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Sourcing Alpha from Logistics: The Drive for Value

Jenny Kim DeSmyter

Operations are often seen as a cost center for an investment manager. In reality, operations make up an investment manager’s logistics and, if done right, can give the manager a competitive advantage by becoming a source of alpha. We caught up with Mike Fastert, Chief Operating Officer and Chief Legal Officer at TIG Advisors, to understand why he considers technology for streamlining middle- and back-office processes to be one of the key ingredients for success.

Mike recently spoke at our 2017 Eze Advance Global Conference, where he educated and entertained the early morning crowd by combining his love for movies with real-life examples of why logistics can be the lifeblood of any successful endeavor. Ferris Bueller couldn’t have had his day off without superior planning, and Marty could have stayed stuck in the past and disrupted the entire space time continuum if not for a random bolt of lightning because planning wasn’t proper (i.e., no extra plutonium).

Asset managers may also suffer severe consequences from having poor logistics, such as an actual drag on bottom-line performance. While a world-class investment team provides the brains behind a successful track record, the middle- and back-office is the heart that keeps the operation running efficiently.

Increasingly Competitive Environment

Investors are looking beyond performance numbers and have higher expectations during the ODD process for funds to demonstrate an efficient infrastructure backing their investment teams. A number of recent surveys support Mike’s argument, such as JP Morgan’s Institutional Investor Survey, which found that technology has become increasingly important to institutional investors over the last three years. Additionally, the traditional 2-and-20 fee structure has come under pressure and the emergence of new models, such as 1-or-30, has put more emphasis on keeping costs low.

Since the financial downturn in 2008, regulatory restrictions and reporting requirements have increased significantly and continue to evolve today. MiFID II in Europe, which goes into effect in a couple of weeks, will undoubtedly have trickle down effects across the industry even in regions where the regulation is not applicable.

As a result, managers entering the market or seeking to grow assets face higher barriers growing forward. Without superior logistics, that barrier will only get higher.

Factors for Efficient Logistics

So, what do you have to do to create an efficient middle- and back-office? Mike believes that a hedge fund cannot be successful without financial technology partners and co-sourcing to build effective and efficient logistics to help optimize the internal human capital within a firm. “In order to deliver maximum fund performance and organizational growth, there must be significant organization, coordination and planning distinct from that done in the front office,” Mike argues. Removing manual entry, expediting workflows through straight-through processing and ensuring compliance with the growing complexities of investor/regulatory requirements are best addressed through thoughtful implementation of technology solutions and partners.

The right platform will let you mobilize human capital efficiently and effectively, while automating repetitive tasks and enhancing the investment process. It can help managers demonstrate tangible value in the following areas:

1. Mitigating operational risk. “It’s very tough to bounce back from a bad headline,” notes Mike. You should therefore leverage a robust system to help you ensure your workflow organization and internal controls are in order at all times to avoid operational risk breakdowns.

2. Maintaining the status quo. Simply put, day-to-day processes such as collateral usage, margin calls, tax reclaim, relationship management, counterparty negotiation and break elimination should be standardized, centralized and monitored for slippage. Ensuring there is no breakdown in these processes is a task ideally suited for technology.

3. Adding basis points to fund performance. While much of the middle- and back-office work, if done well, is invisible, there are several areas where a well-organized operation can demonstrably improve performance. The right platform can help optimize the treasury function by moving the ops team past confirming information and into actively moving on it; help manage expenses; make the organization more risk-focused; and leave more time for correlation analysis, which will lead to better hedging.

Tackling Organizational Performance

In summary, optimized logistics within a firm can actually help contribute to the fund’s alpha. Done right, leveraging technology allows managers to free up limited human capital to spend more time on delivering actual value and help the manager stand out from the competition.

“Overall, traditional investment performance is only part of the equation,” says Mike. “In a maturing industry with significant options available, each part of your organization must work together to deliver superior performance. Without the “logistical” aspect of your fund, the investment performance will have a difficult time keeping up.”

We couldn’t agree more.

What do you think? Drop us a line and let us know!

We’ll be posting more outtakes from the 2017 Eze Advance conference and Mike Fastert’s full presentation in the coming weeks. To ensure you get the latest updates, please subscribe.