How digital transformation can streamline operations and limit costs for hedge funds

9 crucial questions leadership teams should be pondering to promote successful digital initiatives

1. What is the primary goal of digital transformation for our hedge fund?

Hedge funds need better access to data and more transparency across systems to enable growth and competitive edge. Increased efficiency through automation enables funds to scale rapidly without a linear rise in costs and overhead.

In many funds, operations still consist of manually updating Excel spreadsheets, using paper or PDFs to distribute information, and utilizing siloed tech systems. All of these actions are difficult to govern and limit scaling capabilities. A typical goal for hedge funds is to transform these processes by digitizing communication, removing operational friction, and fostering an environment where growth is possible without disrupting entire operational systems. Digital transformation enables these goals.

2. Do we foster an environment where digital initiatives have the best chance to succeed?

The leadership team is responsible for driving any fund’s culture. Do your direct reports feel encouraged to look for opportunities where technology can improve processes, or is the firm “set in its ways”?

If employees lack confidence in exploring or proposing digital initiatives, it’s up to the leadership team to correct the course. This may involve individual conversations with employees or company-wide announcements that digital transformation is fully supported. Most importantly, it should be clear to firm employees that their ideas for digital transformation are welcome, and they’ll get the support they need for new initiatives.

3. Is the technology infrastructure in place to handle growing organizational complexity?

As hedge funds grow, they often expand the number of security categories they invest in, which adds complexity. They have multiple different vendors with multiple information sources they must manage. Plus, they must leverage all that data efficiently to monitor portfolio performance and make timely investment decisions.

If they don’t have the digital infrastructure (data warehousing, integrated tech stack) in place to organize the multiple streams of incoming data, operations can get messy and inefficient and rely too heavily on people, which can lead to mistakes and inaction. Leadership teams should be analyzing current data management infrastructure and asking if they are digitally equipped to handle more complexity. For instance, if the fund needs to recreate a shadow NAV or perform valuation checks, can they quickly and accurately ingest data from a fund administrator and drop it into the data warehouse for analysis?

If not, what are the costs and considerations involved with building out end-to-end workflows and capabilities to address similar issues as complexity increases?

4. Is your expense management process easily auditable?

Historically, the expense management process has been one of the most manual and paper-based systems in hedge funds. Until recently, paying invoices often involved someone walking through the office to find authorized signatories, then comparing and scanning printouts.

While adding tools like DocuSign has helped, the process is still heavily manual. Transforming the expense management process with digitally enabled end-to-end workflows and transparency should be a priority for firms. Some firms opt for expense management solutions like that offered by Linedata.

Regardless of which route you choose, the right platform will capture necessary information, perform proper allocations outside of Excel, and create results that are easily auditable. That way, the firm stays in the SEC’s good graces and adds governance and efficiency to a currently cumbersome process.

5. What processes are we still performing manually?

Ask each member of the leadership team to examine their department’s processes. What steps are still done manually? What are we still doing in Excel? What’s stopping us from digitizing these processes? Could digitization and the outsourcing of some operational processes – such as reconciliation – be the right combination to support future growth and profitability?

Ultimately, the more processes you digitize, the more transparency you have. Then it’s simpler to task the operations team with implementing controls and oversight, and addressing your reporting requirements. Once that level of governance exists, you can decide if you want to manage those processes internally or outsource them to a third party.

6. Is the organization aligned on transformational goals?

Transparency and oversight are essential, but they should help the fund be more operationally efficient — not hinder it. For example, controls around cybersecurity promote digital safeguards. However, if they are too obstructive, cyber controls can actually stand in the way of progress.

Having open communication between compliance teams and digital implementation teams ensures the company can stay both agile and secure.

7. How strong are reporting processes?

Detailed, timely reporting is essential for hedge funds, both internally and externally. Companies must accurately measure operational processes as well as track the progress of digitization efforts. For busy leadership teams, having a detailed reporting dashboard provides all the necessary details and enables faster mid-project adjustments.

Also, automation technology helps firms streamline investor reporting, eliminating time-consuming manual processes.

8. Are vendors keeping up with digital benchmarks?

Not only do hedge funds need to refine processes through digital transformation, but their vendors do as well. Funds should consistently evaluate vendors to ensure they aren’t falling behind.

Cloud migration and the availability of cloud services built with automation are key services that vendors can facilitate. Funds should seek third parties with extensive cloud experience to help them optimize infrastructure costs and gain inside technology knowledge so they can start leveraging services that create automation and operational efficiency.

9. Does our current digitization strategy accommodate our future investment strategy?

As hedge funds add additional investment strategies, their technology and operational plan must adapt. Are your systems and digital transformation strategies only focused on solving current problems, or are you using them to prepare for the challenges of tomorrow?

Dozens of hedge funds have turned to Linedata for help

Most members of hedge fund leadership teams aren’t experts in technology, but they know how to drive businesses forward. An experienced technology partner can analyze operational inefficiencies and develop a plan to fill the gaps with modern digital tools.

With Linedata’s experience driving digital transformation in hedge funds, we can be an invaluable partner to streamline operations and help funds scale while minimizing costs. Learn more about how our Global Services offering can support your growth.

About the author

Jed Gardner is SVP, IT Transformation Technology at Linedata.