Custom House Fund Services
Scott Price
16 October 2013
Managers are moving away from the traditional long/short equity model to more opportunistic and exotic strategies, says Custom House Fund Services
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Managers are moving away from the traditional long/short equity model to more opportunistic and exotic strategies, says Custom House Fund Services
Where do you see growth in the alternative investment space over the next 12 months?
Going back slightly, over the last four months we’ve seen managers moving away from the traditional strategies towards more non-traditional strategies, for example the traditional long/short equity model is being overtaken by more opportunistic strategies. We’ve seen a lot more complex strategies with different types of exotic products and because of that the valuation process and daily reporting is being leveraged much more from us. Over the next 12 months we will continue to see managers trading more complex products and leveraging the infrastructure and reporting capabilities from their administrator in order to be more transparent. We believe that going forward the successful managers will be the ones that use their service providers for their infrastructure.
How has the relationship between fund managers and their fund services administrators changed over the years? How do you foresee this developing in the future?
The relationship between fund managers and their fund administrator has changed in multiple ways. What we are seeing now is better communication with the operational team of our clients’ firms on a daily basis and traditionally we’re seeing their needs becoming much more reporting-based. We’re seeing clients push work on to us so that they can leverage our infrastructure, allowing the client to focus on trading and capital raising.
In the future I foresee more of that occurring. We are now building the capability to do more reporting and we’ve had to develop technology and portals specifically to be able to deal with those types of reporting problems. The managers do not have to build this type of technology, they can simply leverage our technology, reporting capabilities and expertise to solve a lot of those internal issues which they may not see as their core activities.
What are the biggest challenges facing fund managers today when it comes to running their businesses for success?
Performance is the obvious challenge but putting that aside from a business standpoint it’s the uncertainty from the regulatory environment, which I believe is one of the biggest pressures. For example the new regulations regarding FATCA requires management companies to invest in new technology and systems to deal with these types of pressures. Managers will have to either build technology on their own or outsource it. From a compliance standpoint it’s very expensive because the regulatory environment is always changing. With this level of uncertainty, successful managers will focus on their core activities and outsource a lot of these functions to their administrator.
From increased investor reporting, to intensive ODD, to overwhelming demands for regulation and compliance, how are fund managers coping with these extra burdens on their operations, infrastructure and staff time?
There are a few problems here. The first issue is increased investor reporting, where a lot of managers that we work with want us to issue daily flash reports to their clients—not necessarily giving them portfolio information, but information from highs and lows of the day, static risk reports and general profitability of the fund. Management companies also commonly have data consolidation issues, especially those that are multi prime and as investors are demanding reporting on a daily basis. it simply means that the majority of managers are again asking their administrator to consolidate their data and issue clean reporting to their investors every day.
One of the biggest challenges facing management companies is the ability to react to their investors’ demands, from a transparency prospective. During the operational due diligence process managers are required to show how they are calculating risk. It’s very expensive to build up that type of infrastructure, which is why client are asking us for solutions.
How and where have costs grown for fund managers?
Costs have grown in a few ways. The cost of building technology from a risk management perspective is obviously very expensive and it’s not viewed today as an expense that is necessary. The majority of the management company’s expense should be focused on research and a lot of managers believe that anything that’s post-trade should be somewhat outsourced. Whether it is regulatory reporting, risk reporting, or portfolio accounting, if outsourced they can spend their money and efforts on research, execution and obviously capital raising efforts.
Custom House Global Fund Services has worked with some big names in the industry with clients that have grown from start up to multi-billion, multi-asset, global investment firms. How have you partnered with these clients and how can you help other funds grow?
Our approach is very much to listen, learn and build. For our larger clients we take a somewhat consultative approach to their business because we understand that every manager and every fund is very different. What we’ve built from a technology perspective is a scalable solution so if we, for example, have built reporting for our largest client we can leverage that and offer that same level of reporting to our entire client base. That’s really helped out the emerging manager; we can offer the same level of reporting to the $50 million emerging manager that we do for our multi-billion dollar clients and that’s very interesting to them. They will put the reporting capabilities within their due diligence documents and when they are trying to get seeding from an institutional investor it can only help the process. So we have a very scalable technology platform and is something that we are constantly improving on.
How has Custom House invested in technology to meet the needs of US hedge fund managers?
We listened to our US client base and learnt that the expense from the technology perspective was very high. So we’re now in the process of launching a new technology platform called Custom House Gateway, which will provide an innovative and scalable approach to alternative investment operations. We built a web-based platform designed specifically for daily reporting on an interactive dashboard that also allows monthly reporting from a fund accounting perspective as well as an investor services perspective and compliance perspective to be delivered through a single portal. We believe that it will really change the way that managers interact from a technology perspective because now they do not have to build these platforms themselves, they can leverage ours.
It’s completely hosted in the cloud so managers don’t need to put anything on their database or their servers and it’s completely tablet-enabled so when the client’s marketing team is on the road they can show a potential investor how risks are being reported, how the valuation process is captured through the portal and also how investor reporting at the end of the month can also be delivered on the same portal. From a due diligence standpoint it adds real value because the manager is leveraging technology from their admin and they don’t have to support it; they just have to manage a service agreement which is obviously a lot more attractive. At the same time it’s evolving, it’s never going to be static so if a client needs specific reporting it’s something that we can very easily scale up to produce.
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