The Challenges Of Running Efficient Hedge Fund Operations
With the chances for new hedge fund starts, especially among smaller cap funds, brighter than they have been for a few years, many in the bizz are turning their thoughts to new systems procurement. One of the benefits that new starts have is the potential to build their systems from the bottom up – and so avoid perpetuating bequest systems, whose sustainment can eat into operational budgets. So it’s an excellent time to cast critical eyes over the state of the hedge fund software market.
With quick developments in systems integration – and the capability for uninterrupted information flows opened up by the cloud computing model – the prospect to commence with a clean software sheet is one that is too good to miss. Modern software solutions, delivered as a service via a net-based server, have the potential to cut costs – and deliver rich functionality even to the littlest of funds.
But when it comes to hedge fund accounting software, the prime concerns are still much to do with operational competency. Sellers of accounting software need to demonstrate a clear appreciation of the technical accounting needs of the hedge fund sector. One of the supreme necessities is the need to handle a two-tiered structure for accounts, so industrial gains can be totaled concurrently for both fund and investor.
The first tier is pretty familiar to those with a background in exclusive or retail trading – ‘entity level ‘ accounting. This is just a pooled accounting, for trading losses and gains, for those accounts that you have with your prime and associated brokers. That includes broker fees, business expenses and portfolio revenue. These have to be aggregated at the entity level – the hedge fund. During the past many small funds have relied on straightforward spreadsheets, fed by broker reports, to handle accounts.
That is definitely no longer a desirable route for any large hedge fund – office productiveness apps, such as Excel, are simply not geared for the pro and secure operations that today’s backers expect of their fund chiefs. Such an approach is created doubly mystifying when it comes to the second tier of accounting – the individual financier level. Neither spreadsheets, nor patron accounting software, are up to maintaining such an account pecking order; which is where the tailored hedge fund accounting software becomes active.
As the best hedge funds are Limited Partnerships, they are considered as pass-through entities, when it comes to tax treatment. That implies that the level of tax levy is at the ‘partner ‘ level – which comes down to that of the individual moneyman. That dumbfounds matters considerably. When the changeable level of realized P&L from trading, which should be factored together with a stockholder participation that naturally fluctuates (as speculators join, adjust fund-participation or leave the fund altogether), it's very clear that professional seller solutions may be the sole option.
Here, the market in hedge fund accounting software has been definitely made more competitive by Software-as-a-Service (Saas) utilities. These have moved down the feeding chain, from servicing the world macro hedge funds (for instance SunGard’s VPM), to the smaller independent hedge funds (for example Penny from TKS Solutions). A merchant suitably tooled in this sphere’s necessities can these days deliver complicated accounting software in the same way as a turn-key solution. That then leaves the hedge fund manager and trader free to address their attention to the key task in hand – delivering returns from their selected strategy.
Rick Wesley has been studying hedge funds and hedge fund accounting software for a few years.
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