The future of hedge fund operations


The future of hedge fund operations

Between regulations, technology, Brexit and other factors, it’s obvious the investment environment is changing—but how remains less clear. Barry O’Brien of U.S. Bank Global Fund Services tells Cayman Funds about these topics and how they might affect the future of hedge funds.

What’s the future of depositary?

The Alternative Investment Fund Managers Directive (AIFMD) aimed to install a layer of protection after various high-profile frauds affected professional investors across the globe. Its requirement for a depositary (especially depositary-lite) caused much grumbling when it was first rolled out in 2013–2014. Four years in, however, we can see the benefit of a fiduciary providing oversight, monitoring cash movements and acting as a proxy for the regulator on general and specific restrictions Now, investors would likely baulk at the idea of removing the depositary protective layer. Managers appreciate the endeavour in terms of professional investor protection.

The Central Bank of Ireland (CBI) has begun to acknowledge that not all funds present the same risk characteristics. It issued an update in November 2018 that would potentially allow for specialised depositaries or real asset depositaries. Specialised depositaries would not be able to act for Undertakings for Collective Investment in Transferable Securities (UCITS) funds. Rather, they could only act for alternative investment funds (AIFs) that meet the following criteria:

  • The AIF allows no redemptions for a five-year period.
  • It generally doesn’t invest in assets that must be held in custody.
  • It generally doesn’t invest in issuers or non-listed companies in order to acquire control (private equity investments).

U.S. Bank, in preparation for every eventuality, was authorised as a full depositary in Ireland in September 2018. We made a considerable investment in people and technology so we can offer the full array of depositary services—covering UCITS funds to private equity funds—now and into the future.

What does Brexit mean for the hedge fund sector?

If you believed all the newspaper headlines and doomsayers, you’d simply fold your hedge fund tent, shutter your business and focus on the long game and debt opportunities. But this isn’t what we’re seeing. New versions of tried and tested strategies continue to emerge, even though new market entrants are limited in number.

While returns are challenging, growth continues to be a constant. This isn’t Brexit-related per se, but rather market-related. With regard to Brexit, many managers have moved beyond planning to execution. Most have already implemented one of the following accommodations:

  • A temporary regulatory-hosted management company solution.
  • A fully authorised and owned local management company in either Ireland or Luxembourg.

Once the UK has left the EU, we have to trust investor considerations will be kept at the forefront and regulations follow this maxim. If that’s the case, we should end up in the correct place.

How is the COO role evolving since the financial crisis?

Effective change management, continued product development, resilience and predicting future threats are at the core of good COO practice. Key to this are reinvention and a continued belief in good strategy based on simple principles.

Additionally, never forget that customer service excellence is still at the core of our business—or in the case of investment managers, stable investor returns.

Staff retention and motivation improve when the workforce is committed to the company strategy and loyal to its vision to produce great results. Effective COOs stay aware of shared resources at an enterprise level (eg, IT support, HR support, compliance and risk support), while keeping all front-office functions tightly under the control of the line of business.

Granted, this is a fine balance and not always easy to get right in large organisations.

How are technology and compliance needs changing?

A technological solution is always preferable to a manual solution, but not at the expense of experience, accuracy and customer service. We’re still driven by a philosophy that smart technology with the power of experience ensures the control environment is exceptions-based.

Today’s technology must anticipate needs and provide proactive advantages that can be seamlessly merged into clients’ unique processes and data architecture. Ease of use, flexibility and integration have become as important as the tools themselves.

Firms are also demanding greater capabilities for customisation, such as dashboards, interfaces, controls, etc.

Tech advancements require cross-functional teams. It’s more important than ever to prioritise partners with development units representing a full spectrum of disciplines—from information security and data architecture to regulatory compliance and business-focused analysis. When any of these elements is missing, it’s easy to overlook important considerations, run into issues and grind progress to a halt.

New technology can provide many competitive advantages, but only when it’s implemented within a rigorous framework of data security, cybersecurity and business continuity.

Looking ahead, automation and artificial intelligence (AI) will continue to drive innovation. Hands-free net asset value (NAV) calculation and fully automated NAV calculation are especially big trends within the industry. For clients in the US, we are able to strike a fully automated NAV in the alternative investments sector without any human intervention.

We achieved this by running a project that looked at our people, processes and technology, making necessary adjustments to get us to where we could strike that NAV sooner, better and more accurately. We are working hard to bring this technology to all aspects of our business.

Automation like this helps minimise errors since humans aren’t touching the data. It also improves efficiency. Using machines that can perform repetitive functions on a 24/7 basis frees up human resources to focus on more thought-provoking tasks.

For service providers who wish to keep pace, it’s essential to invest in compliance monitoring systems and regulatory reporting solutions—as well as the strategic rollout of full middle-office solutions. At U.S. Bank Global Fund Services, we pride ourselves in developing in-house solutions and using best-of-breed technology to achieve these aims and meet our continually evolving client requirements.

U.S. Bank Global Fund Services LLC is a wholly owned subsidiary of U.S. Bank, N. A. Elavon Financial Services DAC, trading as U.S. Bank Depositary Services, is regulated by the Central Bank of Ireland and is registered in Ireland with the Companies Registration Office Reg. No. 418442.

The registered office is Building 8, Cherrywood Business Park, Loughlinstown, Co. Dublin, D18 W319. U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland with the Companies Registration Office Reg. No. 413707 and Registered Office: 24-26 City Quay, Dublin 2, Ireland. U.S.

Bank Global Fund Services (Ireland) Limited is authorised and regulated by the Central Bank of Ireland under the Investment Intermediaries Act, 1995.

U.S. Bank Global Fund Services (Guernsey) Limited is licensed under the Protection of Investors Law (Bailiwick of Guernsey), 1987, as amended by the Guernsey Financial Services Commission to conduct controlled investment business in the Bailiwick of Guernsey. Investment products and services are: not a deposit • not FDIC insured • may lose value • not bank guaranteed • not insured by any federal government agency.

Barry O’Brien is head of fund client relations–Europe for U.S. Bank Global Fund Services (formerly Quintillion). He can be contacted at:

Cayman Funds