Institutional Investor's Alpha Magazine - February 2009 - (Page 55)

now — doing even adequate due diligence. Tremont had $3.3 billion invested with Madoff; Fairﬁeld Greenwich, $7.5 billion. Could there have been a better advertisement for the new strain of portfolio-management software that several companies have developed recently with funds of funds in mind? Because many funds of hedge funds have been around longer than have most technology-service providers, they have relied on in-house proprietary systems, says Tim Knox, product manager for PerTrac Portfolio Manager, a software package made exclusively for funds of funds by New York– based PerTrac Financial Solutions. Newer, smaller funds are the market because all funds of hedge funds are supposed to excel at due diligence, a characteristic that should give them an advantage over the competition, even the most carefully diversiﬁed hedge fund portfolio. Ideally, funds of funds have more resources than family-wealth ofﬁces, individual investors or endowments can devote to the vetting process, and they should have more expertise too from compliance gurus and quant wonks. This is the extra layer of security that funds of funds supposedly offer for even conservatively managed endowments and foundations to expand into alternative assets and that makes funds of funds worth their additional fees. However, due diligence is difﬁcult, which is why it is the most obvious and possibly the most important area in which funds-of-funds software can make an impact. The most advanced, responsive and well-crafted databases automate due-diligence workﬂow, standardizing information and making it more accessible than it is in raw form. “We make it so that more than one person can look at the information in a meaningful way,” says Erol Dusi, president of Imagineer Technology Group, a New York– based hedge fund software provider. In addition to Imagineer and PerTrac, ﬁrms like Chicagobased Backstop Solutions Group and Netage Solutions in Watertown, Massachusetts, have products that track due diligence by archiving records of meetings, calls and e-mails. Such information, in theory, is assimilated and distributed to investment committees, which can use it to catch suspicious behavior — as when a hedge fund is using an obscure accounting ﬁrm to do its audits. In the Madoff case, such a system could have triggered an alarm over the absence of fund accounting, portfoliopricing services, trade capture and precise calculation of net asset values. A money manager who does not have an independent administrator merits suspicion, notes New York–based Jim Kelly, CEO of HedgeServ, a hedge fund administration platform. Even if a hedge fund is not required by law to use a third-party administrator — and no such requirement exists yet in the U.S., although it does in the U.K. — having one is fundamental. “We always warn our clients about this,” Kelly says. Funds of funds also need to be able to monitor exposure to positions across managers. If a fund of funds is invested in 50 hedge funds, for example, it is not properly managing risk if all of its managers put on the same trade. The latest solutions to this problem allow funds of funds to keep precise track of their positions, a capability that is critical to any ﬁrm serious about risk management and diversiﬁcation. Backstop Solutions’ portfolio management software, for one, allows analysts to run reports by performance attribution or allocation exposure, showing at the fund-offunds portfolio level the aggregated holdings and exposures of underlying managers. Dusi says Imagineer is adding a database function to its software to track not only underlying hedge fund portfolio positions but also those of the fund of funds as well. If a fund of hedge funds makes an allocation that violates its parameters, an alarm is triggered. These products also enable funds of funds to aggregate historical performance from several hedge fund databases and then analyze correlations, volatility, risk premiums and other statistical indicators. Several software developers offer peer-group analysis, which highlights how a manager stacks up against others pursuing the same strategy. Jeremie Bacon, the CEO of Backstop, says several clients chose to steer clear of Madoff Investment Securities after seeing, through historicalperformance research, that its funds were up in 1998 when everyone else using the same strategy was losing money. This type of review is a key component of what he calls “the sniff test.” Some software makers situate their solution inside Microsoft Corp.’s commonly used Outlook e-mail program. By embedding their databases in Outlook, Netage Solutions and PerTrac, for example, can allow analysts to use one “We make it so that more than one person can look at the information in a meaningful way.” — EROL DUSI, PRESIDENT, IMAGINEER TECHNOLOGY GROUP program window to communicate with managers, review their performance and construct analytical charts. More important, the contact databases that track a hedge fund manager’s or analyst’s previous employment and afﬁliations are useful for background checks. Software companies are responding, as well, to the looming specter of more government regulation of hedge funds by adding audit trails, streamlining the data-aggregation process and even perfecting portfolio valuation by feeding accounting-grade data at any time to a portfolio manager, as HedgeServ does. The aim, of course, of enlisting a software program as an automated watchdog is to make it more difﬁcult for a fund of hedge funds to make a rogue investment. FEBRUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 55

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.