Picking Up the Pieces: Financial Services Firms Must Recalibrate

Jun 3 2009 | 2:31am ET

By Marshall Saffer -- In the fourth quarter of 2008, what became clear was that the global financial system was in danger of complete collapse. Suddenly, the notion that a depression was impossible because of the risk management deployed in banks, in public markets, and government and SRO regulation was found to be a canard.

As the crisis and final quarter of 2008 unfolded, hedge funds redemptions soared, many funds closed, some funds consolidated. However, even though the losses sustained by funds were smaller than the losses of traditional asset managers, funds seemed to have been singled out for particular attention. To some extent this was due to a perception of the unregulated nature of the fund business combined with the additional perception that fund liquidations were driving public company stock pricing into a death spiral.

What is now clear some months on is that the financial system as a whole was, in fact, too big to fail, and that for the time being the immediate collapse will not occur. That said, every player in financial services will have to recalibrate. The center did not hold, it will shift, and where the exact center of the financial system resides now is not entirely clear. What is clear is that governments worldwide, and especially the U.S. and China, are now major stakeholders in the private financial system. Given that, calibrating the center is a task each fund manger must consider as they look at where their businesses are and where they are going. This applies not only to the likely move to increased regulation, but also affects how capital will be raised, what vehicles investors will demand (traditional hedge funds vs. managed accounts), and what strategies will work (e.g. will long-short still be viable?).

Will the old “Checks and Balances” Still Apply? Can Technology Help?

Given the increasing scrutiny that hedge funds (and traditional managers) are facing and the need to recalibrate their businesses, the analytical process of what affects the cost, performance, and productivity of the firm are all up for reconsideration. That reconsideration may drive decisions that up to now have been based on categories and criteria that were convenient, but may not stand up to increased regulatory and investor scrutiny. For example, in the past much of the decision process regarding the selection of a fund administrator was based on brand name. As the Bernard Madoff scandal has made clear, brand name alone is not necessarily a reliable indicator of administrator capability, accuracy, or timeliness. This is in part due to the fact the traditional administrators are still deploying legacy systems technologically and dinosaur processes such as Excel spread sheets in executing the essential tasks that funds need and that investors will increasingly want to access.

So the question is: apart from the obvious benefits that technology gives in terms of productivity, are there ways in which the technology can be part of a suite of tools that serve to reduce fund risk to end clients?

While it may seem self-evident that administrators are offering services to funds that are seemingly the same, it is now incumbent upon funds to dig deeper and to look at the internal operations and infrastructure that the administrator deploys in backing services to funds. That must affect the decision process because it can provide comfort to a manager’s end investors.

Viteos has consistently argued that a client service model backed by the most advanced technology and infrastructure will result in the greatest transparency, accuracy, cost-effectiveness and reliability for fund managers.

To that end Viteos has designed its internal “factory” to build to this goal. As an example, most recently the firm has internally deployed VEDA to support its clients. VEDA is an acronym for: The Viteos Economic Distribution Application. Veda is the Sanskrit word which mean knowledge or seeing. Viteos has selected this term because once VEDA is deployed, funds are able to have their clients "know" and "see" all investor services in one application. Patchwork solutions are scrapped and are replaced by one integrated solution.

VEDA is an investor processing system, an economic distribution system, and a CRM. It enables integrated relationship management and delivers all investors services. It responds to the increasing demands for accountability and the increasing frustration with “lags.” And it is scalable.

As the financial world continues to “recenter” it is incumbent upon hedge fund and traditional asset managers to examine all of the support services they and their investors require. The parameters of reliability, cost, productivity, performance, and risk mitigation are all essential in this process. How administrators go about delivering to these criteria will help managers understand whether their own firms can deliver to investors need and support not only ongoing operations, but position themselves for future growth.

Marshall Saffer is the vice president of business development at Vitoes Fund Services.

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