Investor Due Diligence and the Role of Technology

Hedge fund IT and the new competitive advantage

The technology powering your fund has taken on a new significance when it comes to attracting capital. Demonstrating that your fund’s IT is fit for purpose is no longer enough; investors are now looking for how it differentiates you, and what value it brings them.

As regulatory pressures increase and competition accelerates, it’s now more important than ever to see your technology investments through the eyes of your investors.

While you’ll get merit for your technology’s superior ability to satisfy compliance regulations and security best practices (and rightly so), value-add comes from demonstrable performance gains that directly impact the success of the fund, and your investors’ returns.

Ultimately investors allocate capital to your people; their collective ability to generate ideas that translate into good decisions and sound investments. So where once ticking the “IT best practice box” at the middle- and back-office would suffice, front-end technology that enables your investment professionals to perform has come to the fore.

Faced with increased competition and an uncertain economic environment, hedge funds are being forced to step out of the old pattern of implementing operations-focused technologies that don’t support front-end efficiency.
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In its crudest form, this new expectation is about finding technology that covers your back and helps you standout and succeed. With every fund out to tick the same due-diligence boxes at the operational level, many fund CTOs and PMs we speak with have already started to shift their starting position when evaluating technologies; they start by finding advantage…

1. Invest in your competitive advantage

Good technology decisions at the front-end enable your people to be at their best – better than those at your competitors even. It’s why funds of all sizes are increasingly re-evaluating the efficiency and productivity of pre-trade activities, such as research, in order to maintain their edge.

After all, research is essentially where every trade starts. Research management software (RMS) that empowers your analysts to be at their best is fast becoming one of the most powerful cards you have to play.

For our clients, this means taking a new approach to their productivity environment and streamlining processes to foster a fast, collaborative and more integrated research process – one that strips away complexity and sees analysts get smarter in reaping the value of their research, their ideas and ultimately their investments.

2. Be Compliance Ready

Investors don’t just want you to meet regulatory standards anymore; they want you to stay one step ahead of compliance changes. Knowing that you will do everything to meet these standards, no matter how much resource and energy you throw at it, isn’t quite the same as feeling confident that you are ready for them.

It’s less about seeking out tools that make you more compliant, more about those that make the process of maintaining compliance more streamlined.

Research management, for example, must satisfy regulations for data management and electronic recordkeeping, as well as communications monitoring and control. We built Bipsync with this in mind from the outset, so versioning, logging and archiving of all content is automatic, and secure access to review, export and report on any activity is quick and simple. It’s this sort of foundation for maintaining compliance that means you can get the most out of the technology that builds your competitive edge, while ensuring you’re as ready as you can be for what hits next.

3. Always Cover the Basics

Ensuring the basics such as redundancy and failover, disaster recovery and hedge fund cybersecurity are in place go without saying. The increased importance of due diligence questionnaires (DDQ) stands as testament to that. DDQs must be comprehensive and should answer the immediate questions your investors have upfront. This is the tick box element, except it’s evolved to include a lot of boxes and plenty of detail alongside each.

At Bipsync, we adhere to all industry best practices and follow the guidelines set forth by the AITEC (Alternative Investment Technology Executive Club) survey. Made up of 14 sections, it’s anything but basic. Covering cyber security controls from access and network security to incident response policies and software practices, it ensures we, and so our clients, follow the strictest security standards. It’s what your investors demand at a minimum.

From an investor-fund relationship that was largely based on trust 10 years ago, we’ve now moved beyond providing assurance to cold, hard proof. It’s pretty intense. Striking the right balance between operation and innovation has become both a top priority and big challenge, but when it comes to attracting capital your technology’s ability to support performance and return, could increasingly be a deciding factor.