Coast Asset Management, a $5 billion group of funds in Santa Monica, CA, runs its entire operations on Microsoft technology and Dell servers.
“We once looked at an application that was attractive, but it ran on Solaris and we didn’t want to acquire a whole additional set of expertise,” said Richard Grossman, VP of Applications Operations at Symphony FSG, which operates the information technology department for Coast.
By using the latest versions of Microsoft software, from Windows XP SP2 on the desktops to Windows Server 2003, and maintaining a set of standards for implementation, the firm keeps complexity and costs low and performance high.
“We build complex systems out of simple parts,” explained Grossman. The company has over 40 Microsoft servers, including 22 SQL Server databases and two Microsoft Exchange servers in a failover cluster.
For trading, the company uses VPM from IBSI, a highly configurable application.
“In the hedge fund business, you need the ability to support the latest trading strategy; they can’t wait a year for a vendor to provide a new software feature,” Grossman said.
With funds of funds the fastest growing part of Coast’s business, the IT staff supports a lot of analytics.
“In fund of funds, we use point products that we think are best-of-breed in a particular area, and then we do a large amount of .NET programming to glue applications together, add features to an off-the-shelf application, or develop new highly-focused modules,” said Grossman.
For fund reporting to investors, Coast uses Financial Interactive’s FundRunner. It consolidates the monthly net asset value (NAV) reporting for investors, and can also generate reports in real-time.
“Investors don’t ask to receive daily NAV’s on a routine basis, but if they call and ask for a number, Coast can provide it while they are on the phone,” said Grossman.
Grossman said the firm has achieved major benefits in information quality and ease-of-use by moving data from Excel spreadsheets into the Microsoft SQL Server relational database.
“Financial services historically has been a heavy, heavy Excel environment. A lot of times work starts in one person’s Excel model and becomes embedded in the environment, and then other spreadsheets are linked in to read data off the first model, and so on. As a result, you wind up with complicated networks of spreadsheets. That’s fine for producing the particular set of reports they were originally designed for, but it is very hard to get additional information out of them,” Grossman said. “However, when we pull that data into SQL, the number of customers for that data that we generate internally will triple or quadruple within weeks when staff realizes what they can get from it.”
Investor statements, for example, had been prepared in Excel. When IT moved several years of that information into SQL Server, the marketing department found it could use the data to respond to requests for proposals (RFPs) much faster because all the necessary information was in one place.
“A big part of our operating philosophy is to avoid having IT drawn into being a permanent part of the process, but to instead create tools for the users and then keep control of the process in the users’ hands,” said Grossman.
The big job is getting information from Excel into SQL, especially in a typical situation where users use one spreadsheet format for three years, and a different format for two years before that, and still a different format earlier. Data needs to be transformed so it meets a single standard once it is stored in SQL.
“You can import a mess into SQL if you aren’t paying attention,” Grossman said.
For Grossman, the reward comes when a user will ask if the department can produce some information, and they expect it will take at least a few weeks.
“And it takes five minutes to write the query, dump it into Excel, and email it to them. That’s exciting for us, and it’s rewarding for the users and their business,” he said.
When the firm moves a set of information into SQL, his policy is to make the first milestone delivering to users at minimum the same functionality they previously had on Excel, immediately.
Otherwise, a launch with too many initial goals runs the risk that users will continue using the old spreadsheets, and the whole project can slide backwards.
After the basic data is in SQL, then a second milestone is to produce management reports on investment data, which are now easy to generate.
Coast has also realized a benefit in speeding up the annual audit. Once again, standards keep the process relatively simple.
“We make sure the products we get run on SQL, like FundRunner, or we upgrade them, as we did with PerTrac to run on SQL Server. We can really get a lot of value if we have a lot of applications in SQL, because we can match-up data more easily. A lot of what our programmers are working on is data definition in one SQL database and how to make that match up with the vendor’s data definitions in another product on SQL, and then put it together to come up with something really valuable to our end-users.”
To get high performance from SQL, Coast has servers communicating directly with other servers on the same backplane. The servers themselves are highly standardized in their makeup; they have the same Windows operating system image, installed in the same place, in the same configuration, and a standard SQL image and configuration as well.
Coast uses SQL Server data to monitor the fund managers, not only in terms of returns, but also to make sure asset allocations stay within ranges specified by investors. The data helps the firm track whether success in one particular investment has thrown off the desired allocations, and watch for style drift.
Information in the relational database can also be used to test hypotheticals – if we add this much to the fund, how does it affect the allocation targets?
“Our ultimate design is where you could do asset allocation with slider bars. We have a prototype we are putting together on that – doing asset allocation and using PerTrac and our own research. Add in risk, adjust allocation with the slider, and it tells you key reporting ratios, result ratios and whether it fits with the PPM (private placement memorandums) contractual requirements, and the impact on risk scenarios all in one interface in real time,” Grossman said. “That’s our idea of real time – real-time analysis, real-time research and real-time allocation feedback. So you could sit there and envision some allocation and bump it up without having to type numbers into Excel and wait for an iteration of manual analysis.”
The investment committee could use a tool like that to get an idea of how a Chinese currency revaluation would affect investments, for example. Already Grossman can supply hypothetical information fast – in days rather than weeks – but he wants to do more.
“We are trying to get this to the point where the fund committee could sit there in front of a big screen, experiment with investment ideas and strategies, and get immediate feedback on how it works out in the numbers – returns, risk, allocation, and scenario-based risk management,” he said.
Microsoft makes Coast more efficient, but the big gains come from using the best Microsoft tools for the job.
“SQL and .NET are key,” said Grossman. “A lot of people are still using just Excel and Microsoft Access, so more of their data winds up being trapped at the individual level. Access just doesn’t have the reach that SQL and VB .NET have.”
With the Microsoft infrastructure, he can meet the demands by Coast management for tools for the fast-moving hedge fund marketplace.
“Agility is important in the hedge fund space, and the Microsoft tools give us a real advantage,” he said.
Opening Communication Lines to Hedge Fund Investors
Although the conventional wisdom in hedge funds is that they are all highly secretive, it isn’t so widely true anymore. Where once they were the provinces of wealthy families and foundations whose investment managers had broad discretion, many now pursue institutional money, which comes with a higher level of due diligence and reporting requirements.
“These companies are becoming institutions,” said one industry expert. “In the past they were very secret private partnerships sold by word of mouth primarily to high-net-worth individuals at cocktail parties. Now they are becoming real companies with organization charts, infrastructure, and succession plans.”
That’s why hedge funds investor relation management software, which would have gotten a laugh as an oxymoron just a few years ago, is a rapidly growing business. Leading solutions are built on Microsoft tools.
GoldenTree, for example, a $6.2 billion fund based in New York, uses Financial Interactive’s FundRunner, which runs on the Microsoft platform, to assist in investor relations. As the hedge fund world becomes more institutionalized, client service and communication become extremely important, said Laurie Katz, a senior manager there.
Working with internal IT staff and Financial Interactive, the firm has made some modifications to the software to create the reports its customers want. Having a good reporting tool and monthly reporting can be important to maintaining and acquiring new business, she added.
“Clients performing due diligence want to understand how we are structured and the operations of the firm,” Katz explained, “and reporting is a key element of this.” The automation FundRunner offers for distribution of reports gives the firm an edge in comparison to using more manual methods employed with Outlook and mail merges, she added.
Financial Interactive, which was recently acquired by SS&C, has more than 100 hedge fund clients as assets continue to flow into alternative funds.
“We are normally selling to funds with $200 million and above,” said John Kiley, CEO of Financial Interactive. “Once you have 75 limited partners and $150 million to $200 million in assets, your life is getting too complex for spreadsheets and Outlook.” Some large investment funds, such as pension plans, are turning to low-cost indexing for the bulk of their investments and then to hedge funds or funds of funds – i.e. funds that invest in a number of hedge funds – to add some kick to their results.
With a fund of funds, an investor is essentially paying the fund manager to provide due diligence on the funds he selects for the portfolio. The fund manager can use features in FundRunner to analyze the downstream funds and maintain quantitative and qualitative data on them.
FundRunner combines contact management with feeds from the portfolio accounting system to create reports that it then delivers by email, regular mail, or fax to the investor and any advisors the investor selects, such as a tax attorney or accountant. Built on the Microsoft platform, it is moving to 100 percent .NET. The application incorporates Microsoft Word and allows users to take data directly into Excel or access reports through Excel.
“The client servicing groups use it too,” said Kiley, “so if you are between reports and a client calls and wants to know what his balance was two years ago, the information is there.”
Investor relations requirements at hedge funds are complex and sophisticated, said Momchil Mitov, director of business development at Netage Solutions in Cambridge, MA. Some firms have tried to use generic customer relationship management, but that isn’t enough, he said.
“We built our solution on Microsoft Outlook at the front end, and on Microsoft SQL Server and the .NET platform, so we are able to bring data in, work on it, do calculations and write that into our database,” Mitov said. “Now the marketplace is realizing the need for transparency and specificity of data because that’s where their alpha is. Their challenge is to communicate their value proposition when there are 10,000 funds to choose from. Five years ago hedge fund investors were lucky to get any information. If they were a fund of funds, they wouldn’t even tell you which managers they were using; now investors are looking for weekly projections.”
The firm has about 40 hedge fund clients and some private equity firms who use it as well. It offers three sizes, starting with a one-user license that is available through its Web site for $499. A startup fund can buy a low-cost license and upgrade as it prospers.
“Hedge funds want a simple, intuitive system,” said Stuart Sheppard, director of sales at Netage. “They want to be able to stay in Outlook and track emails, calls, and meeting notes in one place.”
Funds use the investor relations packages to tell investors how well they are doing, or to explain dips in the market. Good communications can improve customer retention, and an automated system makes it easy to produce up-to-date information for prospects as well.
TheNextRound, Inc. has also built on Outlook and .NET.
“We do a lot of great things for our clients, but we know we are never going to replace Outlook, Excel and Word,” said Andy Barrett, director of business development at the Westborough, MA firm.
“They can go into Outlook and send an email to an investor, and that automatically gets captured in our system, as does the investor’s response. So they use all their normal daily tools, but they can come back into the system and look up ABC investor and see everything they have done with that investor over the last month. This makes it easier for our clients to manage all their investors. When an investor calls, they have everything right in front of them and can handle it all during that one call.”
Daniel Simpson, CEO at Whittaker Garnier, said his firm provides software to 220 single manager hedge funds and to about 50 funds of funds, including half a dozen funds with more than $7 billion under management.
Regulations that will require most hedge funds to register by February 2006 are making managers pay more attention to software that keeps track of investors, he said, since regulators will require them to prove they know who is putting money into their funds.
“A couple of years ago when we first started selling into the hedge funds space, people made do with a copy of ACT! for customer information and Excel for balances,” Simpson said. “If an investor called up and asked for the current balance and wanted to know who had talked to them the last time they had called, the information was in four or five different silos. We consolidate it all in Outlook.”
Financial Interactive’s Kiley has also noticed that funds are paying attention to regulators. With their information stored in FundRunner’s Microsoft SQL Server database, they have a record of everything that has happened to any particular client or account number, including all communications between the fund and the customer.
www.coastasset.com
www.goldentree.com
www.netagesolutions.com
www.thenextround.com
www.symphonyfsg.com/partners.htm