We here at FTF hope you all h
ave a wonderful Memorial Day Weekend! And as you celebrate the “unofficial” start of summer we also hope you remember the men and women who died while serving in the United States Armed Forces and honor them as well.
If you have a moment, check out this video to help you remember what this weekend is truly all about: http://www.history.com/videos/a-memorial-day-tribute
Thanks to the upco
ming presidential election, we have been flooded with campaign ads and promises from each candidate. So, I started to think about how the upcoming election will affect the financial services industry. With so much new regulation and legislation being put into place, can we even predict what will happen after November’s election?
The last few years have really opened my eyes to how much the financial services industry and Washington are connected. So, after reading some recent articles in The Hedge Fund Law Report, I learned that some firms take no chances when it comes to how Washington’s politics might affect their business. It was through this reading that I was introduced to the political intelligence industry, which appears to be growing by leaps and bounds. Its purpose is to gather information on pending legislation and government policy, and one of the major receivers of this service is, by no surprise, hedge funds.
As we have seen, decisions made in the capital city can alter the profitability of any industry in the US, so industries such as the hedge fund industry are taking this very seriously and hiring political intelligence firms to help conduct research and due diligence. They also help with investment ideas and strategies, which naturally leads anyone to wonder, could this be considered insider trading? Some in Washington see that possibility and are now forming legislation, called the Stop Trading on Congressional Knowledge Act or STOCK Act, which monitors these political intelligence firms. Among other things, the STOCK Act says “hedge funds and their employees who trade on information obtained from a political intelligence firm can be exposed to potential liability”.
So, does this mean hedge funds that use political intelligence firms will be monitored more closely by the government? And will the increased scrutiny be worth all the potential extra hassle in the end? All I know is that with or without these political intelligence firms, hedge funds will probably continue to be under more and more scrutiny.
Guest Contributor: Anil Budha, Managing Principal, GBP Financial Solutions
A growing number of U.S. companies are saying goodbye to Bangalore, India and hello to America’s boondocks. Some IT organizations solicit domestic partners to supplement their offshore outsourcing projects, while others look to domestic providers to clean up messes created by offshore vendors or to avoid the complexities and rising costs of offshoring altogether.
We are only seeing the tip of the ice berg when it comes to identifying issues with offshore outsourcing. Recently the CEO of a major IT firm complained that a resource in India cost more than a resource in St. Louis. When I asked why this was, the answer shocked me. He blames the turnover rate for a good Indian developer. Currently if you have an offshore Indian employee on staff for more than 9 months you are considered lucky. Young Indian IT professionals have learned how truly valuable they have become and are constantly looking for change that will bring higher salaries.
So what does this mean for customers? Higher cost!
Now if we turn our focus to outsourcing to the United States, you can find that in certain areas with low cost of living plus an ample amount of young talent, that the rates are comparable to that of India. For example, a typical head count in India performing a highly skilled implementation will cost about $250 USD a day; in rural America, you will pay about $300.00 a day. The trade off with for the extra $50.00 a day is a resource that will stay on your project for more than 6 months, current domestic outsourcing is seeing a turnover rate of 4.5 years.
The qualification for Indian resources and rural American resources are about the same. Both would have majored in Computer Science, both would have a Bachelor’s or Master’s degree, both would know C++, Java or .NET and both would speak English. The only difference would be the understanding of the English language.
So in the end what do you really pay for when you outsource to India?
With companies like Citigroup, JP Morgan and Barclays capital already exploring this model, is the rest of Wall Street far behind?
Guest Contributor: Laurent Jacquemin, executive vice president, post-trade derivatives, SunGard’s capital markets business
In the derivatives industry, significant, year-over-year transaction volume growth has become the norm. With high-frequency trading driving up the volumes of trades to hundreds of thousands or even millions per day, derivatives market participants must be able to manage these higher volumes. Moreover, due to market volatility, the peaks in volume must be managed within shorter time intervals, and this is driving the need for scalability.
A key factor to meeting the challenge is the ability to reduce the length of end-of-day processing and complete tasks more quickly. However, increased volumes can present difficulties for the monolithic back-office systems that firms have invested in and tailored to their business over many years. These systems must be enhanced to scale and perform optimally in an unpredictable and high volume trading environment. But enhancing the scalability of an entire back-office system in order to manage one specific task ramps up the cost of hardware, software and staffing.
So what is the recommended approach?
Component-based processing can help to address these challenges by focusing on improving scalability only for targeted functions or specific tasks. This technology approach means that firms are enabled to manage high volumes while continuing to leverage their current back-office systems without increasing their total cost of ownership (TCO).
This approach helps to increase flexibility by extracting system functionalities to optimize back-office processes. It also helps firms to improve the scheduling of these tasks. This is especially useful for time zone processing and scaling to new business requirements.
For example, let’s imagine that a large global clearing firm wants to ensure its processing in Asia, Europe and the U.S. is successful according to the requirements of each regional time-frame. A component-based approach gives the firm the ability to launch global end-of-day processing that covers all regions with the flexibility to run each one individually according to time zone.
Components also help to increase scalability while controlling TCO. Based on a firm’s specific requirements, they can make technology choices regarding which processes to externalize to improve processing. This eliminates the cost and pain of a switch-over to new platforms or the need for additional hardware.
With the right system strategies, the back-office can provide better returns in the long run, especially given the explosion of information and trade volumes. Firms must take steps to strategically leverage technology to be more agile and efficient while still properly managing operational risk. The future of post-trade derivatives processing is here.
Guest Contributor: Jane Conway, Executive Vice President for Alpha FMC, US
Outsourcing particular business functions has been an established and growing feature of the more traditional asset manager landscape. Private Equity (PE) asset managers have to date largely shunned this trend – and with good reason. This is now set to change. The case for outsourcing is becoming ever more compelling for PE houses – driven by the search for cost savings and the need for cost avoidance, a regulatory environment that is becoming more intrusive and onerous, and the emerging capability to de-risk non-core activities by leveraging the scale and expertise of third party administrators (TPAs).
The Development of PE Administrator Capability
Historically, bespoke PE administrators have struggled with the scale and breadth of service offering required for them to be seen as plausible partners for General Partners (GPs). Conversely, larger traditional TPAs have been perceived as trying to deliver the administration of PE assets through their core service functions, without fully accounting for the inherent idiosyncrasies of complex asset classes or fund structures.
In recent years, however, the administrator landscape has evolved considerably. Bespoke administrators are reaching a level of maturity and scale that establishes them as genuine potential partners to the PE powerhouses. Concurrently, global TPAs have understood that PE administration is fundamentally more complex than their traditional asset coverage, and that administration on hybrid long-only systems and processes will not suffice as a credible service offering.
A Positive Sales Message
Like their traditional asset manager forerunners, GPs increasingly see the value of the positive marketing message associated with independent administration. Such an arrangement demonstrates transparency and rigorous asset servicing in an environment of increased scrutiny by investors and regulators, particularly on those organizations managing alternative asset classes. Indeed the use of an independent administrator is becoming a key checklist item for some investors when considering where to allocate their capital. Regulatory scrutiny and consequent investor pressure are only likely to become more acute – a challenge that outsourcing may prove the most effective means of addressing.
Technology – Economies of Scale
One of the key benefits to working with outsource providers is the opportunity to leverage their significant investment in advanced technology and reporting platforms. All leading TPAs have invested heavily in these platforms, driving service and efficiency improvements across both traditional and alternative asset classes. Investment on such a scale, and the service and efficiency improvements that result, are the sine-qua-non for TPAs, in precisely the same way that asset managers are increasingly reluctant to undertake the scale of in-house investment required on non-core functions, just to keep up with more sophisticated investment techniques, asset classes, and regulatory requirements.
With all TPAs boasting impressive platform credentials, (some of which are more real and tested than others), the industry consensus appears to remain, in the PE market at least, that while the utopian vision of a “light touch” front end system interfacing seamlessly with a robust, complex administrator platform is edging closer, it is still some way off.
A Compelling Case?
With such a compelling array of factors pushing the PE market towards an outsourcing model, it is almost hard to believe that such a significant number of GPs continue to run their operations in house. However there is still some way to go before many GPs would feel comfortable relinquishing the control and direct oversight they have over their own administration. The most common deterrents to outsourcing remain:
Administrators, for their part, are responding to this challenge head on, targeting mandates for start-up funds, and adapting their value proposition and service capabilities to a level that they hope will open up opportunities for a wider outsourcing trend across the PE market. After all, with the continued squeeze on profit margins experienced in most large legacy asset manager outsourcing arrangements, it is precisely these sorts of new markets and opportunities that present TPAs with the most promising route to new, profitable business.
The Challenge and Prize Ahead
All market participants face challenges as the PE outsourcing market develops. For the GPs, it is about evaluating the real cost of running their business, anticipating the impacts of changing regulatory and investor requirements, and choosing an effective end-to-end operating model that best serves their future business needs. For bespoke administrators, the challenge is to maintain the momentum they have built and to identify ways to maintain their niche foothold in servicing GPs. They face a challenging environment as the larger Administrators produce increasingly more compelling PE-specific servicing solutions and operational platforms to support them. Larger, international TPAs must demonstrate that they can be flexible, client-focused and accommodating – which is always a tough balance to strike in a business which fundamentally demands scale and standardisation. However, their continued development of innovative and differentiating PE solutions alongside their broader service offering is likely to prove an increasingly compelling proposition for GPs.
To find out more about the latest trends in asset management outsourcing from the market experts and participants, be sure to attend the “Asset Management Outsourcing: The Insider’s Guide With a View From Both Sides,” lead by Alpha FMC’s US EVP, Jane Conway Ph.D., on June 14, 2012.
Guest Contributor: Jason Scharfman,, Esq., CFE, CRISC, Managing Partner, Corgentum Consulting
In the past, many hedge fund managers may have cringed at the mere thought of an investor inquiring about conducting a distinct operational due diligence review. Such reticence represents a missed opportunity.
Hedge funds often work hard over many years to develop strong operations and work with high quality service providers, but may falter when it comes to explaining operational procedures to investors. On the investment side, fund managers are generally more than willing to describe their investment edge and alpha generation capabilities. Why don’t most fund manager take similar zeal in showing their operational strong points?
Historically, certain investors may have viewed fund operations as the more mundane, yet equally important, side of the hedge fund business. In recent years, spurred in part by a series of hedge fund frauds such as Bayou and Madoff, it is becoming increasingly more common to hear that a fund is being examined by an operational due diligence consultant. Investors hire these consultants, such as Corgentum, to go into funds and take a closer independent look at fund operational practices, before making the decision to invest. These reviews typically encompass evaluations of traditional back office procedures but can also cover other areas including compliance, valuation and information technology. Due to this trend, more operations personnel have been thrust into the spotlight.
Often, hedge funds do not know what to expect for an on-site visit by an investor or consultant performing operational due diligence. Different investors and different consultants employ different approaches. These approaches however are generally, or at least should be, based around reviewing a core set of standard operational risks. Funds that are prepared not only to meet this minimum, but exceed it will generally make the operational due diligence process not only more efficient but will also gain credibility with investors for not making an already detail oriented process unnecessarily cumbersome.
Although much of a hedge fund’s job is performance based, the operations people know that you need to, at a minimum, have documents in order, and a transparent approach toward your interaction with the due diligence consultants. Here are four tips to help guide fund managers and operations personnel through a due diligence process.
1. Have a plan
In much the same way that a hedge fund would prepare for an SEC review, fund managers should be prepared for an operational due diligence review. Some hedge fund firms may consider even go as far as conducting a mock operational due diligence review as they might for an audit review.
When an investor conducts an operational due diligence review there is a real opportunity for operations personnel to shine, and highlight the strong points of a fund’s operations. In additional to the areas outlined above, other key areas investors or consultants may focus on during an operational due diligence review include:
2. Get your documents in order:
Similarly to an SEC exam, funds should also be prepared to respond to documentation requests during the operational due diligence process. So for example, funds should have prepared fund legal documents, audited financials and ISDA’s. These documents should be easily accessible and available to an investor upon request. Having these types of documents ready to go, makes for a quicker and smoother review process.
3. Know what you don’t know
Invariably during the operational due diligence process, operational professionals, be it a fund’s CFO, COO, CCO or other similar title will be presented with a question that may stump them. That is not to say they cannot find the answer but they may not know the answers to certain questions off the top of their heads. Investors and consultants conducting operational reviews generally understand that a fund’s operational professionals cannot know everything. There is nothing wrong with fund operations personnel telling a fund that they do not know something and they will follow up with them. This is better than simply making up an answer or drawing a hard line in the sand and saying that the fund will not disclose this information.
4. Get everyone involved:
One good piece of advice is that from the hedge fund’s side, it is beneficial for everyone involved to be prepared when getting ready for an investor operational due diligence review. Investors may cover a wide gamut of issues and if someone from business development is unable to cover an issue, someone else in the firm should be able to address it.
To find out more ways in which a hedge fund manager can be best prepared for an operational due diligence review, be sure to attend the “Surviving a Hedge Fund Operational Due Diligence Audit,” lead by Corgentum Consulting’s Managing Partner, Jason Scharfman, Esq., CFE, CRISC on June 12, 2012.
Guest Contributor: Andrew Carrier, Deputy Managing Director of Cognito EMEA
While the likes of Citi and American Express have embraced social media with aplomb on the consumer side of their businesses, the B2B financial services sector has been much slower to adapt these new channels. That’s understandable; it can seem like a daunting task. Where to start? What channels to use? Who will manage it? All the basic rules still apply. It starts with clear objectives and strategic alignment; it’s made hugely more effective by careful planning; and it benefits significantly from a little imagination and some careful monitoring.
At Cognito, over years of consulting with our clients on social media best-practice for B2B financial services, we’ve boiled our advice down to 10 golden rules:
1. Establish business objectives: Whatever you do, do not succumb to the pressure of “we need to do something in social media” and rush into anything. Like any other communications activity, begin by asking: “What are we trying to achieve?” …The answer to that simple question should inform everything you do and – crucially – what you chose not to do.
2. Align strategically: Social media should never be a silo activity that is handed down to a junior member of staff to execute. To be effective, social should be integrated with (and complement) other communications activities, executed by experienced team members and aligned strategically with your business’ goals.
3. Listen: Establish who you are trying to reach, what you want to convey to them, and how you want to do it. Spend time identifying the channels where your audience is holding its conversations. Then, there’s an enormous amount of benefit in then just sitting back and listening – learning how your audience interacts…
4. Embrace compliance rules and communications policies: Do not forget the important regulatory constraints of our industry. Work with your compliance teams: get them on board early and ask them to be clear about the legal rules – if any – that govern what you can say publicly in your particular role. If your organisation doesn’t have a social media policy (many do not) it will have existing policies in place that govern external communications like email and speaking to the press. Following the spirit of these and adapting them for social media will provide a solid framework.
5. Empower colleagues: Social media is far more effective when done as a group of individuals rather than one anonymous corporate face (see rule 10). So, make sure that existing policies are clear and that staff have clear parameters in which they can operate and helpful guidelines. After that, trust and empower them to use social channels. This has been a large part of Cognito’s social media success.
6. Advance the dialogue: Sharing other people’s content is good. Adding your own thoughts, opinions, and questions before passing it on is even better. Your aim should be to make people think, to add value, to drive the dialogue forwards. By all means draw attention to your company or product but only do so when it’s a natural way to advance the dialogue taking place. People can smell a sales pitch a mile away and don’t respond well to it on social channels.
7. Engage: Remember that one of the defining characteristics of social channels is that they are interactive. This is perhaps their most distinguishing feature. So, once you’re ready, be sure to engage with people in a two-way process.
8. Track, measure, and adapt: One of the key benefits of social channels is that they can be tracked so your activity and impact can be measured. Use this data, review it regularly against your objectives and adapt your strategy and tactics if necessary.
9. Commit to the long-term: There are no short-cuts in social media. Accept that it will take time to reap the benefits: to find those with common interests, to build relationships with them, and to begin influencing the audience. Be prepared to invest some time on a daily basis in the process. Once you start, keep at it and be regular.
10. Relax and be yourself: People engage with people, not corporate logos. So, be sure to inject some personality into your presence on social media. You don’t have to be too personal or reveal details of your private life but be sure to provide some insight into what you are like as a person: your interests, thoughts, and perspectives. Relax and have fun.
Andrew (@AndrewCarrier) is Deputy Managing Director of Cognito EMEA (@CognitoPR), an integrated PR and marketing agency focused exclusively on the finance and financial technology sector. To learn more, please visit www.cognitomedia.com.
