The Quest for Alpha
21 May 2020 - Having won the award for ‘Best Administrator – overall’ at the HFM Global European Services Awards 2020, Jay Peller (Head of Fund Services, Citco Fund Services (USA) Inc.) discusses alpha generation and the effect technology and the current pandemic is having on the broader hedge fund industry.
Q: How can hedge fund administration services continue to help clients generate alpha?
A: Affiliates of The Citco Group Limited (Citco) provide an extensive suite of core fund administration, back office and middle office services, aiming to deliver seamless, straight-through, ‘technology first’ solutions to our clients. This, in turn, helps managers to reduce costs and allows them to direct full attention to generating alpha, safe in the knowledge that Citco can be in full control of its back and middle office environment. For example, CitcoConnect simplifies and automates the management of prospective investors and the online placement of initial investments in alternative funds. Such technology creates efficiencies through the minimisation of time consuming, and thus costly, manual processes within the investor relations function. There are many other examples of where our technology across service offerings helps managers to streamline processes and, therefore, reduce costs.
Q: What impact has technology had on hedge fund administration services in the past few years?
A: Technology has been key to ensuring that administrators have the wherewithal to support the ever-increasing level of complexity of a hedge fund’s operations and takes many forms. It includes tools to capture and price the portfolio, in response to increased complexity and trading volumes within the portfolio; data services to meet increasing data requirements from the manager to support their reporting needs; risk, treasury and collateral tools to support additional middle-office and back-office services; and tools to automate communication with investors and to improve the investor experience. Front-end reporting has also moved forward significantly and alignment to front-end technology is now essential, as managers and investors alike need access to real time data ‘on the go’.
Q: Is continuing automation one of the trends you are seeing within the hedge fund administration industry?
A: Automation is key, particularly in the area of analytics and investor communications. The pace at which automation is happening continues to accelerate, in terms of data capture, the core engines used for processing and the front-end tools used for reporting. Managers and investors expect straight-through reporting solutions and front-end reporting excellence, and real time mobile data on ‘the go’. Automation has been a prominent theme in recent years, and we see it as a trend that will continue to evolve.
At Citco, we are continually driven towards enhancing the client and investor experience. As part of our digital strategy, we recently pioneered the online subscription process through our CitcoConnect portal, which has significantly streamlined and simplified the investor process. Artificial intelligence and robotics assist us in our daily tasks, automating processes and introducing efficiencies. We have delivered best-in-class, STP middle office solutions for trade matching, collateral and treasury, with interactive front-end reporting through our CitcoOne portal, to facilitate client oversight. The trend of automation will continue in the industry and we expect to re-main at the forefront in continuing that trend.
Q: Has the current situation emphasised the need for proprietary technology within the fund services industry?
A: Yes, definitely. Citco’s core technologies are proprietary which results in fewer dependencies outside of our control. This is especially important in situations like today where there is a need to adapt quickly and be nimble. As with all industries, the coronavirus pandemic has tested the robustness of the fund services industry, requiring an adaptation of both our own and our clients’ operating models to the new remote environment. The primary challenge has been moving rapidly from a model where working remotely was a feature, but where the office still played a central role, to a situation where the entire work-force is working remotely. We have a state-of-the-art remote infrastructure and, thankfully, it has allowed us to mobilise our entire global workforce to ‘work from home’ mode almost overnight.
Q: What are the main challenges clients are experiencing and how are you addressing these?
A: During this period, our mantra has been to continue providing assurance, control and insight to staff and to clients. For clients, addressing their challenges and in or-der to give them a truly consultative experience, our people and technology infrastructure and applications solutions are absolutely critical to our success.
A key challenge our clients have been asking about relates to how to manage the increased flow of investor communications in a remote working environment. Both investment managers and investors want to continue receiving the information they need to help them make the right decisions; this is even more crucial during this period of uncertainty.
We had already developed CitcoOne to help address information flow. This web portal allows clients to monitor, survey and explore information important to them through a visualised platform. By offering built-in communication tools, investor usage analytics and an on-line trading capability, users can continue to make informed decisions - anywhere, and from any device.
The move to remote working also revealed that some managers were seeing issues with cash management due to expired usernames, passwords and tokens to banking portals. We had previously recognised the need among clients to replace slow and inefficient manual processing with immediate assurance that important payments have correctly occurred. Our Æxeo® Treasury Platform is SWIFT-enabled and uses cloud-based technology for streamlined, centralised access for approval of wires without the need for physical tokens.
We have also seen clients facing some difficulties around managing increased trading volumes, reconciliations, collateral management and OTC settlement. In order to provide assistance, we have leveraged our dedicated collateral management team for timely and accurate management of counterparty exposure, daily calls and a significant increase in margin movement.
Q: In terms of resourcing fund services, how do you weigh such short-term ﬁreﬁghting with long-term needs?
A: We believe short-term requirements – the need to cover the timely production of client service-level agreements (SLAs) - are in alignment, and not in conflict, with the longer-term needs of the business. Over the longer term, clients will seek increasing surety that providers have the ability to meet deliverables irrespective of the wider socio-economic environment and have a robust, stress-tested Business Continuity Plan (BCP) in place. For example, it is important to note that failures in any part of a firm’s middle office can have serious implications: being late for a collateral call could mean the difference between whether a fund is deemed a credit risk. In such an environment, oversight of service providers’ BCP preparedness can only increase.
Our success in enacting our full BCP plan – moving our entire global workforce to working from home – has demonstrated the robustness of our business and is evidence of our preparedness for future crises. We are proud to be able to say that we moved away from firefighting mode and into BAU very quickly and client feedback, which has been exceptional, is testament to that.
Q: How might the fund admin landscape change in the short- to medium-term as a result of the current crisis? Will we see further consolidation?
A: One of the main learning points from this crisis is that firms that have grown organically – without extensive M&A activity – have an advantage. A clean reporting and operational structure means they can react nimbly to external events while maintaining extremely high levels of client service. Some market participants may suffer as a result, but whether further consolidation will occur consequently is unclear.
Q: How do you expect to see the hedge fund administration space develop over the next ﬁve years?
A: We expect the future to continue to be about automation, data and more streamlined communications. Providing golden copy data to an investment manager, when and how they need it in a form that is reconciled and sufficiently enriched with other third-party data, will continue to be the holy grail. Further reducing the manual element of the subscription and redemption process is also in our near future, as we continue to build on the exciting technologies that are in place today. There is no reason that an alternative fund manager cannot have an online application form covering their entire fund product suite, which an investor can complete at the outset of a client relationship and then all other transactions can be straightforward. Excellence in technology will continue to be a non-negotiable requirement both now and into the future.
Published in HFM EU Services Winners Report 2020, HFM.Global.