Could you explain your RECON service, and who its main users are?
Our reconciliation service was built in a data-agnostic way, and it is a rules-based recon engine. Our initial targets have been hedge funds and hedge funds admins, the reason for that being that we come from that field and penetration into the industry was easy.
On our reconciliation engine we currently have trade positions, cash, and profit and loss. People have also used it for migrations to compare trial balances, portfolio valuations, variation reports etc, to make sure the migration happened the right way. From a features perspective: what you want to reconcile, how you want to manage the exceptions, how you want to manage the view of final workflow—are all customisable.
I think that’s one of the reasons why we had such a fast entry into the hedge fund market here in Boston.
How have you seen hedge funds evolve to provide institutional-quality risk management, and where did this demand come from?
There has definitely been more demand from a compliance and risk management perspective in and after 2008, and also from an investor and regulatory perspective. Personally I think the problem for hedge funds has been the products that are already out there.
It has been very cost prohibitive for them, and on top of this most of the hedge funds have some kind of Excel spreadsheet, or a fund accountant manually tracking the data. They usually perceive the management of this process as more of a back-office task, which I think in the last few years has been gaining momentum to become a much more important process.
We as a firm are trying to position ourselves so we can take advantage of this momentum in the market. We want to make it easy for clients to do shadow accounting and audit and quickly do compliance with the data that they receive and the whole workflow that they have.
According to a 2011 Ernst & Young report of hedge funds, “few hedge funds or investors note the independent reconciliation of a hedge fund’s investment positions to custodians and brokers as a key benefit of the administrator, even though this has become an area of significant focus in the wake of the Madoff scandal”. Do you still see this attitude today?
Most of the long/short plain vanilla shops are still relying on fund administration for reconciliation and they’re expecting the administrator to produce some kind of exception report: they are dealing with reviewing the exceptions and not the actual reconciliation task itself.
But for a more complex shop, shadow reconciliation and reconciliation to your prime brokers, custodians and your fund administators is definitely gaining momentum, and they are getting more comfortable with getting those products in-house. We have seen that most of the large funds in Boston are keen to actually get this shadow reconciliation or reconciliation in-house.
How can Smonik differentiate itself from competitors?
The key difference between us and all the major players out there is that we made a tool capable of defining and working flexibly with a prime broker’s data. But when you’re considering the custody side, the data is not defined. And it’s completely different from the instruments that you are used to trading.
Most of our competitors cannot handle this, and the way they deal with it is by releasing instruments one at a time. For a client of ours, Morgan Stanley, we are able to handle its OTCs now. With our reconciliation, we are completely data agnostic and we handle most instruments.
On top of this, the whole mapping must be worked out because once they start trading a new instrument, the data is different to what they were getting previously. Those who are doing the back-office accounting understand the data better than anyone else. Our tool empowers you to do the mapping, which is an operational process, not an IT product: the data reconciliation working, reconciling, and checking the exceptions.
For example, to implement a brand new (small) broker in Hong Kong and to redeem that broker on our system from point of exception to getting the data into reconciliation is a two-hour process; mapping reconciliation and signing off. And that I think is our differentiator, on top of the fact that you can control how you want to review your signoff. Some of the funds want to review signoff by the security type, because there are different groups handling different security types, and other firms don’t have a capability to de-market the data.
What are the challenges of reconciliation—are departments being asked to do more with less?
This is the battle that we are encountering on a day-to-day basis, and that is pretty much the story in every sales call. Most of the funds that we do encounter have some kind of internal accounting, even if they don’t do it on a daily basis, they do it monthly. The challenge for us is convincing them that we offer a product that is more cost effective and will perform a better task than anything they could put in place.
To give an example of this, we had a hedge fund here in Boston, a multi-billion dollar fund and they had one full-time person dedicated to reconciling positions from cash.
Within the first three months of implementation, the entire reconciliation job was given to the front-desk administrator, who had no knowledge of the reconcilaition process, but it was simply so easy. And the other person, the fund accountant, is happy because she moved up the ladder and is now doing trade settlements. So the way we see it, we’re making everyone happy—the fund accountant, the front office, and of course ourselves.
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