THE ADVANTAGES OF CLOUD BASED TECHNOLOGY FOR HEDGE FUNDS

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1 August 15, 2014 Vol. 5, No. 3 THE ADVANTAGES OF CLOUD BASED TECHNOLOGY FOR HEDGE FUNDS An interview with Steve Lewczyk, Cofounder at Nirvana Solutions In this issue we interviewed Steve Lewczyk, Co-founder of Nirvana Solutions. Nirvana s clients include hedge funds, fund of funds, fund administrators and alternative asset managers. Steve is a financial technology veteran with over 25 years in leadership roles at Nirvana, Advent Software and Fidelity Investments. We met up with Steve in San Francisco and had an enlightening conversation focused on the emerging trends in technology that are driving hedge funds to embrace cloud based technology. What factors are causing managers to adopt portfolio management systems? We re seeing more and more hedge funds and asset managers becoming institutionalized. There are two main reasons why now, especially now, funds need portfolio management systems. The first is regulation. And because regulation is driving the need for more accountability through stricter reporting, funds need a formal way of capturing, tracking and reporting on the data that regulators are requesting. The second factor is investors. Investors now demand increased transparency, risk controls and analytics on their portfolio. This is forcing managers to move away from excel spreadsheets or outdated reporting systems. Managers need better systems so they can satisfy those two demands from regulators and investors. How have the advances in technology affected the risk management function? Technology advances have made real-time risk management possible and affordable. In order to manage risk accurately, trade, position and market data need to be normalized and aggregated from multiple sources. They need to take data from the prime brokers, executing brokers, fund administrators and their market data vendors and they have to apply some risk calculations against it. Years ago, it was up to the fund to license software from separate vendors that specialize in order management, risk management, and portfolio management and somehow cobble them together. What we re seeing now is workflow-based tools that cover all aspects of what a hedge fund or asset manager might consider risk management. It s being able to calculate VAR, Sharpe ratios, exposures, delta-adjusted exposures, all of those things in one place. Because of the trend away from enterprise, single siloed systems to cloud based aggregated systems, the costs have come down. Now, a hedge fund manager, including newly launched hedge funds, can have the same capabilities as a very large hedge fund at a fraction of the cost. Other than costs, are there reasons why a cloud based approach is a better solution for these managers? There are two things that come to mind when one thinks of the cloud. The first is that you do not need to buy any hardware and you do not need to maintain that hardware. From a fund s perspective, the cost goes down because you do not need an IT person or IT director to manage hardware. The second component is that the latest and greatest technology is being deployed for the cloud. So, there are a number of efficiencies that can be garnered through the cloud. For example, data capture. This is a really big deal, especially when you have multiple data sources. Now funds of all sizes can share the aggregate resources of cloud vendors that are really good at

2 data aggregation. Funds will not have to staff that function inside their shop. The cost saving comes from not having to buy hardware, it comes from not having to staff operations people and it comes from not having to license specialized software. Instead, funds can hire somebody to provide these services. And operations people can be more like air traffic controllers, instead of flying the plane. They re basically seeing the dashboards, they re seeing information being served up to them so they know when there s any type of reconciliation break or deviations from what they re used to seeing in their data sets. There are a slew of very cool analytics and reporting services that are being laid on top of the cloud technology that ll continue to drive down the costs. Does this put a smaller manager in a position to compete more effectively with larger managers from a risk management point of view? Because all investors are now performing more stringent due diligence, they re taking a deeper dive on what the manager s core expertise is, from an asset management perspective and from a risk management perspective. They re also looking at how sustainable, and what kind of business a fund is running. Is this fund going to survive an up or down market, not only from a portfolio perspective, but from a business perspective? It s hard to be first in a new business. But once you can prove your capabilities, that you re got an edge and you have made operations and risk management a priority in your business, and that you can operate your business and deliver what you say you re going to deliver, that gives investors a lot more confidence in the allocation decision. How large does the manager typically need to be for this type of technology to be affordable? What we see, it s not so much the size of the firm, but it s the level of need the firm has in terms of investment sophistication and data aggregation. It could be a very small fund that has multiple funds and separate accounts that would need this capability from Day 1. We ve also seen very large funds that have single fund structure not needing it at all, depending on their investment strategies. It s more about the data management complexities and regulatory complexities that an asset manager has. Can you give us an idea of what the costs are? There are many variables. We offer a subscription-based service that is aligned with what a fund needs. For example, our core services start at as little as $1,500/month. That s how inexpensive it can be to have your portfolios monitored, reported on and provide workflow capabilities. Now, conversely, it can be a whole lot more depending on the number of funds, the sophistication of the risk management that the fund requires and the type of regulatory and performance reporting it needs to generate. It can be as much as $20,000/month; it s really going to be a function of the client s needs. No two asset managers are exactly the same so why would they be charged the same? What would cause a manager to adopt this technology? First, there has to be a clear need. There has to be a clear problem that a fund manager wants to resolve; for example, a fund going from single-prime to multi-prime. They will immediately have an allocation problem every time they trade. Or, if they ve gone from single fund to multiple funds or are taking on a separate account. When you place a block trade, you will need to allocate between the fund and the separate account. If you ve got multiple prime brokers, you now need to communicate end of day files and trades to each of those prime brokers. You want a streamlined way to make that happen. What is that need? It s defined, it s understood, and it s been proven out in the discovery process. A written proposal is made. If the value is there, we formalize a working relationship. How difficult is it and how long does it take for a manager to adopt this technology? Once a decision has been made, it s relatively easy to deploy because the connectivity already exists between the prime broker, the fund administrator and the executing brokers. A data conversion has to take place, and that s usually a snapshot of what the fund is currently holding by tax lot. And then the client is able to use the system. It takes anywhere between 30 to 60 days to get up and running. Some firms insist on converting all their historical

3 data into a system, like Nirvana, so we do that work on a time and materials basis. We often perform this historical data conversion work while the client is up and running on Nirvana. How have order management systems evolved over the last 5 to 10 years? Well, the traditional order management system was deployed to be a day system. What I mean by that is the process in an older portfolio order management system was you d receive a prime broker s files, or you d receive some source file from the day before, and you d upload it into your system. That would become your book which you traded on. Then you d do your trading, you d see all your orders inside your system, the effects. At the end of your trading day, you would send your trades to your counterparties and then you would repeat the process the next day. The advantage of that, it s very easy to maintain, it s very easy to use that system. The downside of that, and what we re seeing in today s order management systems, is linking the portfolio management and tax lot level accounting into the order management system. What happens now, instead of populating an order management system with the adjusted day s positions from yesterday, management systems are now being reconciled on a daily basis against the prime brokers and the fund administrators to ensure the shadow of the books and records. So, when a trader begins with an order management system today, he knows that his operations and back office team have ensured the books and records are clean before trading. The benefits of that are reduced trade errors, better operational controls, less slippage in portfolio P&L. That s becoming more of a requirement, especially from institutional investors. They want to know that the traders and the portfolio managers have clean books and records from which to trade. It s just another level of care that s being taken day-to-day to make sure that the trades and P&L are accurate. Does this enhance the ability to do real-time portfolio analytics? Yes. Now what you can do is bring together the history of your trades. For example, you re buying and selling a security for the last two years and you decide that you want to trade it today. You want to know how much P&L you ve generated on that security, historically. Today a portfolio manager can just click on the security and see the trade history as it happened, every tick for every single buy and sell that I ve executed, instead of asking the back office person to run an excel spreadsheet and construct it for me. And that s the benefit of integrating the portfolio management system and the order management system. Where do you see things going in the future based on advances in technology? The reality is we have a huge shift happening in the financial services industry right now, from enterprise to cloud based solutions. In the next 3 to 5 years, the adoption of cloud based solutions will continue, and it will certainly accelerate. The other thing that is pretty prevalent is the use of mobile applications. Investors are accustomed to this in other aspects of their lives, and certainly want it in their financial lives. I think you re going to see more mobile applications being adopted by asset managers and hedge funds because it keeps them in touch with their portfolios and what they do. We re mobile. We want access whenever we want it. So, I think mobile applications will get more sophisticated and the adoption rate will accelerate for portfolio managers and anybody in the industry. Lastly, what I think you re going to see is more and more analytics being made available to investors and managers so they know how they compare against their peers. I think we re going to see more and more data aggregation and analytic services being offered to consumers of financial products, as well as manufacturers of alpha. Are there any special security concerns with the cloud based technology? Yes. It s important to make sure the hosting site is SAS70 compliant and if there are some constraints around your investors, especially if you re a hedge fund considering cloud based solutions, you want to ask the vendor, What type of security the host has? SAS70 is a requirement. Sometimes audits are performed by the Big 4 firms for a financial services firm, so they can put that in their documents when they are soliciting assets. But, standards are evolving, as with everything new, so security around cloud based solutions will become more standardized.

4 Steve Lewczyk Co-founder, Nirvana Solutions Headquartered in NYC, Nirvana is the financial service industry s pioneer in cloud based portfolio management solutions for the buy side. Steve and Nirvana CEO Shams Karim founded Nirvana seven years ago with a singular purpose; to simplify investment operations by developing state of the art portfolio management solutions and scaled data management workflows. If you are interested in learning more about Nirvana Solutions, please contact Steve via at steve.lewczyk@nirvanasolutions.com or call him at Also feel free to visit Nirvana s website at

5 ABOUT US Woodfield Fund Administration, LLC provides third-party accounting and fund administration services to hedge funds, private equity and venture capital funds, fund of funds, commodity pools, unit investment trusts, real estate funds, family offices and other investment entities. Our clients range from small startup funds with just a few investors to large asset managers with capital in excess of $1 billion. They choose us because of our focus on accuracy, completeness, timeliness, personal attention, customized services and reasonable cost. Woodfield Fund Administration, LLC annually completes a SOC I Type II audit of our operations. AWARDS In 2013, Woodfield Fund Administration won Best Administrator Under $30bn in AUA Overall for Single Manager Funds in the HFM U.S. Hedge Fund Services Awards. In 2012, Woodfield Fund Administration was named the winner for Best Administrator - Small and Start- Up Firms in the HFM U.S. Hedge Fund Services Awards. In 2011, Woodfield Fund Administration was named the Best Administrator Under $30bn AUM for Client Service in HFM U.S. Hedge Fund Services Awards. CONTACT US Andrew D. Jones VP of Business Development P: (847) E: AJones@woodfieldllc.com One North Wacker, Suite 2150, Chicago, IL W: Algonquin Rd, Suite 900, Rolling Meadows, IL Woodfield Fund Administration LLC. All rights reserved.