Managers need systems which allow for comprehensive instrument coverage and true multi-currency processing, not to mention, streamlined and accurate reconciliation between fund managers and their brokers. Real-time multi-currency processing on a single scalable framework means that global investment management companies can reap the benefits of using a comprehensive portfolio management and fund accounting solution to support their global operations, administrative and accounting services to the alternative investment industry. Another issue rising from the growth of the alternative investment industry is that traditional custody also often doesn't work for these types of funds as they have different needs. Primary among these is a need for leverage. Since the traditional custodians as banks are not able to provide the level of service required in this area, the business has been managed by the prime brokers at the larger brokerage firms. However, the prime brokers are not used to providing many traditional custody services. This often catches the clients unaware and they then must scramble to put a solution into place because it is something that they just assumed the prime broker would take care of as the custodian.
In particular, there are some corporate actions where the prime broker is either unwilling or unable to provide services. Typically in the US market these will be corporate actions where proof of beneficial ownership is required. Due to confidentiality issues that fund managers must contend with and the fact that the funds are most often organised as partnerships, the necessary limited partner beneficial owner information cannot be transmitted to the prime broker necessitating that the fund manager implement alternative solutions. Implementing alternate solutions as you may have gathered by now is not necessarily as simple as picking up the phone book and searching under back office support. Given the issues that hedge funds have with regard to services not provided by their prime brokers, in order to ensure successful operations, they need to address two primary issues. First, make sure that your financial institutions have a way in which to extract standard trading, settlement and corporate actions data from their system and deliver it in a flexible format.
Due to the variations in data with each corporate action, even with 65 standard ISO messages for specific corporate actions a sizable portion of the announcements passed this way contain a narrative field with instructions unique to a particular event. The point is, you want the group or system receiving the data to immediately know what to do with it and not have to spend time with queries so that they can get on with processing the event. Second, the fund manager's documentation and client (partner) communications process must be robust enough to support the gathering of additional documents. Gathering additional documents may be necessary as they may not be held all in one central location as with a traditional custodian. The fund manager may have some, a third-party administrator may hold some and other data will need to be gathered from the prime broker. In order to better service their clients, some of the major prime brokers now have a business services (also called client services) unit which is there to help the fund manager find appropriate solutions and service providers for value added services that the prime broker does not provide. These can be administrators, claims specialists, software vendors and even concierge services - essentially, the prime broker in the context of the business services unit fills the role of the middle office. There are certain activities which the back office has where there is simply no way to automate the process. One of these is client documentation and how original documents are collected from clients, stored, retrieved (or generated) and distributed when necessary.
Quite simply,paper and STP are diametrically opposed. So, given these tasks having to do with clients' beneficial owner documentation, the question becomes, who is responsible for what? Document management is a critical area to get right if your organisation is going to fulfil fiduciary responsibility to clients by managing the documentation effectively so that proper asset servicing can occur. For some global custodians the account manager is the person responsible for managing the client's documentation requests both from the bank for account opening and management procedures and from external sources; regulators, claims and proxy administrators, tax consultants, legal counsel and others. For all of this to sit with the account manager is probably not the best use of them as a resource. A better model would be one which leverages technology to minimise the intervention necessary at the account manager level. This way, the various parties who will need access to the documents from time to time will be; registered as users of the system, given a login ID and have rights assigned based on what the individual user's needs are to properly service the client. A claims administrator for instance will have different needs than a proxy administrator.
Logically, the system will also have a user interface for the client so that they too can have access to the documents that they may need for their own records. A truly proactive and comprehensive system will include features which assist clients in managing process of renewing any documentation requiring update. This will in turn free the account manager up to manage more accounts more effectively than before. As with many other things, if everyone is looking at the same screen then the process becomes much easier and more efficient to manage. It is certain that back, front and middle offices have much to coordinate, not least technologically. Their different perspectives create different needs in the management functions.
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Note: This article was sent to us by: Adam E. Cole at 01082010
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