Multi-manager hedge fund platforms have experienced extraordinary growth in recent years, with a 175% increase in assets under management from 2017 to 2023, compared to just 13% in the hedge fund space. This growth reflects their ability to deliver above-average risk-adjusted returns, attracting investors eager to capitalize on their potential. However, while the opportunities are immense, so are the operational complexities these platforms bring. From intricate fund structures to soaring trading volumes, managing such complexity comes with significant challenges that require robust solutions.
The Core Challenges of Multi-Manager Platforms
To fully leverage the potential of multi-manager structures, firms must first address a host of operational difficulties that arise:
- Complex Fund Structures
Multi-manager platforms are often comprised of various legal entities spanning multiple jurisdictions. Navigating the diverse tax, accounting and regulatory requirements across these entities is a daunting task, particularly when accounting for external managers.
- Diversified Asset Types and Strategies
Managing a wide variety of asset classes and investment strategies adds layers of complexity to portfolio oversight, including return calculations for individual managers and risk management at the fund level.
- Surging Trading Volumes
With multiple managers executing trades, including those adopting quantitative strategies, transaction volumes can scale dramatically. This requires efficient trade execution systems to manage operational risks and ensure data accuracy across diverse trading venues.
- Complicated Payout Structures
Different managers often have varying compensation agreements, making it challenging to automate and streamline payout calculations while preserving accuracy and fairness.
- Demand for Bespoke Reporting
Sophisticated investors and managers expect real-time, customizable reporting tailored to various metrics, requiring robust technological infrastructure for dynamic data analysis.
- Tax Inefficiencies
With managers operating independently, unintended scenarios like wash sales can arise, impairing the fund鈥檚 tax efficiency.
Strategies to Overcome Operational Complexity
While multi-manager platforms are operationally intensive, firms can address these challenges by leveraging tailored technology solutions and strategic operational practices:
- Integrated Technology for Fund Accounting
A scalable and integrated fund accounting system is essential for managing the intricate structures of multi-manager platforms. These systems must support multiple entities, regulatory compliance and varied asset classes, all while enabling real-time portfolio insights.
- Advanced Trading Infrastructure
Sophisticated trade order and execution management systems are vital for handling high trading volumes. Centralizing data aggregation and trade tracking for both internal and external managers streamlines operations, improving fund efficiency.
- Enhanced Risk Management and Compliance Solutions
Modern technology-powered platforms can help firms maintain compliance and proactively manage risk. Leveraging intelligent automation improves accuracy and efficiency while reducing the burden of manual processing.
- Vendor Consolidation
Consolidating multiple vendor relationships simplifies operations and reduces costs. Structuring multi-manager platforms as single legal entities allows firms to centralize service providers, minimize redundancies and streamline reporting processes.
- Outsourcing Operational Complexity
Managed services and outsourcing are increasingly viable options to tackle resource-intensive tasks. From co-sourcing specific areas to full business process outsourcing, these solutions alleviate the operational and compliance workload, enabling firms to focus on core investing strategies without expanding staff resources unnecessarily.
Preparing for Future Growth
While multi-manager hedge funds present substantial opportunities for growth and innovation, staying competitive requires a forward-thinking approach. Investing in scalable, efficient technology and leveraging outsourcing options ensures firms can manage complexity effectively. By strategically addressing operational hurdles, fund managers can unlock the full potential of their platforms and foster long-term success.
To learn more about technology-driven solutions for multi-manager platforms, read our "Untangling the Complexity of Multi-Manager Platforms" whitepaper.
