The future of the hedge fund industry

6 July 2020 - As the hedge fund industry grapples with the disruption, uncertainty and volatility sparked by Covid-19, fund managers continue to face fundamental questions regarding the ways in which they operate and service their investors.

For financial institutions globally, the onset of the pandemic forced a fundamental re-evaluation of operating structures. The abrupt change in how people work, with most teams and staff asked to stay at home, necessitated the implementation of robust BCP as well as substantial measures to accommodate remote working. Amid this process of addressing the immediate threat to smooth operations, we saw fund managers turn outward, reinforcing a key trend that had been growing prior to the pandemic.

At the onset of Covid-19, the outsourced model introduced hedge fund managers to new digital communications tools and security protocols, helping them be more efficient, more effective and more secure. The scale available through our technology and footprint provides managers the ability to absorb increased payments volumes with minimal integration, which clients have found invaluable in this remote working environment.

More specifically, the Treasury offering that sits within our Middle Office Solutions provides managers with a centralised, outsourced function from which to consolidate and co-ordinate all collateral calls and payments. When it comes to delayed cross border wire transfers, our involvement in the SWIFT GPI initiative allows us to dramatically improve the turnaround time on delayed transfers by inserting a GPS-style tracker on payments and securities settlements.

Today, with fund managers counting the benefit of greater productivity, the fundamental re-evaluation of operating structures means the trend of outsourcing inefficient and costly in-houses process will only continue – at a faster pace than before Covid-19, with remote working considerations yet another factor to drive transformation.

In pursuit of alpha generation and to meet the shifting demands of investors, fund managers are increasingly looking to fund administrators for a higher degree of technological innovation and automation, adopting new, innovative tools and structures to build efficiency, transparency, and security into their operations. This is underpinned by increasing investment in technology, which will continue to be a non-negotiable requirement both now and into the future, and will continue to be key in addressing the growing level of complexity of a hedge fund’s operations.

The significance of cloud

This constantly evolving, end-to-end technology solution is supported by a concerted effort to avail of cloud technology. More and more companies are starting to see the tangible benefits of allowing managers to access applications and data from any point, whether on personal devices, company desktops or laptops, or through a corporate datacentre.

The migration of its Æxeo® platform to the cloud has provided The Citco group of companies (“Citco”) with the foundation required to deliver the best solutions and services for the specific needs of its clients. One of the greatest benefits of migrating to a cloud platform is the elasticity cloud computing provides. It offers dynamic scaling and management with no capacity limitations.

With this increased operational agility, we have the advantage to efficiently build, set-up and expand databases of funds in the least possible time as and when trading or transaction volumes change abruptly as has happened in March and April. We have extensive real time monitoring capabilities and utilize performance insights, both of which contribute to our Real Time Premium Toolset.

Another huge benefit is being able to leverage the myriad of tools and technologies to build-out trade matching, reconciliation, risk, treasury and collateral tools in a modular fashion at a much faster velocity than heretofore. Delivering new functionality to users within a three to six-week timeframe is a game-changer.

Investor-first services

With the industry set to move towards a new digital age of online collaboration and investor-first solutions, the nature and pace by which fund managers service their investors is also changing.

Driven by the need to provide enhanced information, higher levels of security and ease of access, hedge fund managers are increasingly looking to their fund administrator for new technology solutions. Transformative and industry-leading order placement technology is amongst the tools in which Citco has seen a clear uptick amongst managers. By facilitating online trading via its own CitcoConnect™ and CitcoOne® platforms, Citco not only addresses the expectation regarding greater ease of access – by being able to place, observe and track orders electronically – but also the desire for risk reduction, improved quality and speedier flow of information.

Through a systematic transfer agency process flow, which results in delivery of information with dynamic visualisation that is easy to understand, Citco addresses the rapidity of how managers must attune the information they provide to investors on a daily basis. With managers and investors alike requiring access to real-time data ‘on the go’, the alignment of front-end technology and elimination of needless information exchange via email is essential.

In an era of increased connectivity, the security of data is increasingly paramount. The rise in online trading requires more security options underpinning it, such as Dual Factor Authentication, watermarked documents, SMS one-time passcode on trade signing, and digital certificates embedded in the document that are tamper-proof once signed.

At Citco, we have seen increased interest from hedge fund managers in safety and portal usage in their interaction with investors. Data needs to be securely acquired and stored in a data room, where managers can communicate electronically with their prospects as well as live investors. Technology such as Citco’s CitcoConnect™ data room enables managers to control all access to data and have full transparency over who is accessing information at the touch of a button.

Loan servicing

As challenges in the market offer significant opportunities to managers operating credit and structured credit strategies, it is also critical for hedge fund managers to find a partner that understands how day-to-day loan activity impacts the portfolio. Loan servicing is a particularly timely issue in the current market, where fund managers may need to provide finance to distressed companies in the form of loans. As a result, services offered by Citco, such as complex loan-level and facility-level covenant tracking, payment and transaction processing – or enhanced agency services for syndicated and complex transactions – will continue to be sought by portfolio managers.

With the flexible technology that outsourcing offers – managed through an extensive suite of core fund administration, back office and middle office services – investors and managers will have the ability to scale applications rapidly and efficiently as they continue to innovate and grow.

We expect the future to continue to be about automation, data and more streamlined communications, and are committed to delivering the most innovative and advanced solutions, enhancing the client and investor experience via a dynamic digital strategy and state-of-art technology. Following a period of intense volatility within the hedge fund industry, we look forward to working closely with the industry to support the emergence of elastic, free-flowing organisations that have the ability to scale quickly.

By Declan Quilligan, Managing Director, Citco Fund Services (Ireland) Ltd.

First published in HFMWeek, 6 July 2020

Our contacts

Declan Quilligan

Declan Quilligan

Head of Hedge Funds Services,
Citco Fund Services (Ireland) Limited

T+353 1 636 7359

Niall Fagan

Niall Fagan

Head of Business Development,
Citco (UK) Limited

T+44 (0)77 6524 1889
LLondon, UK

Nate Goodman

Nate Goodman

Head of Business Development (North America), 
Citco Fund Services (USA) Inc.

T+1 201 699 9435
LNew York

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