2. A Client Case Study:
$90M Hedge Fund Selects Cloud Services
to Simplify Investment Processes
INTRODUCTION
For the financial markets 2014 was another year
of change as sentiments moved forward, strategies
were intensely scrutinized, and regulation remained
uncertain.1
It was no different among hedge funds as their assets
under management grew – only to see more funds
fold at a faster rate – compressed by conservative
positioning and mediocre returns, and unable
to sustain the pressures of transparency and key
operational tools to hunt alpha. While the old guard
held on to legacy, non-real-time infrastructures,
emerging hedge funds began to exercise better
credibility through smarter and faster cloud-based
solutions, while topping the hedge fund industry
by performance.2
This is the world we live in today; a fund-eat-
fund, multi-prime, fragmented and uncertain
landscape—where those that survive will do so
by using strategies where data must be strictly-
managed, where risk is everything, and where
the “hedge fund” is not only a vehicle for other
institutions, but an asset class for institutional
and retail investors alike. A hedge fund, any hedge
fund, is no more than the sum of its parts—no
different than an automobile. It is in fact the parts
that determine whether its optimal speed will be 80
miles per hour and how quickly it can decelerate
to take advantage of a once-unforeseen corner
of opportunity. It’s the same with the system(s)
that hedge funds rely on to manage the business,
whether the critical components be an order,
execution and risk management system (OERMS),
automated end-of-day processes, cap intro, or the
Portfolio Manager him/herself.
Thus, alpha is a result of these parts but not as they
are individually—instead as they are orchestrated
together for more informed investment decisions,
better data management, and the total evolution of
client relationships.
Today, a modern hedge fund operating system must
support the parts of a fund at a specific locale as well
as cross-office components in London, Chicago, or
Jakarta— in the boardroom or on the golf course.
Orchestrating alpha is about seamlessly operating
cross-function in real-time with customized,
mobile, and accurate workflows for:
• The Portfolio Manager
• The Head of Trading
• Ops & Tech
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White Paper
Orchestrating Alpha:
The Hedge Fund Operating System
A hedge fund operating system is powered by a unified database for real-time, accurate workflows, analysis and reporting across the front-office. It is hosted in a secure data
center with direct connections to leading market exchanges, data providers and sell-side brokers. And it is backed by outsourced managed services to ensure accurate
valuations across all holdings on a daily basis. This ensures accurate data management, eliminates multiple points of failure and latency across disparate systems, and
provides resilient disaster recovery and business continuity planning.
HEDGE FUND OPERATING SYSTEM
3. A Client Case Study:
$90M Hedge Fund Selects Cloud Services
to Simplify Investment Processes
FOR THE PORTFOLIO MANAGER
Taking the reins for the fund and staying within
investor mandates is no small task. Constant control
of the portfolio is absolutely essential for the Portfolio
Manager (PM) to generate alpha while remaining
compliant and taking advantage of exposures.
Even in the early stages of a fund, the PM’s core
faculties must include executing and refining
methodology, compliance assurance, benchmarking
against peers, and portfolio communication. And
later, these responsibilities will widen to include some
or all of the following, to not only take advantage of
attractive investment opportunities but to also attract
larger, more sophisticated clients:
• Viewing, identifying, and managing the diversification
of performance and risk
• Stress-testing strategies to uncover hidden exposures
and bets
• Client reporting to steady the hedge fund / investor
relationship
Accurate, real-time views, accessible anywhere allow
PMs to see current positions as they update, historical
numbers over time, and hidden risks and opportunities
across holdings. The right system should provide all
of these capabilities within seamless workflows—
contributing to a smarter investment strategy by
saving time and increasing value brought to client
relationships.
It’s a common conversation—a discussion about
ongoingstrategyveiledinupdatesforpastperformance.
In these instances, the PM will need a real-time tool
to sift through a database full of historical numbers –
using profound, accurate data sets to not only explain
where they stand today, but how their decisions will
influence strategy and returns tomorrow.
Overall,therightoperatingsystemwillencouragebetter
relationships by quickly allowing the PM to understand
where, when, and why there was performance—and
provide a single, modern entry point to communicate
that performance back to investors at personalized
levels of transparency, at all times.
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White Paper
Orchestrating Alpha:
The Hedge Fund Operating System
Consider the following scenario:
The PM fields a call from a potential investor who’s well-connected and could catapult the fund into the top endowments. The
potential investor drills the PM with questions about methodology, risk and compliance, infrastructure and the middle office.
The call is an assessment on whether the fund has the capacity to take on new money— it’s as much about performance and
pedigree as it is about having the scalability and infrastructure to support stiffer transparency demands that come from working
with more sophisticated investors. The investor is also looking for assurances that their contribution will not decrease the PM’s
ability to execute the strategy, due to patch-work operations and controls that can keep the PM away from investing… and as a
result can prohibit the performance that prompted the initial call.
After walking through methodology, the PM grants the potential investor access to an app that his/her current investors access
for ‘personalized transparency’—the ability to drill-in and interrogate performance, daily P&L, market and liquidity risks, and
NAV-light statistics. And when the PM deems necessary, the ability to see how the fund’s top holdings or exposure to a specific
industry, sector, or name are affected in real-time, as the markets move and positions update.
The best part of this scenario—the PM fielded this call away from the desk and utilized an iPad to drive the discussion.
4. A Client Case Study:
$90M Hedge Fund Selects Cloud Services
to Simplify Investment Processes
FOR THE HEAD OF TRADING
While the Head of Trading may be the same individual
in early growth shops, the responsibilities that come
with that title are unique—if not opposite sides of
the same coin from the PM. And, the infrastructure
required to support heads of trading invariably must
complement those priorities:
• Creating orders and ensuring best execution across a
network of counterparties
• Remaining compliant in a multi-separately managed
account (SMA) environment
• Directly fostering a stronger relationship with
executing and prime brokers, and the rest of the street
• Indirectly fostering a stronger PM / investor
relationship
The right operating system will combine workflows
across order, execution and risk management to ensure
all trading activity, from trade inception to execution
and allocation principles, is compliant with the fund’s
investment policy cross-investor, cross-strategy and
cross-geography.
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White Paper
Orchestrating Alpha:
The Hedge Fund Operating System
Consider the following:
18 months ago the fund launched with $50 million in assets, two prime brokers, several executing brokers and zero SMA’s.
Fast forward to today, assets have doubled, the primes remain intact and the PM has relinquished all market transactions to the
newly-hired Head of Trading. And the PM is about to land a coveted investor that will change the fund’s AUM landscape all
together. One requirement persists—the fund cannot co-mingle this latest allocation with its other investors.
In this instance, and moving forward, the head of trading requires modern technology with agnostic workflows to allocate positions
in a compliant manner, all within a single infrastructure that does not sacrifice best-execution due to time spent on manually
tying-out positions across each clients’ portfolio(s).
Compliance is another key requirement in this environment—since the fund’s strategy and investment policy are well-defined,
there’s only so much wiggle-room left for the Head of Trading to augment strategy. Therefore, long-term success comes from best
execution, all within boundary, while avoiding the ‘noise’ that can come from brokers, instant messenger and other social outlets.
This is where sub-millisecond pre-trade controls built into the agnostic front-end not only identify—and where needed, nullify
out-of-bounds transactions—but foster better relationships with the PM by eliminating hidden surprises when it comes to putting
client money to work.
FOR OPS & TECH
For some funds, operations (ops) and tech functions
are supported by an in-house specialist. Sometimes
this person is the last one left who knows the ‘ins and
outs’ of a legacy system, or the band-aid approaches to
working across many systems. Sometimes this person
is outsourced and far from the time zone in which the
fund centrally operates. Either way, ops and tech can
play a role in eroding capital or levitating alpha.
For emerging managers especially, ops and tech can
be the load that weighs down the forward movement
of the fund—by limiting capabilities for institutional
credibility and dragging on costs in the first months
of viability.
In a perfect world, ops and tech help to orchestrate
alpha by eliminating inaccurate, incomplete and at
5. A Client Case Study:
$90M Hedge Fund Selects Cloud Services
to Simplify Investment Processes
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Orchestrating Alpha:
The Hedge Fund Operating System
times of volatility, out-of-date data that can come
about from legacy systems and manual processes,
all while keeping costs and headcount down. This is
where choosing the right operations infrastructure, no
matter the stage of a fund’s maturity, comes into play
as it should:
• Provide follow-the-sun business continuity and
disaster recovery
• Tie-out all investment/trading activity accurately
• Play nice in a multi-prime world
• Nurture scale as the business grows
The right operating system will incorporate automated
middle-office workflows and processes that are
harbored in a managed services framework – backed
by the cloud and fully supported by an outsourced
team of experts – to ensure accurate, real-time
mobility across data sets and time zones, no matter
the size of the fund or its growth rate.
An example:
Before making the decision to allocate to the fund, the potential investor investigates if the PM has given some of the important
business administration functions away at an early stage so she can focus on the strengths his/her career was built on—navigating
the global markets to generate out-sized returns. A must is having an accurate, complete picture of the fund’s performance,
risks and NAV at all times so the fund is well equipped to work more money and launch new products, irrespective of market
conditions.
The PM, already having outsourced his/her operations to a trusted third party, provides examples of the fund’s credibility.
Instant access to reliable, customized dashboards and reports from a central, mobile repository backs his/her investment decisions.
The dashboards detail Nav-light statistics which are calculated, stored and refreshed on a daily basis for start-of-day accuracy and
to provide transparent, frequent reporting to his/her investment team.
The outsource-decision institutionalizes the firm’s pre- and post-trade life cycle processes (file collection and normalization;
corporate actions; reconciliation with brokers and the fund’s admin, short interest costs and margin financing among other
calculations) and assures accurate data will be used throughout the investment process. This allows the PM to turn data into
customized information that, at times, improves performance due to anytime access to granular historical information which can
be used to refine forward-looking investment decisions. Said investor is convinced.
In this instance, outsourcing leads to a smarter
investment core that allows the PM to spend less time
working through end-of-day responsibilities. The costs
and tedium of file transfers with brokers and fund
admins, corporate actions processing, reconciliation
and producing / studying trade-break reports can
be given to a trusted partner so the investment team
can allocate the majority of their time to strategy
execution and client relationships, which are driven
by sound and highly accessible data. The funds who
utilize automated end- and start-of-day processes for
smarter data management will remain a step ahead
in an overwhelming and competitive marketplace—
where PMs and Heads of Trading alike need to be
constantly ready for around-the-clock investing and
around-the-clock communication of key metrics.
6. A Client Case Study:
$90M Hedge Fund Selects Cloud Services
to Simplify Investment Processes
Liquid Holdings Group, Inc.
800 Third Avenue 38th Floor
New York, NY 10022
+1 844-GET-LIQD
www.liquidholdings.com
marketing@liquidholdings.com
Liquid offers a real-time front-office platform built for the cloud to provide the
seamless control and superior speed required to manage alternative investments
more effectively. Liquid is an elegant operating system that lets you concentrate on
what you do best—generate alpha. And it has been designed to scale up effortlessly
right alongside your business.
6
CONCLUSION
The right infrastructure is a modern hedge fund operating system, evolved away from different point solutions
tailored for one aspect of the investment management process to a single, mobile source of mission-critical
workflows across the front and middle office. It’s an environment where each part of the whole, each component
of any fund, emerging or established, can leverage away from cost pits, and instead orchestrate alpha, whether
they sit as:
• The PM, managing client relationships, driving strategy and pivoting to take advantage of new opportunities
• The Head of Trading, informing orders and ensuring best execution
• Or the ops & tech underneath the hood
One system, for all of the parts of a fund—Real-time. All the time. Everywhere.
For more information on how Liquid Holdings can help your business orchestrate alpha , request a demonstration
of our operating system or visit http://liquidholdings.com/solutions/liquid-platform.
1
Deloitte, 2015 Capital Markets Outlook
2
Reuters News, Hedge fund industry’s top performers mainly small, little-known, Dec 22, 2014
