A software company called YouDevise has created a portfolio management application for funds of hedge funds. The company claims it is the first commercial portfolio management system for the funds of hedge funds industry, which can help solve management, risk, compliance and cost issues, especially those resulting from over-reliance on error-prone spreadsheets.
The so-called Hedge Fund Information Provider (the HIP) aims to increase rates of automation in the funds of funds industry, which is estimated to account for $693 billion, or approximately one-third, of all hedge fund assets under management, according to the Barclay Group.
YouDevise says higher rates of automation will reduce the current reliance of the industry on telephone calls, faxes, emails, and multiple spreadsheet entries.
“The HIP brings management of funds of hedge funds into the 21st century,” says Simon Ewart, COO and CFO of Key Asset Management of London, which, with $1.2 billion under management, was a main sponsor among a team of funds of funds that participated with YouDevise in researching and developing the HIP.
“The HIP solves the most pressing information management needs of every fund of hedge fund manager,” adds Owain McNeill, Business Manager of alternative investments at YouDevise. Its capabilities include:
— Portfolio Management – Tracking and evaluating investments in underlying funds.
— Shadow Accounting – Monitoring, reconciling and forecasting portfolio cash, payables/receivables, and FX balances.
— Liquidity – Determining how much cash is redeemable from hedge funds over time.
— FX Hedging – Calculating exposure, hedging needs and determining gains/losses on existing hedges.
The HIP also aims to provide compliance with investment guidelines, eliminate the need for multiple data entry, and enable automatic electronic feeds from external third-party administration and in-house systems.
The HIP is securely accessed via a standard Internet browser, and the company says it can support funds of funds of all sizes and complexities. Adopting the system is alos straightforward, says YouDevise, with initiation in a matter of days, and full migration in less than a month. Annual fees, promise YouDevise, are “a fraction of the cost of developing in-house systems.”
The underlying technology is the same as that employed by YouDevise to build the Repository & Distribution Center (RDC) for Citigroup, Credit Suisse, Dresdner Kleinwort Wasserstein and Merrill Lynch. The RDC is an industry utility that enables the secure exchange of trade ideas between brokerage firms and their fund manager and hedge fund clients.
YouDevise says it developed the HIP in collaboration with leading funds of funds after its research team found almost all were experiencing three widespread difficulties using spreadsheets to manage their businesses.
First, because the business is becoming more complex, it is extremely challenging to value accurately portfolios and track liquidity using spreadsheets. “Investments made in funds of hedge funds can have different share classes, with multiple structures, denominated in various currencies,” McNeill explains. “For fund of hedge fund investments made in hedge funds, subscriptions and redemptions typically involve unique lockup terms, notice periods, fee and settlement schedules, and gating. Terms can be overridden for particular trades. Fees are calculated using complex methodologies and equalization adjustments, and prices arrive at different times, on estimated or confirmed bases, making it difficult to determine which price to use when valuing a hedge fund investment.”
Secondly, spreadsheet data are seriously prone to error. “As many studies have shown, more than 90% of audited spreadsheets contain errors,” says McNeill. “This is compounded at funds of hedge funds, which are dependent on one or two people for developing and updating their spreadsheets. The spreadsheets rely on untested macros and links to other spreadsheets. Information comes in over the phone, via faxes and through unstructured emails, and then is entered into spreadsheets manually, sometimes in triplicate. This exposes fund of hedge fund managers to a high degree of risk, particularly now that they are becoming subject to more regulatory scrutiny and are more frequently reporting intra-month results to clients.”
Thirdly, managers cannot access up-to-date information on performance, cash, liquidity and FX hedging needs. “The situation is suboptimal for fast, well-informed decision making,” says McNeill.
YouDevise Limited is based in London.