Prime brokers and third-party administrators play pivotal roles in hedge fund operations, but there are many other services -- from execution to order management to backup and recovery -- that hedge funds must either bring in-house or outsource.
That opens the door for platform providers that can deliver these services on a managed services basis. Liquid Holdings, for example, delivers a cloud-based platform that is intended to supplement, not replace, fund administrators and prime brokers.
“We're not a third-party administrator. We're not cutting a NAV or doing any of the month-end or formal evaluation processes that a fund administrator would do,” said Robert O’Boyle, executive vice president at Liquid Holdings. “We supplement what a fund administrator would do."
It’s very common for a hedge fund, once it reach a certain critical AUM size, to bring in systems from a vendor. “We are eliminating those through a lower-cost real-time solution, but we're not eliminating a fund administrator whatsoever,” O’Boyle said.
On the prime brokerage side, Liquid partners with prime brokers “to provide a more sophisticated OEMS functionality at a lower cost,” O’Boyle said. “Many hedge funds are looking to operate in a multi-prime environment. Therefore you need to have a system that isn't from the prime broker, because you need the ability to aggregate the assets and be able to report on them in a consolidated fashion.”
Under a joint marketing agreement, ConvergEx Prime Services offers the Liquid platform as an option to its portfolio of prime brokerage clients including hedge funds, family offices, mutual funds, and registered advisors, and Liquid refers its clients to ConvergEx for prime brokerage services.
In an era of greater investor demands for transparency, hedge funds are hard pressed to synthesize and distribute reports, which creates a monumental Big Data problem.
“The big data requirement for a hedge fund means the ability to create a consolidated environment where all of this data coexists together in a single unified database, which enables a hedge fund significantly greater access to the information,” said O’Boyle. “If they have the data in the unified data structure, they can do significantly greater statistical or computational analysis against that data.”
According to research from Milestone Group, 40 percent of North American asset managers feel that their current operation is unprepared to meet anticipated regulatory changes, driving a desire to increase automation. As firms become increasingly automated, 61 percent of asset managers plan to ramp up oversight and claim they would not wait for new regulations to arrive before strengthening oversight.
"Managers need automation, as it reduces error,” said Joe Holman, CEO of Orangefield Columbus, a fund administrator with close to $30 billion in assets under administration. “However, the risk of implementing a program exceeds the tolerance of the manager as there are so many software programs that falsely promise accuracy. Outsourcing allows managers to focus on the fund, while service providers stay on top of the regulatory changes."
Featured image via iStock
