Geneva Enables Global Hedge Fund to Double Assets and Improve Profitability

The client is a large global hedge fund with expertise in Asian securities. Founded in 2000 with $80 million under management, the firm now manages approximately $3.5 billion in international equity funds.

The decision to change the portfolio management and accounting system was driven by rapid asset growth, the need for accurate, real-time portfolio position data and the desire to create operational efficiencies across the firm to drive down costs, enhance quality and raise staff morale.

Solution

In 2004 the client converted to Geneva, completing their implementation in five months. Geneva offers a unified data model for transactions and general ledger, with automated workflows, full multi-currency support and robust security and audit trails.

Key benefits

Benefits included:

• AUM increased by $1.7 billion with no increase in operations staff and savings of more than $350,000 per year.
• New security and audit features significantly reduced operational risks.
• Accurate, real-time data increased trading profits.
• Operations was able to more effectively support the front office, raising the visibility and morale of the department.

Successful hedge funds that experience rapid growth in assets, higher trading volumes or the addition of more complex investments face unique challenges. They must be fluid enough to handle continuous changes to their operations while keeping control over costs and business risks. This case study illustrates how the implementation of Advent's Geneva portfolio management system helped a fast-growing global hedge fund successfully meet those challenges.

In 2001, the firm was using a portfolio and tax lot accounting system suitable to support the management of an $80 million international long/short equity fund. By early 2004, funds under management had grown to more than $1.8 billion and it was clear that they would eventually put a strain on their operations and technology infrastructure. In addition, the client had a reputation for exceptional client service and it was critical that they maintain their high standards.

A decision was made to upgrade to Geneva, Advent's global investment management and accounting solution. As a result, they recognised significant improvements in trading profitability, reduced the potential for operational risk and created a culture that positioned the firm for further asset growth. By November 2005, 13 months after the client went live on Geneva, they had launched two new funds and doubled their assets under management, with no increase in operations staff.

With Geneva, the client was able to keep a tight control on their business, enhance the services they offered to their customers and drive revenues and growth through a transformation of their operations.

Business situation

The client is an Asia-focused hedge fund manager founded in 2000. With more than $3 billion dollars under management and offices in the US and Asia, the client is one of the most respected investment firms in its field.

As a start-up with less than $100 million under management in 2000, they implemented a suitable portfolio accounting system and proceeded to rapidly grow their business over the next several years. In 2004 we were at the point where building scale and best practices into our infrastructure was one of our mission-critical initiatives as a firm, said a managing director.

Strong growth

Explosive growth had increased demands on their systems and personnel. They had additional funds, increasingly complex instruments, an expanded number of trading partners and prime brokers and requirements for advanced multicurrency accounting. It became a key goal of the organisation to meet these day-to-day business demands, compounded by greater regulatory oversight, in a cost-effective way.

Functional groups were responsible for managing trading, operational and accounting data with a common goal of timeliness and accuracy. Synchronising the data across trading, operations and accounting began to be too labour intensive and the risks for errors began to increase.

The front to back office process was built around a shop that had $80 million, said the managing director. We had grown far beyond that.

To get up-to-the-minute position data, traders maintained their own position and counterparty information and the back office devoted significant time to retrieving and accurately processing market event data.

As the firm grew, it became more and more important to efficiently manage cancel and correct and reconciliation activities that might lead to delays in creating an accurate set of books.

Growing headcount

The client maintained its operation excellence by adding staff. Operations was increasingly viewed as a cost centre for data entry, data validation and reporting that would grow in expense proportionate to growth in assets and investment types.

The accounting department also relied on numerous offline procedures to deliver financial statements and NAV calculations in a timely manner. Accuracy never faltered, but as the volumes and complexity grew, it became apparent that more and more effort would be required to keep pace and continue to deliver the world-class service the firm's clients expected and received.

Finally, although the individual functional groups each had their own challenges, across the firm job functions became more specialised, thereby reducing the opportunity for career development, a critical element for retaining talented staff.

The firm had two choices: continue to increase staff to maintain their operational performance standards, or implement a better system that would set a new bar for the productivity and quality of the operational staff.

Solution

The client was growing fast and faced multiple hires and escalating costs unless they upgraded their system to one that could not only accommodate their current size, but would also position the firm for further growth.

Senior management provided a mandate for the evaluation to turn the back office into a profit center. In 2004, the client evaluated vendors to find a platform that would enable them to respond to current and future business needs.

Key requirements included the ability to handle multicurrency transactions in a true cross currency model, enhanced investment instrument coverage to support swaps and an integration model that worked with their existing trade order management and reconciliation systems.

After a comprehensive evaluation process, they selected Geneva, Advent's global investment management and accounting solution. Geneva's broad instrument coverage, multi-currency capabilities and unified data model were key components of the final decision.

Benefits

Geneva provided numerous advantages from a functional standpoint including multi-currency capabilities and an advanced cancel and correct process. The client also realised unexpected benefits from the real-time data model and unique error correction inherent in Geneva's architecture. This architecture eliminated the functional separation of duties and improved workflows across the front, middle and back offices.

Now trading, operations and accounting can work from a single set of real-time position and cash data. By implementing a best-of-breed investment management and accounting solution, the client not only avoided escalating costs but also boosted firm profitability and staff productivity by reallocating back office staff to front office support roles.

Improved profitability

Geneva reduced the time devoted to data management, error resolution and reconciliation by 70% and the effort devoted to the NAV process by 40%. Productivity improvements, which were estimated to be valued at more than $360,000 in the first year, allowed them to re-allocate back office resources to focus on strategic initiatives, such as monitoring trading counterparties for currency exposure.

Access to real-time data gave traders at the firm the information they needed to explore better financing alternatives and to cut trading commissions and other brokerage fees by reducing rebalancing cycles.

Reduced risk

With Geneva, the client was able to eliminate the time lags between the initial trade input, addition of trade details by operations and subsequent fixes and reconciliation.

Trading now has position data in real-time, minimising the potential for trade errors. Similarly, the client has decreased the risk of mis-statements, because accounting and operations can now leverage a single set of data.

Geneva's unified data model supports full general ledger accounting, NAV calculations and standard journal entry lines for all financial, statistical and nominal data. This single set of data supports the need for both closed period accounting figures and up-to-the-minute, accurate positions that reflect real-time error corrections. Finally, Geneva tracks and stores all changes to data elements throughout the system historically, providing critical security and audit features necessary to lower operational risk within a controlled environment.

Positive culture

Prior to the Geneva implementation, the operations group was viewed simply as a cost centre because of the tremendous amount of effort needed to disseminate information across the firm. Operational efficiency gains attributed to the implementation of Geneva reduced the time to finish tasks by approximately 4,400 hours annually, enabling operations to develop better ways to support the front office. Now operations is the first place people turn when they have a problem, said the managing director.

The client was able to eliminate the cost of three budgeted new hires and to maintain cost savings even though assets doubled. Equally important for the positive culture of the firm, the new operations department model has enabled the client to recruit young talent and strategically invest in their development for the betterment of the firm.

Profitability

Key results:

• Assets under management increased by $1.7 billion, with no increase in operations staff.
• Better access to real-time data exposed trading opportunities, resulting in indirect revenue gains in the millions.
• Unified data model for trades and a general ledger reduced time devoted to data management, NAV processing, error resolution and reconciliation, with an annual savings of more than $350,000.

Reduced risk

Other benefits included:

• New security and audit features significantly reduced operational risks.
• Better access to real-time position data shortened the trading cycle, resulting in significant savings in trading commissions and breakage fees.
• Operations staff were repurposed to be an extension of the front office, raising morale and creating a career path for critical staff members.

Summary

Three major reasons drove the client's decision to change portfolio management and accounting systems in 2004:

• The firm had experienced tremendous asset growth, with commensurate increased trade volume and operational complexity. A system was needed that could not only accommodate the current asset size, but would also position the firm for further growth while maintaining their high standards for client service.
• They needed real-time access to information that would allow them to maximise revenue opportunities and minimise trading error costs.
• They wanted to increase operational efficiencies across the firm to drive down costs and raise the productivity and morale of the back office, a department critical to the success of the business.

With Geneva, the client was able to keep control of their business and drive revenues and growth through a transformation of their operations.