Q&A: Hardeep Mehta, Cognivo Solutions
Mehta discusses trends in hedge fund technology adoption and explains what hedge fund managers need to be conscious of when selecting a technology vendor.
AW: Hardeep, hedge funds are increasingly spending money on technology. What particular areas of the business of running a hedge fund are you seeing most interest in?
HM: Hedge fund managers are investing in technology and process automation focused on accuracy, and efficiency, leading to higher-quality middle and back office operations, better reporting and overall cost management, while keeping the operational footprint small. Another area, that has seen increased interest is investor onboarding and servicing. Deploying technology, and automation in these areas is giving hedge funds the confidence to grow their AUM without sacrificing service quality.
At Cognivo, we are helping hedge funds deploy technology in creative ways within the middle and back office operations, including, automation of trade settlement, reconciliation, fund accounting, and regulatory compliance, as well as investor reporting.
We are also helping hedge funds manage and centralize their data from multiple sources. This allows them to have a unified view of their portfolio, and perform real-time, advanced analytics using sophisticated dashboards instead of linking multiple, cumbersome Microsoft Excel workbooks
AW: Many hedge funds still use Microsoft Excel or Access for tasks like CRM instead of a software solution. What other parts of the business should hedge funds look at migrating to something more functional?
HM: As you mentioned, a lot of hedge funds use Microsoft Excel extensively, not just for CRM but also for storing portfolio trades, cash, counterparties, collateral, accounting, investor performance, and other critical data. Excel is a great tool because of its ease of use, flexibility, and powerful features. However, it is not really designed to store data. This becomes clear to any hedge fund analysts who have tried linking multiple Excel workbooks for the purpose of performing analysis over multiple time periods, portfolios, investors, etc.
We have seen hedge funds derive large benefits from integrating a database with their current Microsoft Excel set up. This is accomplished by collecting all critical data within the hedge fund from multiple sources like emails, PDFs, CSV files, FTP servers, and current Microsoft Excel workbooks, and then storing it in a centralized relational database like Microsoft SQL server. Hedge funds then continue to use Microsoft Excel as the front-end to interact with this data in a much more efficient fashion, including the ability to perform various analytics. For more powerful and advanced analysis, hedge funds also incorporate Microsoft Power BI on top of this centralized database.
Some of the major benefits of implementing this hybrid database-Microsoft Excel setup are; (a) Efficient and consistent storage and retrieval of (validated) data for use within the front, middle and back office, (b) More efficient, and accurate, internal, regulatory and investor reporting, and (c) Prevention of the of loss critical hedge fund data that may occur when Excel crashes or Excel workbooks get corrupted.
We have recently written an article discussing some of the pain points of using Microsoft Excel and suggested solutions. You can find it here – http://www.cognivosolutions.com/insights/top-pain-points-hedge-fund-excel-users-proposed-solutions.
AW: Onboarding new technology is costly. For newer or emerging hedge funds, many will stick to Excel or Access from a cost minimisation perspective. What point should they be looking to migrate?
HM: As a general rule, we recommend that if hedge fund analysts are spending more time preparing the data for analysis, than performing the analysis, the hedge fund could see a high ROI by investing in new technology. Another practical gauge is to ask this question – Is the investment analyst team able to answer the investment manager’s crucial questions about the portfolio with regards to cash, positions, return, time-period comparisons, etc, accurately, without spending an inordinate amount of time? If the answer is no, then it’s likely that the hedge fund would significantly benefit by investing in the right technology, and process automation.
I'd like to make a key point here. Many hedge funds feel that technology investments have to be a onetime, big ticket expenditure that requires a large commitment of internal staff and resources. On the contrary, we work with hedge funds all the time where we start with a small use case where we feel that the hedge fund would see the greatest benefit in time and cost savings. Once, that has been implemented successfully the hedge fund can choose to slowly make upgrades to other relevant parts of the fund operations over time.
AW: More and more hedge funds, whether their approach is systematic or discretionary, are using alternative data as part of their quest for alpha. What should they be aware of from a technology perspective when onboarding new data sets?
HM: With the recent explosion in the alternative data space, there is an abundance of alternative data available. As a result, hedge funds need to ask themselves a critical question - What is the investment of time and money to make available alternative datasets into useful data that could readily be used to obtain a new signal or gain confidence on a current signal? The ability to make a correlation between the alternative dataset and the current datasets is also critical for the new datasets to be useful in various market conditions. In addition, like any dataset, the data should provide correlations without being causational.
The second important concept to understand is that the possible value and benefit being obtained from an alternative dataset will diminish if the data is highly marketed and being consumed by other competitors in the industry.
Equally important is data quality – Before incorporating the data, the hedge fund should ensure that the data is complete, and accurate. The two primary reasons for the failure of an alternative data project are spending too much time cleaning bad data, or worse, using signals from bad data that is perceived to be good data.
AW: Finally, investors are increasingly focusing on operational due diligence when it comes to manager selection. What are some of the critical questions a hedge fund needs to ask when selecting a technology partner?
HM: One of the ways hedge fund managers are choosing to increase their alpha is by incorporating technological upgrades to various business functions. To get the most benefit from these upgrades, it’s critical to choose the right technology partner.
First and foremost, our recommendation is to work with a technology partner who has deep domain knowledge of the capital markets and hedge fund operations. They should understand hedge fund operations, financial instruments (such as equities, derivatives, commodities, and currency), U.S. regulations, risk management, portfolio management, and reporting concepts and needs. A partner with specialized industry knowledge, will understand the why behind the upgrades, thereby maximizing the return from the technology investment.
The second thing to look for is a technology partner with experience in implementing financial technology within the hedge fund space. A technology partner with an understanding of the hedge fund industry would be able to make recommendations that would provide the highest ROI based on their prior experience, implementing similar technology.
The third important factor should be the physical location of the technology partner. With risk management, Intellectual Property (IP), data privacy, and data security being paramount for a hedge fund, there are advantages to having a technology partner who works under the same legal jurisdiction. This also leads to a better understanding of the hedge fund’s needs and requirements, with no language or communication gaps. Close physical proximity allows face-to-face communication and closer collaboration.
Hardeep Mehta is Founder of Cognivo Solutions
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