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Peeling the ‘Complexity’ Onion

Chitra Baskar COO, one of the principals and co-founders of Viteos, manages global operations and plays a key role in the overall direction of the company of the company. She has been a visionary overseeing innovations to the firm’s technology offering in combination with services to meet the needs of the most complex funds and managers. Ms. Baskar holds a professional accounting degree and brings 30 years of securities market experience. She formerly headed the securities services business for a leading financial services for several International prime brokers. She has a track record of successfully building businesses and has been engaged with large companies like Citicorp, TCS and IL&FS.

In the quest for above-market returns, hedge funds run in a very complex arena. Private investments, exotic instruments, and currencies strung across world-wide geographies can all enter into a hedge fund portfolio. For hedge fund COOs and CFOs, managing complexity is an all-consuming endeavor—one that requires an advanced technology partner.

Many mid- and back-office service providers claim that they have the sophistication to handle the complex investment strategies of hedge funds. But once deep into the belly of operations, the reality is that they find themselves struggling to make sense of the myriad asset classes and protocols. It’s a giant fumble that eventually leaves CFOs scrambling to properly evaluate instruments in a timely manner. Reporting becomes a nightmare, evaluations unreliable, and expenses unverifiable. It’s no way to run a fund where executive management and sophisticated investors expect excellence at all levels.

The Broad Swath of Data Complexity

Take Volatility Swaps—a commonly used hedge fund strategy—as an example of complexity. An operations provider inexperienced in alternative investments can struggle with calculating the valuation – or may throw up their hands in futility. Compare this to a services partner with a deep focus on alternative investments: the correct valuation is done within the day. In just hours the hedge fund has accuracy and clarity. The complex has been simplified.

It’s not just swaps. With investments extending beyond traditional long-short equity positions on publicly traded products, hedge funds confront complexity every day in their mission to beat benchmarks and create alpha. Having a real-time handle on daily dealing dates, CFDs, and swaptions across geographies and strategies adds layers to the complexity onion.

Complexity is further compounded by the data surrounding these products and transactions. Data cuts across disparate systems, multiple sources, format variations, diverse storage technology, and reconciliations. To address these dense, interlaced layers, market players may build their own technology solutions that look as diverse as the vegetable display at Whole Foods. But in solving just one aspect of the puzzle, they create other problems when the technologies fail to interface across the entire product life cycle.

The Vexing Problem of Structural Complexity

Structural complexity comes from the levels of investors and their respective income distribution. This causes the complexity trail to expand even more. Hedge funds are now faced with complex products, inadequate data, diverse technologies, multiple players, and layered structures.

In differentiating themselves among the myriad alternative investment options, hedge funds have their own unique mix of strategies, invested assets, and pay-out streams. It’s clear that a one- size-fits-all technology solution doesn’t work. The only truly viable solution is customization.

The Human Element

Execution and on-going management of a comprehensive solution requires high domain, technology, and processing skills that can scale to a fund’s volume. Effective technology that can address all the layers and facets of operations won’t be found off-the-shelf. Appropriately skilled talent that can identify needs, tailor systems, integrate processes, and troubleshoot, needs to be sourced, hired, and retained.

The final layer of complexity is the overarching regulatory environment in which hedge funds operate. It is no wonder that hedge fund COOs and CFOs find themselves working under a constant barrage of complexity.

Critical Success for Making the Complex Simple

Having peeled the complexity onion, let’s examine the critical success factors for transforming the complex into the simple in a predictable, reliable way.

The process begins with selecting a technology operations partner that has the appropriate expertise. As with most vendor relationships, a hedge fund COO or CFO will soon recognize that most candidates fall under the 80:20 rule. However, in the highly specialized world of hedge funds, it may be more accurate to say the 95:5 rule—95% of mid- and back-office operations providers lack the requisite alternative investment understanding. Most will not even venture into this territory. Others will fall vastly short in their high-end domain expertise, technology prowess, inquiry skills, and application of best practices. The field quickly whittles down to a very select few that can develop automated, smarter, and more efficient systems. Improvements, such as increasing the STP ratio by just a few percentage points, can have a significant financial impact for a hedge fund.

At Viteos, we recognize that our alternative investment clients are constantly pushing the edge of the envelope in products, strategies, and geographies. We don’t back down—we step up with continual refinements in domain, technology, and innovation. Viteos proactively tracks industry trends, process modifications, and regulatory changes, building intellectual property assets around them. We industrialize best practices for timely transition and accurate execution for complex funds, and test technology solutions and new age digitization to re-imagine existing business models.

With a foundation of innovative technology, best practices, and an intelligent platform, Viteos creates custom approaches for hedge fund mid- and back-office operations. In a complicated world, we make the complex simple.

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