up community? removed. For fund managers who are hesitant Fundraising remains one of the top to follow best practices to have an institutional concerns for the start-up community. Some quality operational infrastructure, they will have of the major fund launches last year have Jaclyn Greco, Financial a difficult time garnering investment capital. monopolised a large amount of the capital Services Practice, EisnerAmper LLP being allocated to emerging managers. What gets you most excited about the This has created a headwind for the rest hedge fund industry, and what do you of the new launch market, which caused a regard as the biggest threat? slowdown in the volume of new launches in The most exciting part of our day-to-day 2018. These prospective portfolio managers is working with entrepreneurs who are have chosen to delay their launches and either beginning or contemplating starting stick it out at their current firms into 2019 a new business. However, the market has when, hopefully, new capital will be available changed significantly in the past ten years from investors redeeming capital in 2018 from and we believe the biggest threats are the underperforming managers. continued underperformance of hedge funds Another headwind that prospective (overall) and the increased regulatory and new launches are facing is the prolonged infrastructure requirements from the regulatory underperformance of existing hedge fund agencies and institutional allocators, managers, especially long/short equity, and respectively. This increased burden has the investor base that continues to remain caused operating budgets to balloon and less-than-positive on the space. when coupled with lower fees the breakeven However, in terms of strategies, long/ AUM level for a fund manager is considerably short equity managers still dominate the higher than it was 10 years ago.

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 20 EISNERAMPER

The markets got spooked in December How should start-ups strike the with the Dow Jones temporarily falling right balance in terms of roles and into bear market territory. Is this the responsibilities, when looking to volatility regime hedge fund managers attract institutional dollars? Is it still have been waiting for and if so, could acceptable for someone to wear dual 2019 be a big opportunity for global hats as the CIO and CFO, for example? macro managers in particular? Institutional allocators look for a clear The lack of volatility and continued separation of duties between the “book upswing in the US equity markets have and the business”. We do not recommend created a difficult environment for hedge that any fund manager also manage the funds to outperform, given the challenge back-office aspects of their business of successfully executing short trades. while managing a portfolio. With that Additionally, the effect of ETFs on the market being said, the marketplace understands and how they influence trade volumes of the need for single individuals to individual names without regard for the wear multiple hats. Those individuals, individual stocks’ fundamentals has made it however, should not be members of the difficult for traditional stock-pickers. investment team. These challenges have hurt the hedge Operational costs for a new manager can fund market overall, especially long/short be daunting, which is why there has been an equity managers. However, when the volatility emergence of the outsourced model in the reared its head last February and in the US. If a new fund manager is launching a fourth quarter of 2018, many managers were fund with less than 100M in capital, the cost caught flat-footed and failed to capitalise of allocating low to mid six figures to each on the volatility, suffering drawdowns. That respective back office c-level function can being said, hedge funds have traditionally be paralysing. Couple that with technology outperformed during periods of increased and other infrastructure costs, it becomes volatility and managers who adhere to their extremely difficult for a fund to get off process should benefit. the ground. Which is why the outsourced model has emerged and why the investor What is the most important ODD community has accepted this strategy (up to consideration that you emphasise to a certain AUM level). your clients? There is not a hard line in the sand as Many ODD professionals use the motto made to what the AUM level is where it becomes famous by former President Ronald Reagan, expected to insource, but we would estimate “Trust but Verify”. It may seem obvious, but we it is approximately USD100 million to USD200 emphasise being completely transparent when million of AUM. going through ODD with prospective investors. Omitting or misrepresenting anything from a Finally, what are you hoping to see in background or reference check will come back 2019? Are you hopeful that new talent and cause for an immediate veto regardless will continue to spring out of existing of how stellar your investment process/ hedge funds? performance/operational procedures are. We feel that there are always going to be talented entrepreneurs looking to start new To what extent is technology facilitating businesses each year. However, given the best practices? headwinds we’ve discussed, I think you’ll We are big believers in technology and see an increased number of global macro feel that the improvements in cyber risk, and credit fund launches as the market reporting and compliance have allowed volatility and interest rates continue to rise. fund managers to continue to focus on their Hopefully the increased volatility will allow investment process rather than allocating hedge funds to outperform and coupled people to do things manually. With the use with the potential underperformance by of technology, you are generally able to long‑only managers, hedge funds will perform tasks faster, better and cheaper and regain their place in the financial services gain operational bandwidth. industry. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 21 The number-one hedge fund administrator is SS&C GlobeOp.

(Just in case you’re making a short list.)

NUMBERS YOU CAN COUNT ON. ssctech.com SS&C GLOBEOP Using AI to better visualise complex data Interview with Mike Megaw

The amount of data is exponentially growing. organisation of unstructured data sets to give A paper by IDC, Data Age 2025, said that clients better information. 16.3 zettabytes of information was generated “We are applying artificial intelligence to in 2017 (one zettabyte is 1 billion terabytes), take unstructured data sets and organise and forecasted this amount would rise to as them in a way such that the interpretation is much as 163 zettabytes in 2025. as accurate as possible; that’s what feeds Making sense of all this data has become other decision-making engines, such as the next arms race, with artificial intelligence neural networks.” playing a pivotal role in pattern recognition “SightLine, on the other hand, allows the and generating new insights for managers. manager to create different visualisations of This is certainly true when one considers Mike Megaw, Managing that data. Different personnel within a hedge the new generation of hedge funds that Director at SS&C GlobeOp fund need to look at the data in different are using autonomous learning and neural ways, and create their own visualisations networks to run their portfolios. These of a particular data set. We also support funds ingest massive data sets. For SS&C the ability to marry data with existing data Technologies, this is a trend that plays very sets that the manager might have. We much to our strengths. empower CIOs to get a better handle on the As analytics tools sharpen, investment investment process,” says Megaw. firms are getting smarter about how they The two platforms combined give utilise data to make investments and hedge fund managers an effective way of operational decisions. This is a great aggregating, managing, and making sense of opportunity for the global hedge fund huge data sets, leading to new insights both industry; each month improvements are at the portfolio level and across the business made both in automation and analysis. as a whole. “A big part of what SightLine “As a tech-focused firm and a global fund does is organise data in a meaningful way administrator, we plug in to that trend really for the manager, and allows them to improve well,” says Mike Megaw, Managing Director the way they communicate with investors,” at SS&C GlobeOp. “A big part of what we adds Megaw. do is provide sound data to help managers Taking raw data and applying analytics understand what they’ve done, know where has huge potential for fund managers. One they are going, and to assist them in their example relates to transaction cost analysis. investment strategy activities. The basis for Using SightLine, the CIO/CFO can look that is having clean data.” at how the portfolio manager is allocating To that end, SS&C Technologies allows trades, perform trend analysis over a period clients to leverage a dual platform that of time, and determine whether those costs handles data aggregation and management, are in line with expectations or are rising too known as CORE, on top of which lies a data high. Previously, arriving at such an answer analytics platform, SightLine, a leading edge would have required a lot of engineering. solution for visualising and presenting data. Now it is available almost instantaneously. CORE creates data sets and feeds them “That’s a big reason why we put this in a formatted way either to the manager’s platform together: to quickly get clean, validated internal systems or to external systems with data to managers and allow them to turn that which they interact. SS&C Technologies data into information to aid the decision-making has made a significant investment into the process,” concludes Megaw. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 23 One Global Cloud. Complete Soluuons. Trusted Partner.

In an ever changing technology and Complete Cloud Services cyber risk landscape you need a Cybersecurity Protections technology provider you can trust! Disaster Recovery Eze Castle Integration is a leading managed Global Private Network service provider to over 650 hedge funds and investment firms worldwide. Outsourced IT Support Voice Solutions

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Despite the undoubted uptake in cloud Additionally, IT teams should research platforms by global hedge funds over the possible cloud services providers and last few years, with much written on the assess their respective data security scalability and cost benefits, the perception protections. A key part of data security is remains that cloud usage invites data built on strong collaboration between cloud security risks. This is not market ignorance. providers and third party vendors, where A cloud security report by Crowd both parties take a collective responsibility Research Partners1 found that 91 percent for protecting client data. of cybersecurity professionals share such concerns. In its “Navigating a cloudy sky” Grappling with access control 2 report, McAfee noted that approximately 25 Mary Beth Hamilton, VP A second consideration relates to per cent of public cloud users have suffered of Marketing at Eze Castle unauthorised access and underscores just data loss. Integration how important it is for firms to manage the Hedge funds have to balance private biggest data risk of all: human beings. versus public cloud usage and remain Eze Castle points out that malicious confident at all times that their data is insiders were involved in approximately 28 going to be safe and secure. Indeed, percent of more than 53,000 system attacks with General Data Protection Regulation recorded in 2017, citing a Data Breach (‘GDPR’) now in play in Europe, assurances Investigations Report by Verizon Wireless3. over personal data security cannot be A lack of good login management overestimated. practices permeates all industries and So how should hedge fund professionals sectors and has to be addressed head-on by be sure that their cloud providers are up to cloud providers to maintain security. This can scratch? What are the types of best practices be done by helping cloud users mitigate the they should be looking for? risks by incorporating strict access controls, Eze Castle Integration, one of the as well as Multifactor Authentication, within leading providers of cloud solutions and the cloud environment. cybersecurity for the financial industry, has At the most basic level, this requires the spent a lot of time thinking about this and use of preconfigured access management recently published a white paper Cloud features included with most enterprise cloud Security: Embracing Enterprise Innovation services. The tools allow firms to dole out Without Risking it All – to highlight what system access on a granular level. some of those best practices are. However, employing these modules is not enough. IT teams and third parties Security-first approach tasked with managing governance strategies First and foremost, a successful cloud should have guidelines for granting access, migration hinges on taking a security-first particularly where it concerns matching approach to planning and implementation. permissions to user job duties. This Hedge funds should spend sufficient time at way, firms can quickly identify when an the planning phase to consider the assets or employee is trying to access or download applications they plan to move to the cloud files that go beyond the scope of their role, and how those items might become a target which could indicate the early stages of of cybercrime. malicious activity.

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 25 EZE CASTLE INTEGRATION

and at least prevent small-scale data security issues metastasizing into something potentially serious.

Collaborate with best-in-class vendors The largest public cloud providers are increasingly providing add-on features in an effort to be the single source for clients. While single source may seem appealing, it is unrealistic to think that one vendor can excel at all security and feature requirements. A single vendor cannot be everything to everyone. Moreover, a single source strategy can result in increased risk due to a single point of failure. “Given these reasons coupled with the complexity and rapid pace of technology change, it is recommended that firms follow a best-of-breed approach,” says Eze Castle Integration. In Eze’s view, this approach gives firms more options to utilise the best feature sets from an array of solutions and ensure high levels of security. Install the right digital defences Working with a managed service provider Another key feature of maintaining a strong (MSP) that bundles public cloud features security posture is to put in place multi- with other best-of-breed solutions (i.e. next- layered protection. This can be broken down generation firewalls and other layers of into three layers. The system-level defence security) is a successful strategy to get the layer protects the overall cloud infrastructure best of both worlds. including networks, operating systems and By doing so, hedge funds can take connectivity systems. confidence in knowing that the MSP will The next layer of defence relates to execute the necessary product testing to application-level security. This layer relates select the best vendor for each security layer to access control policies mentioned above. and then manage the environment on an The third layer relates to data-level security ongoing basis, 24/7, 365 days a year. and should act as the last line of defence These best practices should help those against cyber attacks. thinking of migrating to the cloud and give Eze Castle Integration points out in its them a framework within which to do proper white paper that while cloud-computing planning. In the current environment, hedge vendors are responsible for developing funds can ill afford to take a reputational hit and deploying the data security features to their business because of poor cloud data included in the first layer, internal IT teams security provisions. n or managed service providers must build out the two remaining layers of security. To contact Eze Castle Integration for a A number of data security tools have consultation today, you can contact them: proven effective over time including: access www.eci.com/contact/ auditing; URL scanning; web filtering; system environment monitoring; multifactor Sources: authentication and email protection. 1. Crowd Research Partners, “Cloud Security Applying these tools in a multi-layered Report,” 2018. defence should assuage hedge fund IT 2. McAfee, “Navigating a Cloudy Sky,” 2018. professionals that their data can remain 3. Verizon Wireless, “Data Breach secure within a hosted cloud environment Investigations Report,” 2018.

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 26 Global Fund Services

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*Custody services are offered by U.S. Bank, N.A. U.S. Bank does not guarantee the products, services, or the performance of its affiliates and third-party providers. ©2019 U.S. Bank 012319 U.S. BANK GLOBAL FUND SERVICES Robotics migrates into the desktop Interview with Christine Waldron

Robotic process automation is accelerating is still used for the bank’s electronic productivity within the financial sector. communication needs, but it has migrated Much of the recent progress that’s been to a point where U.S. Bank Global Fund made innovating artificial intelligence (AI) Services now empowers staff to automate technology toward greater efficiency has some of the more mundane tasks they been driven by the significant resource have on their desktops. For example, their investments of fund administrators, such as investor services group can now run a bot U.S. Bank Global Fund Services. that instantaneously logs individuals into “Since early 2013, our teams have worked necessary websites and systems, whereas tirelessly to be able to fully strike an automated before, they had to do it manually. NAV with zero human intervention,” says “Likewise, with respect to machine learning Christine Waldron, chief global Christine Waldron, chief global strategy officer strategy officer at U.S. Bank tools, the capabilities have come a long way,” at U.S. Bank Global Fund Services. “We’re now Global Fund Services says Waldron. “The accuracy ratio is now to able to deliver this NAV five days sooner than a point where machine learning technology we were able to historically.” is very effective at identifying exceptions or Robotic intervention has produced areas where we should look a little deeper.” significant time savings – enabling staff, on Waldron believes next generation average, to do their work 10 to 15 percent technologies, such as natural language more quickly, according to Waldron, adding processing, are a real game changer. the aim is to improve personnel efficiency by This has prompted U.S. Bank Global Fund two to five percent per year: “Many companies Services to run two additional projects. focus on overall efficiency gains; we’re more The first project focuses on exploring the granular. We want derive value from knowing potential of cognitive learning. This technology how every staff member contributes to that has come so far that they can take an overall efficiency improvement.” offering document for a PE fund, scrape out U.S. Bank Global Fund Services first all the details around the waterfall calculation applied robotic tools to help automate the and translate it into an automatic electronic movement and management of data files. By waterfall. The second focuses on expenses. March 2018, their teams had achieved a fully “We applied an NLP tool to our clients’ automated NAV calculation capability. invoices. We were able to scrape a huge “Approximately 30 percent of our NAVs amount of data – things like an attorney’s are produced autonomously,” confirms hourly charge relative to another attorney. Waldron. “This has enabled clients to give It’s resulted in us being able to offer a huge their investors faster access to data and body of expense-related data to our clients greater transparency. It’s something we’ll to make more informed business decisions,” continue to invest in over the next couple of confirms Waldron. years – not just for hedge funds, but also for The investor community is beginning to our private equity and mutual fund clients. expect this added transparency as a means “Our clients are already seeing a lot of of enriching the investment experience. benefits: automated closing of the general “I think autonomous tools will begin to ledger, the quality around corporate actions take hold across other core processes in and more.” our business. With the volume of data and Waldron’s assessment is supported by meaningful analysis we can provide to the fact that robotics is now moving into clients, we are very excited about our future,” desktop automation. Artificial intelligence concludes Waldron. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 28

OPUS FUND SERVICES Standardising the fund administration industry Interview with Robin Bedford

Fund administrators have, over the last decade, smart automation to process all accounting focused a lot of attention and marketing entries for the preparation of NAV. dollars to persuade clients to buy customised, The decision to allocate resources to premium value-add services, in a bid to stand developing the JET system “was a no-brainer”, out from the crowd. To some extent, this has says Bedford. “Aside from reducing time been a period of seduction, driven in large part needed to process NAVs by over 90 per cent, by the incredible sophistication and evolution it removes people from the process, resulting of technology tools. This has empowered fund in significant cost savings and reduced administrators to ramp up their middle-office risk of human error. Since the first version offerings and get closer to their clients. That is was released in 2017, tens of thousands of no bad thing, but according to Robin Bedford, Robin Bedford, CEO at accounting entries have been automated and CEO of Opus Fund Services (‘Opus’), all that Opus Fund Services thoroughly tested. Each month we use system most fund managers want is an accurate, driven metrics to further enhance the system.” timely, and cost-effective product, delivered to them the best All journals automatically appear in JET, by pulling data way possible. Clambering for highly bespoke services is from the various Shared Service teams and third-party not something he sees externally, nor encourages internally. sources such as banks, prime brokers, etc. The current “Rather than a boutique, custom ‘only we can do this’ version of JET suggests what the journals should be, mentality, we are focusing on a standardised, automated and these can either be accepted, at which point they route that we think better meets client’s true demands,” automatically flow through to create the fund NAV, or says Bedford. “We are driving towards an ultimate goal, to they can be amended if needed. As JET evolves, then remove people from needing to complete repetitive tasks future versions will skip the acceptance stage and will such as data processing. Developing our own technology move towards an automated NAV ready for final review. allows us to focus on smart automation and achieving “We get an end-of-day report showing the STP rate the mythical goal of Straight Through Processing (STP). for all funds. If I look at yesterday’s data, for example, Additionally, having dedicated cybersecurity, risk, internal the straight-through processing rate was 69 per cent. We audit and IT teams allows us to carefully plan for the best, can also see reasons for the 31 per cent of amended or whilst preparing for the worst.” manual entries. By using this data, we continually tweak Opus has always thought differently, as evidenced by and modify the NAV creation process to get as close to its tagline: “Think Alternatively”. In Bedford’s view, fund 100 per cent STP rate as possible. Using this approach, we administrators create a veneer of complexity, against are effectively trying to mutualise the hedge fund industry, which they present new tools and solutions. Rather than which is famed for its ability to automatically process vast take this approach, which might only benefit 10 per cent amounts of data and generate daily NAVs,” says Bedford. of its clients, Opus strives for payback on 100 per cent. Whilst working on a number of exciting initiatives, “When developing technology, we’re focusing on building Opus is looking to improve the data gathering process systems and processes that create unique benefits for our and become fully automated; a difficult task, however, clients. Whether that’s data redundancy, report accuracy, given that Opus deals with hundreds of different banks, faster NAV delivery, or development of proprietary smart brokers and counterparties, some of which are more technology that automates processing; we look to scale automated than others. using technology and process allowing us to devote more “Ultimately, we want to focus our man-hours on hours to complex, more manual tasks,” explains Bedford. analysis and review. Do the numbers look right? Do they Within Opus, constant innovation is driven from a make sense? That’s where our experience and expertise culture that questions everything. “There is a relentless add value. By standardising the fund administration pursuit to continuously improve what we do, and how industry, we ensure that Opus delivers an accurate, we do it,” stresses Bedford. This resulted last year in the timely, cost effective product to our clients, and their release of a new product called JET, which leverages investors,” concludes Bedford. n

US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 30 Looking for an independent director?

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Contact: Gary Butler Tel: +1 (345) 949 4244 Email: [email protected] International Management Services IMS P.O. Box 61, KYI-1012, 3rd Floor, Harbour Centre, George Town, Grand Cayman, Cayman Islands www.ims.ky

Untitled-1 1 26/05/2015 10:19 IMS Residency of independent directors more important in current market Q&A with Karl O’Reilly

Change is always happening and as we near investment manager should not have the the end of the current investment cycle the majority of votes at a board meeting to world is learning to deal with increased and make any decisions that are not in the persistent market volatility. With this market best interest of all investors and to help backdrop, the role of independent directors prevent/manage potential conflicts. remains as important as ever. Institutional • Litigation – ask if the individuals are/have investors are taking a more proactive approach been involved in any threatened/actual in reviewing the directors of hedge funds, so it litigation issues. If they have, ask some is essential that investment managers take the detailed/probing questions regarding the appointment of directors seriously. cases and adopt a standard risk/reward Karl O’Reilly, Fund Director at IMS, Karl O’Reilly is a fund director analysis. outlines some of the key considerations that at International Management • Investor confidence – it is important for Services Ltd (‘IMS’), one investment managers should be discussing investors to gain confidence that the of the leading providers of when selecting independent directors of governance and directorship director clearly understands the hedge Cayman Islands hedge funds. services to the investment fund’s investment strategy, its operations fund industry in the Cayman and fund documentation. Investors want Islands What are the key considerations that to have confidence in the independent investment managers should be thinking directors, who are not afraid to voice about when appointing independent their opinions, particularly in important directors? sensitive, perhaps distressed, situations. • Experience – the director should have • Capacity – capacity levels are always an sufficient experience with the fund’s important area of discussion. My advice investment strategy, be experienced in would be to always focus on more than a serving on fund boards and have dealt single client/fund number and look at the with important issues throughout the composition of the individual’s portfolio and various stages of a fund’s life cycle. The his or her ability to manage that portfolio more wide-ranging a director’s portfolio, effectively. Generally, the industry has the better he or she is likely to be able moved on from purely focusing on client/ to give sound guidance on governance fund numbers and has focused more on issues and then apply that experience to the composition of an individual’s portfolio. the new hedge funds. • Residency – the residency of the directors • Qualifications – the director should is a key consideration that has surprisingly be suitably qualified with either an received little to no attention from the accounting, investment, legal, compliance market in recent years. or other relevant qualification. • Independence – the majority of a fund’s Why do you think the residency of a directors should be free from any conflicts director should now be regarded as a of interest. The investment manager will key consideration when appointing a naturally have a conflict of interest that director and how would you advise on will be clearly disclosed. However, best structuring the board? practice dictates that employees of the In my opinion, it may be important for the

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lobby CIMA, the Cayman Islands regulator, to mandate a director residency rule for regulated hedge funds, as I believe that market participants are well capable of reviewing the director residency issue based on currently available information and global practices. We should be equally mindful of the director residency issue for unregulated funds to ensure their tax status is also never jeopardised. It should be noted that other jurisdictions have gone so far as to mandate that a certain number of a fund’s directors are resident in the country of incorporation. CIMA has more oversight on a Cayman Islands resident director than a director that is resident in a foreign jurisdiction. The local resident directors and CIMA are both very aware of this key point and it ensures that the appropriate level of skill and care is brought to the role. Certain jurisdictions have found it a persuasive argument to have a majority of local resident directors when funds become distressed. Cayman Islands resident directors have direct access to an experienced local knowledge base. They attend legal updates presented by the local law firms that provides the directors with the opportunity for a thorough and thoughtful Q&A session afterwards to discuss the important issues from a new piece of legislation or recent case law. The local law firms are highly professional, deliver quality work on tight majority of a hedge fund’s directors to be deadlines, provide active partner involvement resident in the Cayman Islands. We must and also have the experience of dealing with focus on the critical point here that a hedge the sheer number of hedge funds domiciled fund should be clearly able to demonstrate in the jurisdiction. The strong working that the mind, management and control of relationship between the local resident the hedge fund is directed from the Cayman directors, the local law firms and CIMA has Islands and it is not directed from the enabled the Cayman Islands to maintain investment managers jurisdiction. As we are its position as the domicile of choice for keenly aware in offshore jurisdictions, the offshore hedge funds. governments of larger countries directly and My advice to investment managers indirectly have attempted to exert greater would be to take the appropriate amount of pressure on offshore jurisdictions regarding time to speak with the individuals that will such issues in recent times as beneficial serve as directors and who will be working ownership, appointment of AML Officers, with them for many years. Ask thoughtful FATCA/CRS and economic substance and challenging questions, keeping the requirements. We should be mindful of any above points in mind regarding their potential shortfalls with the current fund and experience, qualifications, independence, board structure and always be proactive litigation, investor confidence, capacity and to ensure the fund’s tax status is never residency. And finally, ensure the individuals jeopardised. are engaged and are available at all I do not wish for the funds industry to reasonable times. n

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