youdevise says Portfolio Management Technology to Play Pivotal Role as FoHF Industry Consolidates
23rd September 2009
Portfolio management technology will play a pivotal role in facilitating consolidation in the fund of hedge funds (FoHF) industry, a trend that is increasing in light of significant changes over the past year in the hedge fund world, says Richard Koppel, Managing Director of youDevise Limited and a leading authority on FoHF technology.
In response, youDevise is finalizing new features on its Hedge Fund Information Provider, or HIP, that will automate the data loading and error checking and recovery processes that youDevise currently uses to migrate different funds onto its FoHF online portfolio management platform. In addition, youDevise is expanding HIP’s front office capabilities to provide more robust analysis, pre- and post-trade compliance, and “what if” scenarios across multiple FoHFs operating in a consolidated structure.
Industry leaders have said they anticipate widespread industry consolidation as FoHFs have been ravaged by a “perfect-storm” wherein investors have redeemed holdings, hedge funds have imposed gates, and FX market volatility has significantly increased counterparty margin calls.
Currently, Mr. Koppel explained, as many as 75% of FoHFs rely on informal spreadsheets to manage their accounts and other data, which dramatically increases the cost of integration and lengthens the period before the benefits of consolidation are realized.
Some participants – particularly those with the technology in place to manage liquidity, handle foreign exchange risk, and demonstrate transparency to their investors – have been able to weather this storm. These players are seizing on the present situation as an opportunity to increase scale by acquiring weaker competitors.
Mr. Koppel helped to create the HIP in 2006 as the first online portfolio management system used by FoHFs and their administrators, such as Northern Trust. The HIP incorporates all standard industry formulas into a robust, scalable platform that can be tailored to fit the needs of any FoHF. Today, FoHFs, family offices and pension funds from around the world employ the HIP on a standalone basis or access it through their administrator or custodian to manage approximately US$15 billion in assets.
The ability to standardize on a FoHF portfolio management platform – whether the platform belongs to the buyer or to the acquired company – makes it faster and less expensive to integrate the funds being acquired, and assures greater success in a consolidation move. “Success of fund of hedge fund consolidation hinges on the speed and efficiency with which firms can combine their operations,” said Mr. Koppel. “Integration runs smoothly if the combining firms can take advantage of a platform that gives coherent structure to their data and provides formal controls to ensure data integrity.”
Such technology also benefits target firms aiming to maximize their value, he said. “There is significant business risk involved in divestiture. The seller must manage the sales process while preserving the value of the business being sold. A portfolio management platform that delivers heightened transparency and risk management tools can help to achieve both objectives.”
FoHFs considering standardization through technology face the classic dilemma of whether to build or buy. Mr. Koppel noted that many independent consultants have come to the conclusion that building technology is time-consuming and expensive for FoHFs. “It is not their core business,” Mr. Koppel said. “Their expertise is managing money, not building technology.”
FoHF acquisition targets are expected to fall into three categories, according to youDevise:
- Managers with $400 million to $1 billion AUM. Such FoHFs would be strengthened by joining a larger institution with a bigger balance sheet and more access to clients with investable funds
- Global banks seeking to divest non-core FoHF operations
- Smaller funds that would benefit from gaining scale through acquisition by a larger FoHF
HIP