A new technology framework  

As business moves to operate on a wide variety of platforms and yet remain secure, we have introduced a framework which supports the browsers that people now want.  This means that M.A.T.ware operates on Chrome and Safari as easily as Internet Explorer or indeed any number of secure browsers.  This means consistency in the presentation and interaction aiding in the ease of use.

Our new framework also works for users operating on tablets as it supports touch screen systems.  With  modern work running on a variety of devices to support remote working as well as in-office work and given M.A.T.ware’s private cloud-based solution, it’s completely in line with operating securely anywhere.

Multiple approval process 

M.A.T.ware is used by both large institutions with a significant number of users and smaller firms that have only a handful of users.  It’s been critical to users that their way of working including internal controls, is suited to their business scale.  M.A.T.ware’s core strength is based on its configurability  that enables clients to actively manage every day complex processing and reporting with ease. This configurability not only ensures their system is sized best for their business today, but also provides the necessary scalable framework required for the business changes ahead.

One such area is multiple approvals (commonly referred to as “four-eyes”).  M.A.T.ware has well-established multiple approval controls over the trade process.  However this release extends a universal feature that allows businesses to configure multiple approvals as needed over functions.  An immediately useful implementation of this is in Price and Performance Management where firms that desire internal controls over price discovery can implement them.  Of course up front controls including data validation and tolerance checks have long been in place but multiple approvals extends this for best practice.

Increased speed 

M.A.T.ware has always been characterized by its precise, dynamic valuation process.  Supporting onshore and offshore hedge funds, private equity partnerships and equities through a pricing evaluation model allows for no compromises.  In order to enhance speed, Comada has targeted this critical area with a highly optimized process that means getting this information instantaneously is managed and delivered consistently.  Ultimately we know users want to get the results rather than spend time on a system.

Out with the old

As technologies evolve we constantly upgrade M.A.T.ware – for this release we have moved to Microsoft’s newest .NET architecture version.  We have also removed and replaced older (which today may only be a few years old) technology.  It makes us able to build new features more efficiently and therefore respond to the business requirements of our clients.

On the other hand, the exposure of networks creates opportunities for cyber crime with the attendant reputational risk this entails.

How then, can fund managers, investors and service providers reconcile the conflicting demands of cyber security with the obvious cost savings offered by outsourcing and the use of the internet to deliver mission critical data? How can we be confident that orders are being securely managed between counterparties when we are being asked to interact with different firms with varying levels of cyber security protocols?

In Comada’s three part series on cyber security, we’ll be looking at some of the critical issues that the alternative funds industry needs to address as a matter of priority. In this, the first instalment, we look at what need to be included in a cyber security policy.

Your cyber security policy – are you ready?

Being aware of the risks is a continuous exercise: Comada, as a provider of secure solutions, communicates regularly with experts who can provide up to date guidance and planning. Strategies are also developing within the hedge funds industry to limit bilateral connectivity, thereby reducing cyber crime risks.

We understand that investors and managers face a rapidly changing security situation. On top of that, regulators and operational due diligence professionals are adding cyber security to the list of business items they wish to inspect. Lack of an informed and enforced policy will create problems for firms in the very near future.

Here are some guidelines to good cyber security policy practice:

• Ensure your policy is prepared in consultation with external professionals, and that it is detailed, including organisation and staffing issues, and how it applies to your clients and across your organisation. Make sure it includes who is responsible for ensuring security, how staff are expected to comply, how you vet personnel, what your password protocols should be, and how you ensure secure access to email, VPNs and your servers.
• Make sure your staff are properly trained: human error is frequently the source of problems, regardless of how tight your policies are. How is desktop software updated? How is anti-virus software installed and updated? How is this process managed, and how much is the individual employee expected to do?
• It is important that external vendors are made aware of security policies, and that they can adhere to these. They should be aware of their responsibilities under the policy.
• As Software As A Service (SaaS) has become an increasingly relevant solution for participants in the industry, your policy should make sure that it incorporates your SaaS vendors, and that they can respond effectively to your regular security audits and are able to implement their services securely.
• Cyber security threats are not simply external – internal data management is also critical. Drafting a policy may also be an opportunity to re-visit internal access protocols. Firms should be aware of who among their employees has access to different pieces of data. Should all your employees have universal access to all your data? Why? Your security policy should govern who has access to software and data and that this cannot be acquired by mistake. This may be harder to achieve in smaller firms like individual hedge funds or family offices, but it can be useful to leverage SaaS applications that have been developed for larger firms, but are now within the price range of the smaller market participant to use.
• Like driving a car, where you partly rely on the competence of other road users, you must still be vigilant. Make sure your policy covers the standards you expect of the firms you deal with, that they are reputable and that they vet their own staff.

In our next bulletin we will look at some of the practical applications available for firms in the alternative investment industry that want to make themselves more secure. How does this all work in practice?

If you would like to receive regular updates from Comada or are interested in speaking to use about our SaaS applications for hedge fund investors, administrators, custodians and TAs, please contact Stuart Fieldhouse (Europe) – sf@comada.com, or Dave Shastri (North America) – ds@comada.com or call +1 441 234 4300.

The alternative investments industry has now woken up to the new world order of increased regulation and reporting requirements. These new and stringent demands have become a major driver for firms of all types and sizes involved in hedge fund operations, and those who ignore the implications of this do so at their peril.

Regulators have become far more stringent about the regularity and detail of the reporting they expect to see, and errors in this process can be met with more robust fines. Combined with the challenge of dealing with multiple regulatory regimes, the risks are very real.

Professionals working in fund servicing, including custody and administration, transfer agents, and COOs at investment management firms, now face a situation where their careers and professional credibility lie in the hands of regulators. To keep costs contained as much as possible, financial services firms have to address their operational environments, including the way data and reporting are managed.

This mission can be a complex and costly exercise, but convenient out of the box solutions, such as those launched by Comada this year, can help investors and hedge fund managers to meet regulatory reporting requirements, including under FATCA and AIFMD, without the cost and disruption of a major revision of compliance programmes.

Better integration, cost-effectively

Comada has long been a strong advocate of better integration of reporting processes with pricing data and transactional information. Importantly this needs to create an environment in which live data can support more comprehensive and automated reporting activity.

Comada’s M.A.T.ware technology replaces legacy services, bringing to our clients a secure Cloud-based integration platform with more flexible connectivity.

Using the technical road map we have developed, transaction and pricing data and account information can be easily harvested from disparate reporting lines and systems to build a more comprehensive picture of such critical information as dynamic cash and liquidity in alternative portfolios.

M.A.T.ware is designed to meet the complex requirements of the alternative investment industry, and supports the reporting needs of even the largest organisations, integrating and then delivering the requisite data where it is needed. This includes information that it would be difficult and costly to incorporate otherwise, but which regulators are now asking for.

As the regulatory environment becomes stricter, solutions like this will be essential for firms that wish to continue to operate cost-effectively while meeting their reporting obligations.

For further information on how Comada can support your regulatory reporting, please contact Dave Shastri (North America) – ds@comada.com / +1 212 880 4245 or Stuart Fieldhouse (Europe) – sf@comada.com / +44 (0) 20 7043 1480.

Hedge fund software developer Comada has released a new update for its award-winning M.A.T.ware technology for investors in alternative funds. Available immediately to Comada clients, the update meets the new reporting requirements of regulators, allowing investors and service providers to manage fund transactions without disruption.

The new release fully integrates cash management by combining cash from FX dealing, credit and position exposures into comprehensive view and projection features. It also includes enhanced liquidity features which recognise that hedge fund investors increasingly invest in a wide variety of illiquid assets like private equity and less-liquid securities.  Recognizing the impact on both sides of the balance sheet, the release also delivers asset / liability management reporting to assist organisations in managing those risks that may arise from mismatches in liquidity.

The release also recognises the new reporting requirements around liquidity of portfolios as introduced by the Alternative Investment Fund Managers Directive (AIFMD). M.A.T.ware now delivers enhanced and standardised reporting around the delivery of liquidity information and also includes a UK Financial Conduct Authority reporting module to meet FCA Client Assets (CASS) requirements.

Said Dave Shastri, co-founder of Comada: “The global regulatory environment for both investors in hedge funds and their custodians has changed enormously in the last few years. Comada has been reacting to this by enhancing both the suite of regulatory reporting tools we make available to our clients, and the detailed cash management and liquidity data they require to support that reporting.”

Rupert Vaughan Williams, co-founder of Comada, added: “While prized for its straight-through-processing capabilities, Comada’s M.A.T.ware software is also highly regarded because of the additional live portfolio data it delivers to hedge fund investors. Our latest release allows this data to be used to meet new regulatory demands in an efficient and timely manner.”

Launched in 2006, Comada’s M.A.T.ware software is in use by hedge fund investors and custodians as both a hosted or internal solution for the management of portfolios of hedge funds and other alternative assets. It has won industry plaudits for the level of detail it delivers on actual and hypothetical portfolio liquidity and for secure electronic trade processing.

For more information, please contact Stuart Fieldhouse (Europe/Asia) or Dave Shastri (North America) or call +1 441 234 4400.

Liquidity emerged as a major risk for hedge fund investors during the 2008 credit crisis, but it remains a major source of risk for custodians of alternative assets. Again, it is worth comparing the risks posed by alternative assets against those of more traditional securities.

In the world of normal trading, a broker who makes an error can usually rectify it quite speedily. This is because he is trading in a continuous market – the period during which the broker is exposed to his mistake is limited. He might only be at the mercy of price movements for an hour or less. And because systems between counterparties in conventional securities markets are automated, brokers can limit financial losses caused by errors with relative confidence.

Within the alternative investment market, where custodians are acting as brokers for investors in funds, potential errors are magnified because of the time it takes to confirm a trade. Mistakes in orders are uncovered in the reconciliation process, but it can take days before a counterparty will issue a trade confirmation.

Consider then the situation a custodian faces once an error in an order is discovered, for example when a sell order is confused as a buy order. Because shares in hedge funds are so illiquid, it can prove very difficult to have a mistake resolved, particularly as the custodian bank is dealing in a principal market – i.e. the fund is creating the security for the investor.

Funds have very little leeway to address errors, particularly since corporate governance might prohibit them from favouring a specific investor. Redemption terms can mean a trade will not be resolved for six or even 12 months, during which time the price of a fund will change with little or no scope to hedge it.

Custodians participating in the market for alternative funds are not being rewarded for the liquidity risks they are taking on a daily basis. Once such risks are fully understood, many banks may decide that it is not worth the slim rewards they earn. Custodians have improved the language used in agreements with clients as they have started to wake up to the liabilities they face, but another solution would be the introduction of electronic execution, speeding up the trade confirmation process and radically reducing manual errors.

On the other side of the coin, investors may want to use their alternative investments as collateral when raising cash. However, due to the lack of hedge funds’ liquidity, it can often be difficult to discover an accurate price. There is no readily available market data source, requiring significant proprietary effort to procure a recent net asset value (NAV).

Investors will often want to raise cash more quickly than shares in a hedge fund can be redeemed, and the lack of daily or weekly market prices means the lending bank can create significant risk for itself by lending against hard to value assets or assets than themselves can take some time to liquidate (frequently three months or more in the case of many hedge funds). Again, investment in electronic pricing interfaces can ensure more accurate and speedy pricing and support faster decision making.

The calculation of custody fees needs to be transparent and consistent with the other services offered by the custodian. The cost involved in procuring a price for a traditional security is negligible – many prices are free, and vanilla securities also have the benefit of a reliable security ID code. The pricing of traditional securities can be carried out quickly, with clearly defined data sources and consistent prices. For hedge funds, the picture is much more opaque.

Where to find the data?

For alternative assets, procuring a price represents a much larger challenge, as there is no single data provider that can be consistently accessed.

• Traditional securities data vendors publish the prices of those alternative funds that report directly to them, but pricing is frequently delayed and the funds covered do not represent a sufficient segment of the universe custodians need.
• Specialist hedge fund databases cover a much larger slice of the universe, but rely on funds to report data to them. If a fund chooses not to report, or stops reporting (for example if it closes to new investment), the data series becomes incomplete.
• Custodians can hire a third party agent to procure prices from fund managers on their behalf, but this can be an expensive and time consuming process.
• Alternatively, custodians can go direct to the funds themselves, but this requires considerable investment in terms of time, money and manpower internally.

On top of the above data-related challenges is the fact that accurate pricing is required for a range of tasks, including for loans, bridging finance and leverage. Pricing hedge funds effectively for such functions is still a much greater problem for custodians than it should be.

For example, no electronic feed exists that can readily integrate with other data systems, causing custodians to rely on manual processes, which are slow and prone to errors. Audit trails to prove a price is accurate are both time consuming and expensive. In addition there is a huge burden of associated documentation to be managed.

Financing can be a much more lucrative business for custodians than plain vanilla custody, but even here, lending against alternative assets can be fraught with risks because of pricing issues. Because of the illiquid nature of alternative investments, investors sometimes need to borrow against holdings that are in the process of being redeemed in order to be able to re-invest assets. Such interim funding is frequently provided by custodians because they hold the assets, but this also puts pressure on the custodian to ensure accurate pricing and a detailed picture of the redemption time horizon. Ultimately, the lack of a consistent pricing picture represents a significant risk to the lending side of the custodian’s business.

For more information on how Comada can help you with your custody related risks, please contact Stuart Fieldhouse at sf@comada.com

The challenge for custodians in safekeeping alternative assets like hedge funds is that there is no Central Securities Depository they can rely on. For conventional securities, CSDs exist to help investors and custodians by providing an easily accessible record of securities owned. Historically, the CSD would take delivery of physical share certificates – today an electronic registry is maintained which allows investors and company registrars to keep track of who owns what.

For the vast bulk of hedge funds, which are not actively traded on stock exchanges, there is no CSD. Nor is there a broker to broker network like the Depository Trust Company’s National Securities Clearing Corporation. Custodians are therefore forced on a monthly basis to request statements of hedge fund holdings from the transfer agents who maintain funds’ registers of shareholders. The problem with this is that there is a large universe of TAs in the market, each acting for only a small portion of the total universe of hedge funds.

This problem does not exist in the long only funds universe where there are effective CSDs in the cross-border funds market, like Clearstream and Euroclear, or in the North American market the NSCC’s Fund/SERV network. But for hedge fund investors, to obtain a regular proof of ownership is much harder.

In this series we often refer back to emerging share markets as an example of the problems faced in early stages securities processing. In Russia in the 1990s, for example, there was no CSD and no facility to verify share ownership electronically. Custodians had to send representatives to the offices of the company issuing the shares to physically inspect the shareholders’ register. Hedge fund custodians have similar problems today – they have to check in with each individual transfer agent acting for every fund they hold on behalf of their clients.

There is currently still no effective central repository of data that can be used as a statement of ownership for even 20% of the hedge funds universe. While some TAs have explored electronic connectivity with custodians, there is no uniform transport mechanism, no way to achieve reconciliations in a consistent format. Most TAs are still not using SWIFT, for example.

Consequently, when custodians have to report to clients on their hedge fund holdings it is not only harder to confirm positions, but a great deal of internal data processing has to still be carried out manually.

The above just covers the problems arising from putting out a monthly statement – what of corporate actions? How does the custodian establish how investors want to vote at AGMs or EGMs for hedge funds? How are voluntary or involuntary corporate actions communicated effectively? How can custodians manage the issuance of equalisation shares or the establishment of side pockets? There is no automated method of managing this, creating yet more manual processing and a wider margin for costly errors. The custodian is left accumulating reams of non-standard information from TAs, often delivered in fax or email format. While traditional securities are processed via rules that have been established in global capital markets, no such standards exist for hedge fund investments.

Ultimately, this remains a key area of risk for custodians – investments are issued and redeemed at NAV. If errors occur here, they can be costly ones. Similarly, corporate actions in themselves can require delicate management as they often include a decision making component.

Custodians will need to find a way to manage their investor reporting for hedge funds with fewer manual processes, as errors can bring significant reputational damage with them.

To be added to the list to receive future custody-related bulletins from Comada, please email Stuart Fieldhouse – sf@comada.com

#1: Custodian as broker

The key function of a custodian is to be able to hold an asset securely. This requires that a custodian be able to keep track of and reconcile the asset concerned. However, as institutional allocators like pension funds and insurance companies increase their investments in alternative assets, their custodians are being asked to perform this role for shares in funds like hedge funds and private equity partnerships.

Because of the illiquid nature of many alternative funds and the fact that custodians are being called upon to actually place orders and redeem holdings by their clients, significant operational risks are being created. The quality of the connections between the various parties involved in a trade in an alternative investment fund need to be-re-examined in order to avoid a higher level of risk and commensurate expense when trades fail.

Custodians habitually only become involved in a trade once it has been executed: however, with alternative investments they are also being asked to take the place of a broker and place a trade. This is because hedge funds – and other alternative investments – are private placements. There is no broker acting as an intermediary, hence the custodian most often takes on the role of the broker, bringing with it significant execution risks.

In other markets – shares, for example – efficient systems exist to manage execution, but not so with private placements in funds. Manual procedures continue to dominate trades into and out of funds and it is often impossible for custodians to pass this role onto a specialist service provider, as might have been the case with other emerging asset classes in the past. Habitually devolving trades onto third parties will involve a custodian in transactions with dozens of service providers, including transfer agents and administrators, again considerably raising the risk that an order is inaccurately transmitted, or a deadline is missed.

Because systems are manual and paper-based, multiple checks and balances are needed to ensure there are no errors. Every fax requires several levels of completeness and accuracy checks.

Every control measure added to the process, while it cuts down on risk, also adds time and cost to the process of investing in funds. It requires that custodians be aware of closing dates for new investment in alternative funds, and submit orders well in advance. However, custodians’ clients will often push back on deadlines established by for submission of orders. Several days’ lead time will frequently be required, but investors, the end clients, will sometimes consider such deadlines as artificial.

Compressing manual processes in order to cope with client demands adds a considerably higher level of risk for custodians already under pressure as they process higher volumes of transactions in alternative funds. This will, without doubt, create more scope for costly errors. Having compressed the time frame for executing orders into funds, investing clients will be less than happy if errors occur and the custodian will often be asked to compensate them.

If you would like to receive further bulletins from Comada on custody risk, please email Stuart Fieldhouse at sf@comada.com.

In the increasingly competitive world of investment management, it is still possible to achieve a critical edge by simply presenting information to clients in an efficient and secure manner. Many money managers subconsciously see a client as being invested solely in their fund, and yet investing clients have their own difficulties keeping track of the numerous different funds and other investment types they have exposure to.

For investors, one of the big battles continues to be around procuring information about alternative fund investments in a format that meshes effectively with their own internal mechanisms. This conundrum offers the fund of funds manager an opportunity to seize a distinct competitive advantage and win investor goodwill at the same time.

Investors face the weekly struggle of collating performance information, much of which can get lost or arrives in a format which can only be transcribed with much manual effort and with the data errors which are an inherent risk with such a process.

A typical medium sized investor will be receiving data from alternative investments as emails, sometimes as PDFs. This contrasts with data on listed securities, which is cheaply and readily available in a convenient format. It is an enormous irony of the hedge funds industry that while the fund strategies themselves are highly sophisticated, the way in which their performance is reported is not.

Know your client

Today’s hedge fund investor is looking increasingly institutional in character; moving up the sophistication curve from the individual investor towards the requirements of pension funds or insurance companies, reveals a demand that information be delivered in an easily digestible format.

For the fund of funds manager, it becomes increasingly important that you identify the manner in which your investing clients would like to receive information. It becomes critical that you become aware of how your clients view that information and particularly how that data relates to the way your investors make use of their assets – for example their risk analysis protocols.

A fund of funds manager needs to understand that his fund still comprises only a small percentage of an institutional investor’s overall portfolio. Yet, all other things being equal, the investor is likely to favour the fund which will offer him better reporting, that can allow clients to readily process the information it generates.

Tailoring your data

To secure your competitive edge, you will need to consider the process you are using to report to investors, including the data points your clients want to see, and automate this process as much as possible. In today’s back office environment the technology now exists to provide high quality transaction-driven data in a format that is easily configured to the requirements of different stakeholders.

Funds of funds must recognise that for most investors, alternatives will comprise less than 50% of their portfolios, and frequently less than 25%. Therefore, managers of alternative investment fund portfolios need to be able to report into a framework that has probably been designed to harvest information from listed security investments. It will require involving service providers like fund administrators in the reporting conversation, and being consistent about how data is marshalled and presented. It will also require investment in tools which can be shared by service providers, helping to drive down the cost of delivery.

Overall operational compliance within the hedge funds industry needs to be a lot less problematic if funds are to meet the established reporting frameworks of institutional clients. As the character of the hedge fund investor base becomes increasingly institutional in nature, fund managers will need to make more use of technology – like the secure reporting opportunity offered by the Cloud – to ensure they make the most of the competitive edge efficient data delivery can become.

Investors in alternative funds are managing far more diverse portfolios than they used to. And even within the hedge funds universe, they are grappling with wildly different structures and liquidity terms. Investors are set to increase their overall allocation to alternative investments, a trend that was already becoming established prior to the financial crisis, but by doing so they are creating some immediate operational challenges when it comes to monitoring their critical cash picture.

Fund allocators embrace new conditions of risk when they invest in alternatives. From an operations perspective, one of the key obstacles is the implementation of appropriate technology within the business that will allow for the effective management of alternative portfolios alongside other investments like long only funds and ETFs, where liquidity timelines and redemption conditions are very different. It is not unusual to have a UCITS fund with daily dealing sitting in the same bucket as a conventional hedge fund with monthly liquidity or a private equity or real estate fund with even longer liquidity time frames.

We are now living in an environment where more emphasis is being placed on internal risk controls and the quality of real time reporting is an important part of the overall risk management package. Portfolio managers and risk officers within investor organisations need to make sense of and fully understand the divergent cash flow and liquidity picture. Failure to do so will only create further pain for the organisation when another disruptive market event occurs.

Today’s institutional allocator will have a number of alternative funds within their portfolio:

• Onshore hedge funds, including Limited Partnerships
• Offshore hedge funds, usually employing a unitised holdings model including series of shares or equalisation allocations
• Private equity investments, again with a Limited Partnership structure with a commitment and funded periodically on a capital call basis
• Real estate funds
• Alternative UCITS with daily or weekly dealing
• ETFs used as indexed hedges of based on alternative markets (e.g. based on commodities futures)

There is a need for a diverse range of alternative investment funds to be managed and analysed via a single platform, particularly when a portfolio manager requires accurate reporting on cash flow and liquidity terms. Managers of alternative fund portfolios now need to see all the way out the liquidity curve, to a year or more if needed. Private equity cash flows, for example, are much less frequent than conventional funds and need to be accounted for efficiently if the investor is going to ensure sufficient cash is on hand to meet PE commitments.

How can daily cash flow commitments to alternative investment funds be monitored on a forwards basis out to 12 months?

Proper cash flow management within the alternative portfolio in this challenging environment goes beyond normal accounting requirements. There is a need to budget and estimate both future commitments and withdrawals, taking into account actual and anticipated liquidity terms. Accurate risk management and forecasting can be managed on a dynamic basis from a single point, but not with an Excel spreadsheet. The sophisticated cash flow requirements of today’s industry go beyond what is economically achievable with Excel.

Today’s portfolio management solution needs to take account of a range of varying factors – liquidity terms of a hedge fund, or a particular side letter for example.  It has to be sufficiently customisable to dynamically track commitments over time, and provide an accurate picture of cash and asset positions, on a daily basis if necessary. To do this manually seems a reckless waste of man hours at a time when many investors are very conscious of both the lack of effective reporting on their portfolios and the costs they already incur in their operations.

The typical institutional fund portfolio will hold a range of assets with varying liquidity terms that will behave very differently under liquidity stress test scenarios:

Managing the balance between longer and shorter dated assets

It is important that, as the investment manager maintains his own diversification between different asset classes, he also keeps a clear picture of the pricing and liquidity terms of the portfolio of funds. This can even change several times a day. Juggling the short and long term liquidity picture simultaneously without appropriate monitoring can be like driving a car at midnight with no headlights. An Excel basic road map may help you, but you are still placing yourself at risk.

In addition, today’s portfolio manager will also need to model liquidity scenarios on an allocation-by-allocation basis, including hypotheticals. This can have an increasingly important bearing on decisions to allocate in the first place. The biggest variable, however, is the cash flow picture.  Is the manager overweight on monthly dealing funds? Can liabilities be met without altering exposures? Can they monitor and transact on both manager and client portfolio liquidity dynamically?

During the credit crunch of 2008, managers of alternative investment portfolios were forced to turn to their most liquid investments to access cash in the shortest possible time. Sometimes this meant liquidating holdings with some of the better performing fund managers. It is an experience that has created more emphasis on controlling and diversifying the underlying portfolio liquidity picture across sophisticated hybrid portfolios. Doing this effectively without resorting to manual and error-prone Excel-based processes is another matter.