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| Survival of the Fittest |
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| Written by Fritz McCormick | |||||
| Thursday, 01 February 2007 | |||||
| Hedge Fund Journal | |||||
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Problems have appeared in the hedge fund marketplace and they are not about fund management, but rather data management. Consider Archeus Capital, a once proud, $3 billion hedge fund, which has apparently suffered from administrative inadequacies, both self-inflicted and via its hedge fund administrator (HFA). The firm's closure has brought attention to the myriad pitfalls hedge funds can encounter that aren't related to their ability to generate returns. The exact details of the Archeus Capital closure are still being debated, and blame still being sorted. However, it proves that non-performance based issues can derail a hedge fund. It also illustrates the role that HFAs are taking, as an increasingly integral part of their clients' businesses. Hedge funds and their administrators must seek to improve their operations to avoid massive clerical mistakes that can take their firms down, and also to quell increasing investor discontent and the subsequent outflow of funds. The realisation of the importance of proper and rigorous administration has paralleled the rise in popularity of the hedge fund market. This awareness is akin to the increasing scrutiny the institutional asset management industry faces from regulatory authorities and their clients. As that market has adjusted, largely through enhanced processes and the take up of key technologies, so must hedge funds seeking to maintain and grow their share in the market. Effective hedge fund administration typically involves full maintenance of multi-currency accounting records (including some partnership accounting), calculation of fund related fees, net asset value calculations, reporting, tax return preparation, payment of distributions and dividends, and assistance in regulatory reporting. Administrator duties have grown to also cover areas like trade processing, security master maintenance, corporate action processing and collateral management. Surely the duties entrusted to this segment of the market will continue to grow. However, every functional area a HFA takes on relies on effective, comprehensive data management. Without a strong data management practice, as in the case of Archeus, the fund risks complete extinction. Components of Data ManagementThe important question to ask is: what are the components of a strong data management practice to support the burgeoning hedge fund marketplace?Firstly, successful data management in this context must be programmatic in nature; a strong process with effective governance must be in place to achieve the operational goals the firm seeks. The application of this process must extend beyond the hedge fund's four walls, to reach the administrator and ensure the same level of data management with this trusted partner. The administrator must apply to its own operations a level of discipline with its data that emulates and often exceeds that of its client base; often being called on as a final arbiter when discrepancies and other problems arise. Effective data management must be comprehensive. There are various types of data that a hedge fund and HFA must manage: security reference data, corporate actions, customer, counterparty and positional data, to name a few. A full view of the enterprise must be available, and without each piece, this view cannot be achieved. Quality, Consistency and CentralizationData management must focus on quality. Hedge funds regularly strike net asset values; they must accurately portray their positions in the market for the benefit of their investors. Often this activity is complicated by the assets being valued - derivatives for instance, which are a challenge to effectively price. To promote quality, data must go through a rigorous process of cleansing, which includes normalisation, verification, and enrichment where necessary. A composite record, constructed based upon preferred hierarchies of data providers, is then produced, which can be used with confidence to power internal hedge fund applications (trading, accounting, risk management) as well as to synch up with the administrator. In this manner both administration and investment operations are improved.Consistency is another contributor to data quality - without it, a fund cannot confidently provide the necessary valuations and other portfolio data demanded by its client base, on an ongoing and timely basis. It's for the sake of consistency that data management must be conducted on a centralised basis. It's not necessary (nor realistic) for every area of the firm to consume the exact same data record, or composite. However, if the composites being created are not coming from a centralised source, the fund cannot attribute any level of confidence to the output over time and has no baseline from which to accurately proceed.
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