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Over the past 20 years the investment management industry, and specifically hedge funds, has achieved tremendous growth. As assets under management increased, so did diversification in strategies and investments. During that time investors have become very sophisticated in their selection of investments as well as the operational due diligence process. This growth and sophistication has reinforced the critical role of operational executives, and their teams’ responsibility to effectively manage the operational infrastructure. These are the people, functions and technology that are an integral part of keeping these firms thriving.
I have been on the operational side of the hedge fund business for 23 years, holding various senior positions. The first 8 years I had the privilege of being at Tiger Management, one of the premier firms at that time. The people I worked with were brilliant, the standards were high, the positive energy was contagious, and I felt honored to be a part of it. My background includes leading Global Operations for Tiger Management and Highbridge Capital, as well as having several COO positions for emerging managers.
Industry Evolution
I’ve witnessed and participated in the evolution of the operational side of hedge funds. In the early years hedge funds launched with mainly portfolio managers and traders, and relied heavily on their prime brokers to fulfill their back office needs. As assets grew so did the investment process, and subsequently, it was imperative to start building out an “operations group” within a hedge fund. Expansion from U.S. to foreign investments began, as well as diversifying from only equities and bonds to now including all types of derivatives and over the counter contracts. Also happening was the addition of multiple prime brokers to meet their “shorting” requirements. All these changes were occurring simultaneously.
Rapid Growth
The investment side of the business was growing so rapidly that the operations side had to quickly adapt to meet the challenge. As this expansion was happening the prime brokers were not as equipped to take on these new investments since their early model was built principally to support equity investments. Additionally, with hedge funds now engaging with multiple prime brokers, supporting them was even more challenging. Therefore, hedge fund operations, especially the larger firms, were taking back some of these functions from prime brokers to manage them more closely.
For a while, the trend was to take back processes and manage them in-house in order to gain greater control. However, the pendulum swung once again to outsourcing. The prime brokers quickly adapted to supporting various investments and became experts in many areas; from capital raising, to consulting services to risk management and more. Additionally, new service providers began emerging in specialized sectors (administrators, valuation vendors, compliance, risk management, and many others). Now it is common to find the best experts in these areas, outsource the work, and manage these providers remotely.
Challenges
The challenge today is to find the proper mix of what to manage in-house and what to outsource. However, regardless of where these tasks are performed, the responsibility of their accuracy remains with the hedge fund manager. Additionally, the overall demands, including greater transparency from regulators and investors alike, are at an all-time high. Also at an all-time high is the breadth of responsibilities and the amount of tasks the operations group needs to perform.
Recently I launched a new application, OpsCheck, to support the operational infrastructure and to meet the challenge of achieving and maintaining operational excellence in the present and future environment.
Specifically Designed for the Finance Industry
OpsCheck is a web based application which was developed to centralize, manage and warehouse all the tasks performed that support your business operations. OpsCheck enhances management oversight, promotes continuous improvements, and builds a culture of operational excellence. It’s easy to configure, very customizable, and inexpensive. OpsCheck can support firms of any size, and supports hierarchical as well as flat line organizational structures. You can track tasks as granular or as high level as you prefer. I strongly believe, by employing OpsCheck, you will manage your operational infrastructure with even greater command. You will also benefit in a variety of ways, and quickly become part of the industry’s leadership.
Best regards,
Frank Caccio
Managing Partner