By Declan Quilligan, Head of Hedge Fund Services – Citco Fund Services: The last two years accelerated change in our industry in a way that no one could have anticipated. Whilst the solutions and stop gaps introduced to keep funds running were successful during the pandemic and its aftermath, they also served to highlight inefficiencies within established and trusted operating models.

While the catalyst for this accelerated change will hopefully stay firmly in the rear-view mirror, we are in a place where the industry has already evolved significantly.

As managers increase diversification across asset classes, move into hybrid strategies and access a wider range of investment vehicles, the volume of data being exchanged between funds and asset servicers has reached new highs, and the complexity of asset-servicing of alternatives will only continue to grow.

Long gone are the days of providing month-end NAV calculations, with the industry now focused on offering truly front-to-back office services, and tailored, outsourced solutions. The challenge from here is to keep the foot on the gas.

MEETING COMPLEXITY WITH INNOVATION

With delivering returns to their investor base front of mind for hedge fund managers, they need a partner that understands the nuances and complexities of day-to-day transactions and the impact these have on their portfolios.

Whether covering complex loan activity or enhanced agency services for syndicated and complex transactions, experienced and knowledgeable staff at asset servicers must work in parallel with software and systems to tackle these challenges. As such, outsourcing this digitization is crucial to the streamlining of managers’ businesses.

From removing paper from the initial subscription and capital commitment process to helping managers score their portfolios against environmental, social and governance (ESG) metrics, there are various tools either available or in development that can help with this process. At Citco, we have a three-year digitization program geared towards a “touchless” future – designed around our intention to minimize human interaction with data and automate regular processes. Whilst we are always in the business of ‘doing’, automation allows us to add value by using our teams as analysts and strategists, rather than just processers.

One of the biggest technology enhancements we have implemented is the successful transition of our Æxeo® platform to the Amazon Web Services (AWS) cloud. The data lake we have since been able to set up in AWS provides clients with on-demand access to their data through an API, giving them flexibility and accuracy in a timely fashion. The move to the cloud was a significant milestone for the Citco team – marking one of the largest accounting transactions in history, and the largest within the alternative investment sector – and is the forward-thinking innovation that underpins our client-centric approach.

However, it isn’t all technology of today. Natural Language Processing (NLP), a branch of artificial intelligence, has been around in some form or another for the last fifty years, and focuses on how computers can be used to analyze natural language to extract information. We already use a combination of robotic process automation, business process management applications and AI, with over 30 RPA processes currently in place performing basic tasks across all clients.

This base technology is being enhanced all the time, and as it improves it provides more and more use cases for asset servicing. From improving the client experience through data extraction, to speeding up NAV finalization, the positive impact on Service Level Agreements is unquestionable.

THE NEXT FRONTIER

These innovations, however, are concerned primarily with the collation of data. Whilst this is an acknowledged challenge, the new frontier is increasingly how that data is used and – crucially – how it is protected.

With data from multiple sources, data management tools are emerging as a solution that will help fund managers tackle the wealth of data crossing their desks. By providing transparency, they can unearth inefficiencies in existing processes allowing for adaptation and improvement, driving real business value.

With this efficiency comes the added advantage of addressing security risk. As our world becomes increasingly connected and reliant on data, ensuring security is critical. As online trading becomes more prevalent, it becomes necessary for processes to incorporate security methods such as dual factor authentication, watermarked documents, and digital certificates embedded in documents that are tamper-proof once signed.

It is through collaborative platforms that servicers can meet managers’ needs to have data securely acquired and stored, as well as permitting managers to communicate electronically with their existing investors, as well as potential new clients. This cutting-edge technology is already in high demand, and we would expect that to continue to pick up pace throughout 2023.

FUELING THE FUTURE

Today, there are demands on managers to deliver returns in a world where those very returns are challenged. In turn, the opportunity for asset servicers is simple – help managers to spend less time on administrative duties so they can achieve their objectives for end investors.

There is widespread growth of outsourcing like this in many areas of the world, including the US, UK and Asia. However, some regions – like the Nordics – are yet to embrace this trend so emphatically. Managers in the Nordic region have been less eager to leverage such services, opting instead to either continue to work in-house, or partner with regional providers.

The drawback to this is that regional providers may not have a global footprint, and this can often delay operations outside of the Nordics. In an industry whereby regulation is becoming increasingly more complex, and the importance of data intensifies, we believe that Nordic funds are likely to move away from this local approach, increasingly turning to global service providers who can provide everything under one roof. This is likely to be particularly pertinent when it comes to areas such as middle-office services, where it increasingly makes sense to have treasury, collateral and cash management carried out by one provider who has full oversight of managers’ cash positions.

To continue to bring value to clients, our expectation is that asset servicers will in turn need to pitch themselves as one-stop-shops for clients’ needs. It is this simplification for businesses that could be one of the biggest growth areas in asset servicing going forward.

At Citco we have a nimble, independent structure, digitized technology processes and a culture of dedication to client service, so if clients do seek an all-in-one solution from a single provider, we are well placed to provide that.

This article features in HedgeNordic’s “Powering Hedge Funds” publication.