Top 5 Ways Successful Hedge Funds Benefit from Process Automation

Process Automation Leads to Improved Efficiency & Greater Accuracy

The two main central tenets of process and workflow automation are improved efficiency and greater accuracy in the hedge fund front, middle, and back office. For most hedge funds looking to manage risk and cost, an initial thought may be to deploy process automation within the back office. This is usually the case as there are often repetitive tasks in the back office that can be easily identified. Custom software can be deployed to automate these mundane, cumbersome, yet highly critical nightly processing related tasks.


In most successful hedge funds process automation in the back office can generate almost instantaneous benefits. However, there are various use cases where the hedge fund front office, as well the middle office, including the investor relations team can also take advantage of process automation to achieve greater efficiency and accuracy, while minimizing overhead and risk.


In this article, I will discuss top 5 areas of effectively applying process and workflow automation, based on my experience working with hedge funds of various sizes.


Enhancing the Investment Process

In the front office, there are possibilities to benefit from automation in several ways. One example is to enhance the investment process. Automated trading systems can be built that integrate with multiple trading platforms and have the ability to fill orders at multiple brokers, either manually or via API. Automated exception handling can be improved through automatic alerts, assisting the front-office in prioritization of critical tasks during the trading day.


New investment strategies can be more easily back-tested on historical data by using automation. This method allows for quick testing of multiple trade approaches, assisting the front office in determining an optimal trade strategy.


Another example is in relevant data aggregating, which allows the investment management team to have near real-time data at their fingertips. Portfolio managers’ critical questions about portfolio management can be easily and accurately answered – for example, what is the portfolio’s VAR (value at risk)? What is the portfolio breakdown and performance by asset classes, investment strategy, geography, and investor? In the same fashion, disparate sources of data (i.e. market data and alternative data) can be aggregated in a centralized view, resulting in a more rapid and comprehensive understanding of the portfolio.


Improving Operational Efficiency & Reporting Accuracy

The middle office also has much to gain from automation. Regulations have increased in complexity, and custom software solutions can help the middle office ensure compliance. Newer requirements, such as the Liquidity Risk Management Report, can be a burden on the middle office. A custom software solution is a potential path to ease this burden. Generating the XML files for the quarterly 13F Report can be an onerous task, but there are solutions that can automate the work. This is the case for other reports such as the 10-K, 10-Q, etc.


Additionally, investor report statements for profit and loss are often prepared in the middle office. Today’s investor expects access to relevant, accurate and up-to-date information about their funds. Due to the nature of hedge funds, these P&L reports can be very complex and may require considerable effort to prepare. As with regulatory reports, the P&L reports are candidates for automation.


As with external P&L reporting, the investment manager or CFO will typically need to review the fund P&L in more detail. To stay abreast of fund performance, the investment manager will want access to the P&L as soon as possible. With quick, automated access to the P&L, decisions can be made faster.


Reconciliations are another area for efficiency improvements in the middle office. Reconciling positions has been a core task of middle office, but this is changing. Software can retrieve data from both external sources and internal record systems and compare the two automatically. When the processes are automated, middle office staff can focus their efforts on the outliers or exceptions, where their expertise is more valuable.


With the speed and volume of transactions in modern hedge funds, so much is happening that traditional reconciliation methods are no longer plausible. As the Hedge Fund Journal notes: “the largest service providers to hedge funds now process well over 1000 transactions every month. Each order may come with up to 50 pages of documentation attached. A typical team within a hedge fund administrator might be handling 600-700 orders with a dedicated staff of a dozen or so.”


Faced with this challenge, the Cognivo team was able to help automate reconciliation reporting, effectively saving 1 Full Time Equivalent (FTE) in time. Previously, analysts were spending several hours each night manually copying, pasting, and compiling text files.


Of course, the back office will also benefit. Their tasks are often high volume and repetitive – the type that are ripe for process automation. A report by Arvato and AT Kearney estimates 53% of back office processes will be automated within 10 years. With RPA (robotic process automation), the processes will be “20 times faster than humans with a 10 per cent lower error rate”. Furthermore: “widespread roll-out of RPA solutions will result in an annual compound market growth of 50 per cent, with the global market set to be worth $5billion by 2020.”


Like the front and middle offices, efficiency improvements in the back office will bring benefits to the bottom line. CFA Institute reported that “automating financial statements reduced the cost of producing these documents by 30%.” There are many existing solutions that can be leveraged today, so the barrier for adoption is low.


When tasks are automated, risk of manual error in data input is eliminated. An illustration of this concept occurs in regulatory reporting, where accuracy and integrity of data is of utmost importance. Accurate reporting is an expectation of today’s investor, and automation is a sound strategy for compliance. As The Hedge Fund Journal states: “A sound technology infrastructure is also virtually imperative in determining success in regulatory examinations. The systems you use and the way you use them can give regulators greater confidence that you are exercising due diligence and have the controls in place to properly monitor your activities for compliance.”


High accuracy also means high efficiency. When employees do not have to spend time chasing down errors, they are free to work on more meaningful tasks.


Enhancing the Investor Experience for Hedge Fund Investors

According to the latest 2018 Global Alternative Fund survey done by EY, “With increasing frequency, investors expect to be more active partners with their managers. Whether through a separately managed account (SMA), co-investments or unique rights within a commingled product, investors express a desire to influence the investment and operational decisions of the manager.”.


Investor interactions can be improved in many ways. Utilizing automation allows the fund to eliminate the need to repeat information entry in multiple systems, accelerating the onboarding process. Investor account inquiries can be handled via automated processes, freeing up time for the front office staff. Communication between the front-office and the investor can be improved via automated messaging on account status, or progress updates on transactions.


Transparency between the investor and the account manager is enhanced through these processes. For example, an internal portal can be set up for communication and document sharing. Workflows can then be displayed to the investor at each stage in the process. The investor is able to review relevant documents at any time, from anywhere.


Because of these improvements, a sound automation strategy will result in improved investor satisfaction. Ross Elliss of SEI states about the investor experience: “Investors want to be treated as if the manager knows them personally and knows what their issues are, knows what problems need to be solved, and how their solutions will improve their lives.”


Standardizing Processes Leads to Enhance Reliability

Process standardization is a key initiative for any digitization strategy. When a standard workflow is developed, there are several benefits. First, everyone agrees and understands the process steps, increasing transparency. Second, once a process is standard, it can be measured through key performance indicators (KPIs) and secondary information can be found. Third, the business is not relying on a single person for key tasks – thus reliability is improved. Fourth, a standard process is improved more easily, as the various people completing the process will undoubtedly find methods to make it better.


Standardization can also be discussed in terms of reporting and dashboards. When dashboards are standardized, they can be automated, saving the organization valuable time. Cognivo was able to help a client in this regard, automating their reports and organizing them into a centralized dashboard. This made the reports readily available for management, who could find them without tasking the operations team. This project resulted in an estimated 2 FTEs in time savings – a huge benefit to the client.


Most people likely can relate to the following example. Let’s say Steve has been working in the office for 10 years and he handles all of the reconciliations. Steve has a collection of Excel spreadsheets on his computer that he uses to complete these tasks. One day, Steve leaves the office. Now, the others in the office have to figure out how Steve accomplished his duties. They may start by poring over the spreadsheets; and it will likely take several people days, even weeks, to unlock the code. Does this sound familiar? If these processes are standardized, this scenario does not occur.


Higher Employee Satisfaction and Retention Rates

Automating repetitive tasks not only improves efficiency and accuracy, it helps keep your employees satisfied and motivated. Rather than spending much of their time repeating similar tasks that require little thought, analysts can focus on adding value to the business. They can conduct equity research, analyze market opportunities, and so on. Similarly, the front office can focus on optimal trading strategies, and the middle-back office can focus on investor relations. An employee whose work is more interesting will naturally be more satisfied, less likely to leave and of greater value to the business as a result.


Retention of talent is important in today’s climate. The EY 2018 Global Alternative Fund Survey showed that behind Asset Growth, Talent Management ranked as the second priority for firms. The survey report illustrated the scarcity of available talent that meets new business needs such as automation, data analytics and diversity of thought. Thus, it is vital that talent be developed and retained – and keeping people satisfied and motivated will go a long way in doing so.


In Conclusion

In the 2018 Global Alternative Fund Survey, EY states: “In order to properly scale the business for further growth and meet investor expectations that the operations are institutional in nature to support the business, investing in technology is now a prerequisite.”


Technology investment and process automation is no longer an option for hedge funds – it is a requirement. The benefits of utilizing technology to automate processes are numerous – improved efficiency, better accuracy, enhanced investor experience, superior reliability, and higher employee satisfaction. Solutions exist today that can be quickly deployed, realizing rapid benefits. These solutions do not have to be high-cost or need large effort in deployment. They can be designed to interact with legacy systems, bridging the gap to digitization. In summary, increasing process automation is a prudent investment for any successful hedge fund.