Evolution of shadow accounting for fund managers. July 2013

Transcription

1 Evolution of shadow accounting for fund managers July 2013

2 Current industry trends in shadow accounting Page 1

3 Current industry trends in shadow accounting Evolution of shadow accounting in the hedge fund industry Limited full partial shadowing Crisis of confidence full shadow resulting from investor demands and complexity of operations Partial shadow to reduce cost, increased trust in administrator, increased skill levels and increased administrator s investment in operations technology Evolution following traditional asset management industry path Page 2

4 Current industry trends in shadow accounting (cont d) Evolution of shadow accounting in the private equity industry Shadow accounting nonexistent trending from no administrator to outsourced administrator Page 3

5 Drivers of partial shadowing Page 4

6 Drivers of partial shadowing Cost savings Eliminating duplicative functions and reducing IT expenses Fund administrators investing heavily in their operations Managers pushing more responsibility and functions, such as middle office, to administrators Focus on portfolio management and marketing Enabling resources to focus and spend money on the firm s investments/value added activities Page 5

7 Drivers of partial shadowing (cont d) Administrator SOC 1 reports Providing evidence to managers that the administrator has sufficient operational controls Regulatory reform Requiring more experience, making it more expensive for funds to shadow those tasks in-house Page 6

8 Key considerations for moving toward partial shadowing Page 7

9 Potential benefits of partial shadowing Leveraging of administrator s technology and infrastructure Ability to focus on investments and grow the business Cost savings Page 8

10 Challenges fund manager perspective Lack of control Risk of error Potential limited access to data Limited transparency Page 9

11 Challenges administrator perspective Operational workflow analysis and changes for both the manager and administrator Migrating to risk based review processes Impact to culture of the manager Page 10

12 Determination of optimal shadowing model Page 11

13 Review of current operating model Data warehouse and data aggregation need Compliance/investor reporting deadlines that require real-time access to data Page 12

14 Review of current outsourcing agreements Comparison of administrator s technology, automation, and market data feeds to those in-house Resource constraints; market expertise Page 13

15 In-house functionalities case studies Page 14

16 Functions maintained in-house Determined based on each manager s strategy, risk appetite, relationship, etc. with fund administrator Examples of functions that managers maintain in-house: Risk management Valuation Compliance Treasury PnL attribution Daily and intraday estimates Collateral management Affirmation and settlements Page 15

17 Functions that do not require shadowing Examples of functions that managers do not shadow: Trade processing Reconciliation Full general ledger Partner accounting Page 16

18 Methods of shadowing Page 17

19 In-house More common Requires more technology than outsourced model Page 18

20 Outsourced May be more costly Frequently seen when manager is looking to switch administrators and is used during a transition period Managers can outsource discrete functions to other types of service providers (e.g., asset valuation) Page 19

21 Appropriate governance and oversight model Page 20

22 Appropriate governance and oversight model Review daily and monthly trade, cash and positions reconciliation break reports Review fund accounting month-end package, including pricing, interest and expense accruals, fund allocations, hurdle calculations, management and incentive fees and net asset value Page 21

23 Appropriate governance and oversight model (cont d) Establish detailed SLAs (sub-ledger accountings) and KPIs (key performance indicators) with the fund administrator Hold monthly/quarterly meeting with fund administrator to monitor KPIs Page 22

24 Transition to partial shadowing: best approach Page 23

25 Transition to partial shadowing: best approach Assess the current state of systems, technology, data and architecture holistically Develop a future-state operating model Re-assess the relationship between the fund and its administrator Communicate more timely and closely Page 24

26 Transition pitfalls to avoid Page 25

27 Transition pitfalls to avoid Avoid the Big Bang approach Stay away from establishing a partial shadowing strategy in one swoop; use a phased approach Avoid trying to outsource a broken process, hoping the administrator will fix it Page 26

28 How to create the ideal relationship Page 27

29 How to create the ideal relationship Manager to dedicate sufficient resources to overseeing the relationship to ensure the administrator is providing the agreed-upon level of service Manager to provide continuous feedback to the administrator Hold monthly/quarterly meetings Manager to visit on-site quarterly with administrator Page 28

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