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Mastering Domain Complexity

By Roshi Dandona, Co-Head of Fund Services Business at Viteos Fund Services.

Roshi Dandona of Viteos Fund Services reflects on the relative simplicity of Viteos’ offering, enabling clients to readily understand their technology.

Fin-tech users may be captivated by technology, but they are sometimes disappointed when it does not meet their expectations. Usually, either the chosen technology lacks the ability to address necessary domain specific elements or the technology must be combined with additional technologies to provide the benefits the user seeks. Understanding computing technology without the specialized domain expertise may exacerbate the possibility of underperformance. Superior results require more than just data input and computing power. Such advanced performance also requires domain expertise and an understanding of the nuances of the business before engaging in strategy discussions, as Melissa Sexton, head of investment risk at Morgan Stanley, opined in a recent interview.

Understanding the nuances of investment classes

As of January 2018, the AuM of hedge funds exceed $3 trillion. Investment success depends on a clear-cut understanding of the subtle differences between various asset classes. Nothing else compares to the processing complexity of hedge fund investments, and a complete operational solution covers every nuance of the domain.

Technology sometimes fails to deliver an effective platform that meets the needs of the targeted domain experts, demonstrating that deploying new technology developed with insufficient domain expertise is risky. This situation is not uncommon when the technology developer lacks the domain expertise to develop context-specific, narrowly-focused solutions that take industry-specific nuances into account. At Viteos, we have seen many clients discard ‘ready-to-deploy technology’ because the solution failed to meet their expectations.

Viteos’ technology, combined with our team of industry experts, enables us to understand and provide the best solutions and strategies for success.

Technology is valueless when design limitations compromise performance

Technology limitations sometimes arise from ill-conceived designs or by incorporating rules or characteristics that don’t match the hedge fund industry. In such a fluid industry, hardwiring any concept may eventually become problematic because of the differences between hedge funds and traditional asset management.

When entities without a complete understanding of the complex hedge-fund domain develop technologies based on their limited understanding, end users will eventually find that the solution lacks the necessary flexibility, forcing them to work off line or create workarounds that hinder productivity and efficiency.

While SaaS models offer solutions without the need to maintain infrastructure, there is still a need for the fund to understand the technology to effectively deploy it. The complex business problems faced by hedge funds will never be completely ‘plug and play’, making rule libraries and the ability to easily create custom rules a key component of hedge fund technologies. With to-manage rules, business operations can become simpler and more easily automated.

However, a degree of technical proficiency is mandatory because the technology will never automatically manage every aspect of the business. For instance, creation and inclusion of a new asset class and its associated nuances would be impossible without the technical skill to operate the technology and the ability to manage the system security to prevent unauthorized changes or additions.

Service providers’ expertise arises from a mix of clients

Service providers deal with multiple prime brokers and counter-parties and have access to reporting and data from various desks. Non-standardized in nature, this wide exposure offers service providers a distinct advantage over funds who have more limited exposure to variations from desk to desk.

As a capital market services specialist, Viteos manages fund operations for many clients, dealing with hundreds of prime brokers, custodians and broker dealer combinations. Viteos’ rich experience is incorporated in a set of rules and best practices within its technology, creating a significant positive impact on the accuracy, timeliness and productivity of operations.

Technology provides a channel that becomes a highly effective and super fast method of aggregation, but human expertise is often required to identify and connect disparate insights to support timely decisions. It is not small details that matter but their connection to the ‘big picture’ that makes a difference. But for most funds, a platform that offers a view of the ‘big picture’ is simply unavailable.

Effective solutions require domain expertise during development

The value of industry experts has been recognized by technologists and clients alike, many of whom resort to innovative methods to hire and retain top talent. For example, Interactive Brokers Group annually scouts for quantitative analysts through a contest in which participants must demonstrate their ability to analyze stock markets and make mock investments using technology. The company hires the top performers.

Clients who use technology still need in-house resources to use the technology or to provide inputs to the developers to prevent alignment issues between business outcomes and technical subtleties. Achieving this alignment often demands hundreds of hours of effort. The resulting solution may still require post-deployment tweaks because of emerging or dynamic scenarios, robbing the technology of many of its perceived advantages.

Contrast this scenario with the case of a service provider with industry-experienced resources at hand to develop a solution that meets requirements. With an in-house technical team working in tandem with business experts, service providers can create solutions that work in every conceivable combination based on their rich experience.

Actionable insight from technology

Without the right context, information is vague and adds zero value. For example, when a fund buys a reconciliation technology, the basic expectation is a tool which will do intelligent matching of two sets of data across asset classes without much human intervention. The fund may move a step closer to identify the breaks but working with a service provider may increase the value even more than simple technology.

In the first scenario, the focus is on insights into breaks to provide understanding of the underlying cause of a specific break. However, a service provider not only uncovers and presents trends but also actively works to identify and eliminate the root causes of breaks.

CFOs and COOs commonly wonder what they can do to improve operations, and the first step in improving a process is measuring current results against best-in-class performance benchmarks. Seasoned service providers who work with established clients can help by providing benchmarks to help determine areas for performance improvement.

The benefits of a complete solution

Technology-oriented solutions offer great benefits. There is a nearly infinite number of applications, and competitive advantage to a specific business hinges entirely upon the innovative use of the technology, whether alone or in combination with other technologies.

Businesses sometimes make the mistake of selecting a solution because it worked somewhere else or because they want to address a specific problem. Unfortunately, this approach rarely results in the desired benefits because a solution must address the needs of the unique business. Given the dynamic nature of asset classes, and the host of technologies and data formats the operations team encounters, it is inevitable to have many instances of ‘quick fixes’ or ‘largely automated but…’ strategies.

Technology and operational processes are simpler and more effective without the need for patching or hard coding integration routines. The best solution is the one that delivers a cohesive answer to the organization’s needs. Funds sometimes use a general ledger (GL) system as PMS, either because the PMS system lacks a full cash functionality or because the fund lacks the internal controls to manage its cash activities so relies on the fund administrator. Some GLs or PMS tools offer a built-in reconciliation tool, but the reconciliation may be suboptimal for handling cash reconciliation. In addition, using the reconciliation tool in this way requires domain expertise and a human element as part of the solution. Automation can collect and display information, but it takes human effort to create a meaningful visualization.

Fund managers chasing an active return on investments can achieve greater success with accretion of the right strategies. They must extract trends and analyze results to reduce costs or improve operations. Because markets are in a constant state of flux, applying a cookie cutter or textbook approach is doomed to failure.

The fund requires a balanced combination of technology, operational resources, strong analytics and informed insights. The biggest question facing fund managers is whether it is possible to fulfill all these requirements in-house. For most funds, the answer is no. Leveraging service providers with relevant industry expertise can help asset management improve operational benchmarks and achieve top performance.

Roshi Dandona co-heads the fund services business at Viteos and manages key relationships at the firm. He is a 20-year veteran of operations and technology, and oversees the delivery of multi-platform services at Viteos. Taking a consultative approach, Dandona advises managers on optimal outsourcing strategies and has helped customers in complex engagements to drive operations transformation.

For more information, please email reply@viteos.com!

Viteos Fund Services

We offer customized, straight-through processing and integrated post-trade operations across virtually every asset class, currency, border, and structure. Our deep operational and accounting expertise is backed by state-of-the-art technology, enabling a high degree of control via automation in a 24/7 global delivery model. The result is a new level of scalability and flexibility to help you grow-whether you are focused on gathering assets, developing new strategies, or entering new markets. Visit www.viteos.com or contact us for more information.

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