The 2012 annual surveys of the hedge fund industry are out, and all of them point to an increasingly competitive business environment for running an alternative investment fund. Management costs continued to rise as investor and regulatory demands on the firms increased. According to Ernst & Young, in order to maintain operational profitability, firms need to leverage technology in order to maintain the operational profitability and achieve the required economies of scale.
While fund administrators play an important role in terms of both outsourcing non-core functions and adding third party review, in the eyes of institutional investors, investor servicing / shadowing remains an essential part of the mix; that is likely why almost half of funds in North America reported making capital investments explicitly for client servicing and reporting in 2012. Indeed, typically 44-54 cents of every infrastructure dollar spent is applied to middle office, finance, accounting and IT.
Large hedge funds are not immune to these pressures. These firms vie for the stability that comes from “sticky money” obtained by institutional investors. While performance is a key trigger for these investors, operational concerns are still the primary driver for investors’ decisions regarding redemptions. As a result, failures that lead to reissuing statements — such as incorrect allocations or mistaken fee calculations — are of paramount concern for the funds. Investors are increasingly insisting that funds shadow the investor allocation and fee calculations done by third parties in an effort to decrease operational risk.
It gets worst for the smaller firms. Expenses related to running the hedge fund equal almost the entire management fee for small hedge fund managers, even before factoring in the salaries of the investment team. The operational efficiencies that come from implementation of effective, purpose-built investor accounting/reporting systems are crucial for the survival of these smaller firms.
Says TKS Solutions founder Ron Kashden, “Commercially available software products, such as our Penny – It Works package, gives our clients a multiplier effect on their efficiency by allowing them to leverage the years of experience, real-world testing, and investment structures of many firms. The features and functionality that we offer for fund accounting, investor services, and performance reporting simply can’t be matched by any home-grown solution.”
In a recent edition of Financier Worldwide, Matt Atkins postulated that firms that don’t make the investment could be under increasing pressure to consolidate with larger firms. Both the KPMG and Ernst and Young 2012 industry surveys backed up that view, finding that technology was critical in hedge fund’s ability to support growth.
It seems that the days of hedge funds being just two guys in front of a terminal are over. The economic operational pressures are forcing the institutionalizing of the industry. Commercial industrial systems like investor accounting and reporting, which was previously considered luxuries, have become vital elements in hedge funds maintaining economic viability.
TKS Solutions offers a unified partnership and shareholder accounting solution for the financial industry. Its flagship software, Penny- It Works, is used to manage upwards of 600 onshore and offshore funds by providing automated and instant access to detailed investor data, performance, fees, and transactions. Penny’s open architecture facilitates easy integration with portfolio accounting systems, data warehouses and proprietary solutions. Penny is used by leading fund administrators, hedge funds, investment management companies, and private equity firms with assets under management of ranging from $50 million to $100 billion.