FEATURING Advent Software // Global Prime Partners // Intralinks // Jefferies // Netconsult

TECHNOLOGYCreating a market-leading investment offering through the right systems

REGULATIONAdapting to increased reporting requirements and new levels of transparency

PRIME BROKERAGEChoosing the right service to navigate the contemporary business environment

BEST PRACTICE 2013/14WEEKHFM

S P E C I A L R E P O R T

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Open the door to new opportunitiesInvestor Portals from Intralinks

intralinks.com/fundspace

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H F M W E E K . CO M 3

REPORT EDITOR Alexis Burris T: +44 (0) 20 7832 6656 a.burris@pageantmedia.com REPORT EDITOR Karolina Kaminska T: +44 (0) 20 7832 6654 k.kaminska@pageantmedia.com HFMWEEK HEAD OF CONTENT Tony Griffiths T: +44 (0) 20 7832 6622 t.griffiths@pageantmedia.com HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Rachel Kurzfield, Eleanor Stanley, Luke Tuchscherer CEO Charlie Kerr GROUP COMMERCIAL MANAGER Lucy Churchill T: +44 (0) 20 7832 6615 l.churchill@hfmweek.com SENIOR PUBLISHING ACCOUNT MANAGER Tara Nolan +44 (0) 20 7832 6612, t.nolan@hfmweek.com PUBLISHING ACCOUNT MANAGERS Bryce Robson +44 (0) 20 7832 6616, bryce.robson@hfmweek.com, Rebecca Wheeler, +44(0) 20 7832 6613 r.wheeler@hfmweek.com CONTENT SALES Tel: +44 (0) 20 7832 6511 sales@hfmweek.com CIRCULATION MANAGER Fay Muddle T: +44 (0) 20 7832 6524 f.muddle@pageantmedia.com

HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group © 2013 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher

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uoyed by stabilising market movements, many managers are beginning to feel a renewed sense of confidence as performance picks up following several

years of unpredictable returns. The shift has not gone unnoticed within

the investor community. Industry reports suggest investors are feeling a similar uptick in optimism, eyeing an increase in hedge fund exposure.

Onwards from last year’s Best Practice Report, and while competition for capital remains high, so, too, are investor expectations, with a number of new and higher hurdles ahead.

Striving for best practice standards has always been – and should be – a priority for

hedge fund managers. But as investors and regulators worldwide push for increased transparency and rules with extensive reporting requirements, the topic has become more important than ever.

So how can new and established managers adhere to contemporary expectations of best practice? For this, the HFMWeek Best Practice Report 2013-2014, we sought the views of professionals at technology, marketing and prime brokerage firms to get a full array of updates, including the latest thinking on how managers can streamline their services with investors in mind.

Read on to get to get the full picture on how best practice standards in the hedge fund industry have evolved over the last 12 months.

Alexis BurrisReport editor

BB E S T P R A C T I C E 2 0 1 3 - 2 0 1 4 I N T R O D U C T I O N

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4 H F M W E E K . CO M

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MARKETING

GETTING FUND MARKETING RIGHTAndre Boreas of Intralinks and Holly Singer of HS Marketing discuss the role marketing communication plays in hedge fund management

PRIME BROKERAGE

STREAMLINED SERVICESKevin LoPrimo of Global Prime Partners speaks to HFMWeek about the company’s continued growth and how it is innovating client services

FUND SERVICES

STANDING OUT FROM THE CROWDGlen Dailey, co-head of global prime services, and Carlos Cabrera, head of futures sales & alternative investment services, of Jefferies, speak to HFMWeek about the current landscape and where it provides value to clients

TECHNOLOGY

BLURRED LINESRobert Roley of Advent Software discusses the increase in hybrid funds and challenges this presents for the industry

10

13

5

7

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M A R K E T I N G

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E� ective communication methods are es-sential to hedge fund managers’ processes of marketing funds to potential investors. While there has been progress in marketing e� orts over recent years, managers are just beginning to embrace the technological and

communications tools available to them. Andre Boreas of Intralinks and Holly Singer of HS Marketing discuss tech-niques and best practices.

HFMWeek (HFM): What is the current state of mar-keting communication for hedge funds? What grade would you give the overall in-dustry? Are there any particular trends you are seeing that are worth noting?

Holly Singer (HS): On an anec-dotal basis, marketing communi-cation samples among many fund managers appear too verbose and overly focused on performance-based message detail but the dis-persion of overall content quality is wide, so I’d give a “B” grade with the observation that the trend is upward. Pitch-type messages are o� en unstructured and missing a well-de� ned edge or memora-ble story. Alternatively, managers should focus on the basic building blocks that their audience needs to know. Begin by addressing three questions: Who are you? What do you do? What sets you apart? Communication AlphaSM re-quires introspective brand truth and competitive analysis. Graphic presentation of metrics must be accompanied by insightful comments to distill precisely what the manager is a� empting to convey. You only get one chance to make a � rst impression.

Andre Boreas (AB): I think there has certainly been pro-gress in overall marketing e� orts from where we were � ve years ago. However, the industry seems to be more bifur-cated than ever in terms of those who ‘get’ marketing and those who don’t. I hear constant frustration from small and mid-sized managers who complain that the majority of assets constantly go to the very largest managers. What seems to be less understood is the fact that large managers

have been able to a� ract assets by executing a well-de� ned communications programme, not the least of which in-cludes succinct messaging, personnel support and a best-in-class operational framework.

HFM: You’ve mentioned the term ‘communication al-pha’ – what do you mean by that?

HS: I have used the term ‘communication alpha’ to repre-sent the capability and willingness of managers to deliver clear, consistent and frequent messages to investors and relevant industry counterparts. Alpha – typically consid-

ered the skill element of returns achieved in excess of benchmarks – is a natural pair with communica-tion. Complex investing and hedg-ing strategies, as well as volatile re-turns, require heightened message clarity. For example, best practices include return a� ribution during both positive and negative perfor-mance periods in order to build solid trusting relationships while avoiding the perception of fair weather marketing.

Communication AlphaSM encom-passes well-planned and executed initiatives to pursue thought lead-ership and earned media coverage through public relations channels by casting a wider net. For exam-ple, white papers, articles and press interviews enable managers to ar-ticulate market views and distinctive

bene� ts of a speci� c investing niche. In addition, managers that choose to avail themselves of the JOBS Act rules (to-gether with requisite compliance and reporting provisions) may bene� t in terms of increased visibility from this new-found free speech by taking a deeper dive with further trans-parency about their fund and � rm than pre-JOBS Act.

AB: With institutions allocating more to the hedge fund space, there is a clear need for managers to embrace the concept of ‘brand’ and related marketing e� orts if acquir-ing institutional mandates is indeed the goal. As managers look to move up the proverbial food chain, investment alpha begins to take more of a back seat to those e� orts centred around the who, what, why and how, and ultimately in what way those answers are communicated to targeted investors.

SOCIAL MEDIA, SUCH AS TWITTER AND LINKEDIN, HAS SLOWLY STARTED

TO GAIN ACCEPTANCE AS A JUSTIFIABLE WAY TO

ESTABLISH OR REINFORCE THOUGHT LEADERSHIP

”

ANDRE BOREAS OF INTRALINKS AND HOLLY SINGER OF HS MARKETING DISCUSS THE ROLE MARKETING COMMUNICATION PLAYS IN HEDGE FUND MANAGEMENT

GETTING FUND MARKETING RIGHT

Andre Boreas is the director of product marketing, alternative investments for global technology provider Intralinks, Inc., where he leads the product strategy efforts in delivering critical information exchange capabilities for the private equity and hedge fund markets. Mr. Boreas has over 15 years of experience as both a fund manager and investor.

Holly Singer is president of HS Marketing, a marketing communications, public relations and media planning firm specialised in the alternative investment community since inception in 1994. Her work has enabled numerous clients to be heard, seen and understood.

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HFM: Should smaller or emerging managers approach their marketing communications e�orts di�erently than larger or established managers?

HS: All �rms need to consider budget re-ality and potential return on investment. Unfortunately, the smaller/emerging managers who are most in need of jump-starting or ramping up their marketing communications are o�en squeezed �nan-cially or challenged to absorb compliance-related overhead while under-emphasising critical marketing e�orts needed to grow their business. �ey can prioritise and al-locate budgets to pursue targeted direct mail campaigns and public relations initia-tives. Both of these should be viewed not as a potential quick hit but rather an ongo-ing process requiring dedicated personnel (internal resources and/or external profes-sionals), a sustained timetable, speci�c ob-jectives and a content strategy including a clear story and a reasonable editorial calendar to disseminate the message with deliberate frequency.

AB: �ought leadership is potentially one area where a manager, regardless of size, can o�er value to the market while at the same time highlighting their own value prop-osition as it relates to the investment process. At the end of the day, investors are always looking for more insight into the markets. Opinion pieces, edi-torials and articles can be an e�ective way to gain positive a�ention from the investor community and help facilitate introductions.

HFM: How can technology play a role in an ef-fective marketing communications strategy?

AB: Fund managers these days have a number of options in using technology as a marketing me-dium. I broadly de�ne these channels into three distinct types: social media, digital advertising and direct channel. As Holly mentioned, the passage of the JOBS Act has opened a number of doors for managers to leverage the bene�ts of these types of channels. Social media, such as Twi�er and LinkedIn, has slowly started to gain acceptance as a justi-�able way to establish or reinforce thought leadership in a market where investors are looking for more guidance. Digital advertising, o�en very costly, has not yet fully found its way into fund managers’ marketing arsenal, but it certainly represents a viable medium that should be taken into consideration given the number of targeted publications available in the market. Perhaps the great-est asset a manager could employ is the development of a central communications hub in the form of a website or investor portal. Paired with broadcast methodology, the establishment of an investor portal that functions as digital headquarters can become a manager’s centralised communication medium to establish a direct ‘fund-to-investor’ relationship.

HS: A holistic view on communication may be the best approach. As Andre states, a thought leadership initia-tive such as the rationale for a niche strategy, articulated as an article posted on the website, resonates well with investors. If the initiative is supported by multi-media content and disseminated via properly branded press re-leases leading to media interviews and further broadcast

through trackable direct email and media channels (for marketing intelligence), the manager bene�ts via credibility and awareness building. A mix of technology tools, fully integrated and e�ectively branded, makes the sum far greater than the parts.

HFM: �e use of investor portals to commu-nicate with clients and prospects seems to be gaining traction in the hedge fund space. What are the advantages of using such platforms ver-sus simple email to support a marketing com-munications strategy?

AB: Email, by and far, has been the communi-cation platform of choice for most hedge fund managers. It’s easy to use, has minimal cost and is widely accepted. However, it is by far one of the

least secure communication methods, providing zero abil-ity to control information once sent. An investor portal, by de�nition, can serve as a secure and central communica-tions ‘hub’ providing both documents and data to clients and prospects. I think one of the greatest bene�ts of such a platform is that it supports the notion of technology being a great equaliser. Smaller managers can gain access to the same branding and communication tools as larger managers, enabling them to compete more e�ectively for assets by employing best operational practices. Employing an investor portal as the �rm’s digital headquarters can go a long way to protecting the intellectual property of the fund manager while meeting the ever increasing transpar-ency requirements of the investor community. And simply giving what investors want can be the best marketing tactic of all. n

SIMPLY GIVING WHAT INVESTORS WANT CAN

BE THE BEST MARKETING TACTIC OF ALL

”

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P R I M E B R O K E R A G E

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One year on since the last HFMWeek Best Practice Report and yet again, it has been a busy year for Global Prime Partners. As two times winner of the HFMWeek Best Boutique Prime Broker Award, the � rm is not backing down and is set to undergo a

number of new developments over the next year.Chief among these is the continuing upli� in the num-

ber of new managers who have been largely ignored by the majority of prime brokerage � rms. Kevin LoP-rimo, managing director of Global Prime Partners, has recognised this gap in ser-vices available, saying “com-panies like ours are helping to facilitate an institutional service to smaller manag-ers which is allowing more entrepreneurial managers to establish funds with less capital and giving them a longer runway to create the

right track record”. However, this trend does not mean that there is less money being invested into the market, but rather suggests that more money is being invested across a greater number of start-up managers. For bou-tique prime brokers dealing primarily in smaller managers, this has proved to be a positive trend.

Global Prime Partners was built around the start-up market, striving to provide a fast to market service to get emerging managers up and running quickly and e� cient-ly. “Our best practice centres around constantly striving to make our processes more e� cient, get pricing as tight as possible, introducing straight through processing and hav-ing a high quality client service team on our side to provide the best responses to our clients,” says LoPrimo.

A� er all, for emerging managers speed is essential when it comes to starting up, something Kevin LoPrimo believes his � rm certainly brings to the table. “We like the idea that we are quick to market which works well for our client base. While most of our clients do allow a few months to get up and running, we have had clients come to us on a Friday with a need to be operational within weeks and we pride ourselves on being able to accomplish that,” he says.

While some managers do look at prime brokers early in the process, it is o� en the case that a prime broker is the

GLOBAL PRIME PARTNERS WAS BUILT AROUND THE START-UP MARKET, STRIVING TO PROVIDE A FAST TO

MARKET SERVICE TO GET EMERGING MANAGERS UP AND RUNNING

QUICKLY AND EFFICIENTLY

”

WITH THE BOUTIQUE PRIME BROKER MORE IN DEMAND THAN EVER FROM A GROWING NUMBER OF START-UP MANAGERS, KEVIN LOPRIMO OF GLOBAL PRIME PARTNERS SPEAKS TO HFMWEEK ABOUT THE COMPANY’S CONTINUED GROWTH AND HOW IT IS INNOVATING CLIENT SERVICES

STREAMLINED SERVICES

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last consideration for start-ups who usually will have eve-rything else in place including a lawyer, fund administra-tor and compliance support before they approach Global Prime Partners. “Our streamlined and quick-to-market process is bene�cial to many clients because by the time they get to us, they are eager to launch and ge�ing a prime broker is the last step in the process. We have a well set up on-boarding process, particularly with our compliance team to make sure that all the due diligence of our client base is done correctly and quickly,” comments LoPrimo.

What allows for Global Prime Partners’ quick turna-round is its top of the line technology systems. “We have been developing exciting new arrangements with best of breed technology providers to enhance our clients’ ex-perience,” says LoPrimo. �e prime broker has recently formed a relationship with a �rm called Liquid Holdings, which o�ers front end trading technology and a real-time risk management system. Global Prime Partners is in the process of integrating this into its services so it can roll this out to clients and completely streamline processes. At the moment, most of Global Prime Partners’ clients are trad-ing through a Bloomberg Trading Screen or Neovest and cannot trade all of the products they may want to through these platforms. �rough Liquid Holdings, clients are able to expand what they can do directly through Global Prime Partners in a low touch environment. In addition to this existing partnership, the company also has a robust infra-structure in place with its own proprietary IT solution, called Global Back O�ce or GBO, something, according to LoPrimo, other boutique prime brokers are not o�er-ing. “Our internal systems continue to be enhanced and become more user friendly, providing more reporting and �exibility to our clients and this is something we will al-ways strive for,” he says.

One of the key elements which Kevin LoPrimo believes di�erentiates Global Prime Partners from its peers is the fact that the �rm does not compete with clients in any

way and they are also willing to o�er best practice services through �rms that other prime brokers might regard as ri-vals. “We are all about providing services to our clients and continue to add more counterparties to how we operate. A number of high-tiered banks are now working with us to diversify our risk and our clients risk including Nomura, �S Bank, BNY Mellon and Deutsche Bank. In this sense, we can be described more as a prime of prime brokers”.

To expand the services it o�ers clients, Global Prime Partners revealed plans last year to go into capital intro-duction. It has now started this move, but according to LoPrimo this development has been in “more of a capi-

tal allocation and marketing sense than a straight capital introduction service like the bigger banks provide as we feel this �ts our client base a li�le be�er. We are currently working to further understand the needs of our clients in this area and determine how viable this will be for manag-ers starting up with small AuMs.”

�is comes as just one of many developments the bou-tique prime broker is taking to increase diversity of ser-vices. “We’ve been working hard to bring increased diver-sity to Global Prime Partners. We are growing as a �rm, adding a handful of clients every month and we provide services to hedge fund managers, broker dealers and fam-ily o�ces as well as some individual professional traders,” LoPrimo says. Helping to build this diverse client base, Global Prime Partners’ client focus is expanding beyond Europe into new markets, particularly in Asia. Since the last Best Practice Report, the �rm has placed its �rst per-son on the ground in this region working toward new cli-ent acquisition in Hong Kong and Singapore. �is direc-tor has been active since July and, according to LoPrimo “has already achieved considerable traction for us in the region.” Within the next six months, the company is also hoping to expand into the States and is working to have the right regulatory framework in place to accomplish that. �e US market has proved challenging for many, operating on a much more rule-based environment as op-posed to more �exible and principle based operations in the UK under the FCA.

Over the next year, Global Prime Partners plans to con-tinue to grow and work to further improve client o�erings. “We are striving to have the best product we can at a rea-sonable cost so that our clients can operate for as long as they can to create the right business for them to become successful,” says LoPrimo. n

WE ARE ALL ABOUT PROVIDING SERVICES TO OUR CLIENTS

AND CONTINUE TO ADD MORE COUNTERPARTIES TO HOW WE

OPERATE

”

007-009_HFMBestPractice2013_GlobalPrimePartners.indd 8 11/11/2013 16:52

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Over recent years, the prime brokerage sec-tor has become crowded with increasing competition. More than ever, it has be-come critical for these � rms to stand out with best practice standards. Glen Dailey and Carlos Cabrera of Je� eries explain

how their full suite of services and client centred approach to mid-sized funds put them above the competition.

HFMWeek (HFM): How does Je� eries remain com-petitive and pro� table in a very crowded prime services land-scape?

Carlos Carbrera (CC): At Je� er-ies, we partner with clients early in the cycle and help them reach critical mass. We � nd emerging managers that are largely ignored by the bulge bracket shops and develop loyalty and trust by being there on day one. We are competi-tive and pro� table because we are di� erent. Our solutions must al-ways be aligned with our clients. We grow market share because we grow clients.

Glen Dailey (GD): Prime broker-age is made up of three tiers. � e largest � rms focus their resources on their largest opportunities, which are the multi-billion dollar funds. � ere are a fair number of smaller mini-primes that have limited resources, most of which are focused exclusively on emerging managers. At Je� eries, we feel we are the only � rm that o� ers a full range of services to mid-sized hedge funds, including provid-ing them with a fair value exchange for the resources and services we make available. Smaller � rms do not have the breadth of product to match our o� ering and larger � rms are constrained from o� ering their services to mid-sized funds.

HFM: In what way has Je� eries developed a best prac-tice standard in prime brokerage that stands out from the competition?

CC: It’s “one � rm”. We have a � at organisation and a cor-

porate culture that promotes cross-selling. � is gives clients access to the � rm’s entire suite of products and resources.

GD: We have a coordinated e� ort across the � rm to make all of our resources available to our clients. We have built a � rst class technology platform for trading, portfolio re-porting and risk management that is coupled with Je� er-ies’ global research and banking capabilities. We feel our value exchange to clients is more compelling than our competitors.

HFM: How has the purchase of Prudential Bache be� er po-sitioned Je� eries in the Global Market Place?

CC: � e Bache product suite of Foreign Exchange, Base & Precious Metals, Agriculture, Energy & Fixed Income Futures represents a synergistic match for the global cli-ent base already found within Jef-feries. We are now a global futures clearing merchant with member-ships on all the major exchanges. It is a one-stop shop with a focus on clients and facilitating their global execution and clearing needs.

GD: Futures and FX trading was an ability that Je� eries lacked until the Bache acquisition. We have added a world class resource to be� er serve our clients. � e integration of

Bache and the talented people that joined as part of the acquisition has certainly enhanced our ability to deliver a complete trading platform to our clients.

HFM: In what ways has your � rm taken a client cen-tered approach to your services?

CC: 95% of � rm revenues come from our client-focused businesses. We do not compete with our clients; we part-ner with them to help them grow.

GD: Je� eries has been in business for more than 50 years and we have one mission that has never changed: a singu-lar focus on serving our clients. We are stronger and more capable than ever before to help our clients be successful.

WE HAVE BUILT A FIRST CLASS TECHNOLOGY

PLATFORM FOR TRADING, PORTFOLIO REPORTING

AND RISK MANAGEMENT THAT IS COUPLED WITH

JEFFERIES’ GLOBAL RESEARCH AND BANKING

CAPABILITIES

”

GLEN DAILEY, CO-HEAD OF GLOBAL PRIME SERVICES, AND CARLOS CABRERA, HEAD OF FUTURES SALES & ALTERNATIVE INVESTMENT SERVICES, OF JEFFERIES, SPEAK TO HFMWEEK ABOUT THE CURRENT LANDSCAPE AND WHERE IT PROVIDES VALUE TO CLIENTS

STANDING OUT FROM THE CROWD

Glen C. Dailey joined Jefferies & Company in March 2006 as managing director and head of prime brokerage. He previously founded Banc of America Prime Brokerage in 1995 and led the business for 11 years.

Carlos Cabrera is head of futures sales & alternative investment services at Jefferies Bache. He is a 20-year veteran who joined Jefferies in July 2011 after the acquisition of Prudential Bache where he headed the US Listed Futures business. He has been directly allocating assets in conjunction with clients for over 15 years.

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H F M W E E K . CO M 11

F U N D S E R V I C E S

HFM: Can you speak to the depth of your sales and capital introductions team?

CC: Many PB teams are comprised of life-long sell-side individuals. Je�eries has combined sell-side experience with practi-tioners who have institutionally allocated to hedge funds and CTAs. We also em-ploy experts that have helped build suc-cessful hedge funds businesses, including a full time quant to provide insight to both funds and investors.

GD: One of the great bene�ts that has resulted from the Bache acquisition is a greater pool of resources within our capi-tal introduction e�ort that is integrated across products. We have a much more diverse platform of managers to showcase at the 50+ events we host annually, which makes for more interesting exchanges for both managers and investors.

HFM: How important is liquidity to hedge fund investors today?

CC: Liquidity has become one of the most impor-tant factors in investors’ due diligence processes to-day. Equities and futures are liquid, listed, mark to market instruments and these are the products Jef-feries’ clears and prime brokers. Our investor inter-ests are aligned in o�ering access to these markets.

GD: Liquidity is always an important factor, es-pecially when leverage is being used. Hedge funds have to ensure that their liquidity matches their investors’ ability to redeem and the fund’s ability to be nimble in volatile markets.

HFM: Are you seeing growth in managed ac-count vehicles for hedge fund allocations or has this growth plateaued?

CC: On the futures side, managed accounts con-tinue to grow. Due to the regulatory changes, some traders are leaving the larger banks and starting up their own businesses. Investors want to participate in these launches, but prefer a managed account structure. �e bene�ts are obvious: liquidity, transparency and most importantly, cash e�ciency.

GD: We have many hedge funds that manage separate accounts but it is not the standard. We also deal with sev-eral groups that use strictly separately managed accounts to maintain liquidity and transparency. It is a trend that I expect to grow over the next few years.

HFM: �e prime brokerage industry has experienced immense growth over the past few decades. What are your future growth expectations and are there any oth-er key trends you expect to see?

CC: I expect to see continued consolidation in our industry. Je�eries is uniquely positioned as an FCM with a strong balance sheet and �at manage-ment structure. Our job is to �nd talent early, stay nimble, �exible, understand client mandates and identify solutions.

GD: �e prime brokerage industry has grown tre-mendously over the past 20 years. �e losses and redemptions that resulted from the �nancial crisis of 2008 caused a major contraction in the indus-try. �e good news is that investors have returned but their investments have been concentrated with the 50 largest funds. While the industry has become institutionalised, I expect that investors will focus more on emerging managers where the chance of outsized returns will be greatest in the next few years.

HFM: How di�cult is the current asset-raising envi-ronment? How di�cult is it for funds to launch?

CC: It’s very di�cult to raise assets in the current environ-ment but quality managers will always a�ract a�ention. It’s much more di�cult than years past to launch because of regulatory and compliance costs associated with start-ing a new fund.

GD: �e largest funds have got larger in the past �ve years and there is a greater concentration of assets in the largest 50 funds. We feel that the best performance will always come when a fund is smaller and more nimble. I would expect to see a gradual adjustment in the next few years with a greater focus on emerging managers that will add alpha to a portfolio of hedge funds. n

JEFFERIES IS UNIQUELY POSITIONED AS AN

FCM WITH A STRONG BALANCE SHEET AND FLAT MANAGEMENT

STRUCTURE

”

010-011_HFMBestPractice2013_Jefferies.indd 11 11/11/2013 12:14

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ADV139246 HFM 273x203.indd 3 11/8/13 2:25 PMUntitled-3 1 11/11/2013 15:22

T E C H N O L O G Y

H F M W E E K . CO M 13

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Since late 2007, the fund industry has wit-nessed an increasing blurring of lines be-tween the di� erent types of investment strategies as a steadily growing number of hybrid funds have emerged. Managers be-gan to have increased interest in aligning

their investor liquidity with their investment strategies, particularly if they were investing in illiquid securities.

� e � nancial crisis witnessed a trend in clients pulling money out of funds, which caused a number of issues for those managers involved in illiquid investments, who of-ten had to sell in a � re sale situation to meet investor de-mands. � is impacted funds across the board, from those that were doing well to ones that were struggling, and hurt the performance of all investors, including those who didn’t want to pull out of the fund and whose performance su� ered as a result. Many � rms realised that private equity funds had the right capital structure in terms of liquidity for long-term or illiquid investments but they wanted to be able to trade at a higher volume with more complex invest-ments that were characteristic of a hedge fund. � erefore, hybrid funds became the most logical way for managers to align the liquidities of their investors. Aspects of these hy-brid funds have a� ractive qualities for investors and man-agers alike. � ey reduce co-investor risk of a group of large investors pulling out of the fund and having a detrimental e� ect on performance. Hybrid models also open managers

up to additional investors who may have shied away from investing in the past, creating new opportunities and rais-ing additional capital. While they may not like that they don’t have as much liquid access to capital, many inves-

tors are comforted by the fact that fellow investors are also locked down.

We have been seeing a number of di� erent types of these funds emerge in recent years. � e most common type of hybrid funds we are seeing are private equity type funds that trade like hedge funds, which is what we usu-

HYBRID MODELS OPEN MANAGERS UP TO ADDITIONAL INVESTORS

WHO MAY HAVE SHIED AWAY FROM INVESTING IN THE PAST, CREATING NEW OPPORTUNITIES AND RAISING

ADDITIONAL CAPITAL

”

Robert Roley joined Advent in 2001 and now leads the product management and solutions consulting groups, responsible for designing solutions on and around Advent’s award-winning portfolio accounting platforms and ensuring that Advent’s solutions continue to keep pace with the rapid change in the market.

ROBERT ROLEY OF ADVENT SOFTWARE DISCUSSES THE INCREASE IN HYBRID FUNDS AND CHALLENGES THIS PRESENTS FOR THE INDUSTRY

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ally refer to when we are speaking about hybrid funds. However, a plethora of other hybrids have emerged to include hedge funds/fund of funds and funds that are packaged like traditional mutual funds but trade on a hedge fund level.

�e term ‘hybrid’ is becoming so overused as a means of describing any combination of two or more lines of busi-ness that it has become too generic and borders on useless to describe these types of funds. It was fairly easy in the past to look at a �rm by just their name and know what type of funds they are managing. New terms to di�erenti-ate between the di�erent combinations of funds have not been introduced, so it is di�cult to tell what kind of hybrid it is without knowing the context. �e only way to now di�erentiate between what �rms are doing is to steer clear of de�ning them by old categories and drill down on the important questions such as “do they simply allocate capi-tal for an investor or do they manage a discreet amount of money?” or “are the assets you manage for them co-mingled as in funds or are they in separate accounts?” It becomes more necessary to take a closer look at the trad-ing strategies, legal structures and fees to really determine what they do.

Hybrid funds present challenges in their complexity. Managers are struggling both internally and from their counterparties in terms of aligning processes. As a com-pany providing technology to some of these �rms, we have witnessed a challenge in �rms having a system or process in place for one type of fund but not necessarily for all. �ey are also seeing these challenges from their service providers. �ey may be able to get fund admin-istration from a single top-tier bank, however in the past di�erent types of funds were managed on di�erent plat-

forms with separate reports, integration and even teams of people. Managers of these funds have found it di�cult to manage their funds in a cohesive way. �is increasing blurring of lines is also going to put pressure on service providers, many of which haven’t quite solved the puzzle of providing a consolidated solution where their clients want a single set of contacts and don’t want their di�er-ent funds on separate platforms. I think it is fair to say that the days when fund types were distinct and stayed in clearly de�ned lanes is long gone.

Our company has been working over the years to ad-dress the challenges arising from hybrid funds. Advent

So�ware specialises in portfolio accounting products which started both in the hedge fund space and the global asset management world. We’ve developed a great solu-tion for these hybrid funds that we built in conjunction with some of the early hybrid funds, which were institu-tional managers with complex investment strategies that couldn’t utilise traditional investment accounting plat-forms built for long only or traditional asset managers. More recently, we’ve been engaged by a number of our clients, particularly service providers, moving into the private equity and hedge fund hybrid space who might have had three platforms for fund of funds, single manag-er hedge funds and private equity who are ge�ing a book of business from new and existing clients that doesn’t �t into any of these models. �ey come to us to �nd a so-lution to align their operations. We’ve partnered with a number of funds over the last couple of years such that our solution can now cater to that entire suite of busi-ness, allowing our service provider clients to retire their old systems and have a consolidated platform that they can �t all of their various product types on.

Looking ahead, investment managers are going to con-tinue to look to new ways to a�ract capital and to make money in launching new product types. It seems hybrid funds are here to stay. I don’t see �rms restricting them-selves to strictly managing one type of fund if they can �nd a way to e�ectively manage money and raise capital through di�erent products. n

THIS INCREASING BLURRING OF LINES IS ALSO GOING TO PUT

PRESSURE ON SERVICE PROVIDERS, MANY OF WHICH HAVEN’T QUITE

SOLVED THE PUZZLE OF PROVIDING A CONSOLIDATED SOLUTION

”

013-014_HFMBestPractice2013_Advent.indd 14 11/11/2013 16:53

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