Sponsored by Viteos
GC: What is the changing landscape for hedge funds that is driving IBOR
innovation?
Shankar Iyer: Managers are searching for asset classes and products that can meet that level of performance demanded by investors. In the search for those products, they have realised it is not in standard, listed products such as equities, and instead they need to trade instruments like OTC products or illiquid alternatives that are not settled in a straight-through process.
These products that managers trade have put pressure on the operations team that needs to track cash flows, carry out individual pricing, or building risk management modelling. This has led to demands for better internal systems. It is much more complicated than where you have a price, you have a scrip and you have the NAV; instead there is tremendous focus on things like cash flows, borrow, margin and collateral. This has all put pressure on what the investment book of records (IBOR) looks like, which has made demands of the middle and back office functions from both a people and technology perspective.
GC: What choices are on offer for hedge funds to alleviate IBOR pressures?
SI: Fund administrators are sometimes the natural choice to go to for IBOR outsourcing, but the challenge firms have is that the fund admin book or technology is discrete from the hedge fund’s book or technology.
Other outsourcing providers have grown in which their business model is based on being a partner to the fund operations and building that infrastructure cooperatively to produce the IBOR. They operate like an extension of the hedge fund’s back-office in addressing this need. While some fund administrators have taken the position of being an IBOR outsourcer by providing their own technology, they are not always the first choice firms have gone to.
GC: What innovations can we expect to see for hedge funds to utilise their IBOR?
SI: Firms have looked to introduce work flow automation processes, technologies like machine learning and other tools to the IBOR process. Many of these processes are repetitive and could use some level of robotics process automation (RPA), which really leads to even better straight-through processing (STP). While the case for distributed ledger technology (DLT) can be made in IBOR creation and management, it is still in the preliminary phase. Broadly speaking, there is much innovation happening that helps create that efficiency.
GC: How is Viteos providing new services in response to these changes?
SI: We are bringing expertise and tools that eventually drive towards providing better insights. For example, we carried out a pilot for a hedge fund where we took all of their trades for a past period, and analysed the cost of placing them through the most optimally priced broker versus the ones they were using out of habit or relationship. We were able to show they could have saved a few million dollars if they had leveraged technology in making the determination of where to place their trades. Efficiency through better processes and technology is not just a cost advantage but in many situations can result in quicker processing and turnaround times, leading to better decision-making.
A concept of what Viteos has been practising over the years is what we call Ops2Tech; where we rapidly turn operations into tech for each applicable process as our technology works to deliver the solutions requested by decision makers—tech that we own, manage, and continuously improve. The real value proposition is the continuous improvement of operations by employing automation solutions each day that improve STP.