Operational Improvements to Excel in Your ODD

Published by — Bryan Messer

Date — 6.05.22

The importance of ODD

ODD (operational due diligence) is key for maintaining existing investor confidence and attracting new subscriptions. Due to numerous incidents of fund failures including fraud, mismarking of positions, and trading losses, the ODD process is becoming more detailed and in-depth than ever, and ODD teams are given increasing authorisation over investment decisions. Investment into the right areas of your operational process will not only protect your fund from malpractice and hefty fines, it may also help you unlock further investments. This article delves into the key areas a fund manager should consider investing in for the ODD process.

Key operational areas to consider investing in

1. Reconciliation

According to AIMA’s A Guide to Institutional Investor’s Views and Preferences regarding Hedge Fund Operational Infrastructures, “triangular reconciliation of cash and positions should occur ideally daily, or at least frequently, between the manager, administrator, and prime broker/OTC counterparty. This process should be automated through the use of proprietary or third party systems, where possible.” Timely reconciliation and break resolution is essential for identifying missing, incorrect or duplicate transactions. Managers that reconcile daily are also able to expedite their month end process. It is recommended that senior operations personnel (i.e., controller or CFO) should oversee the reconciliation process.

Messer’s reconciliation system allows for daily reconciliation of positions, trade activity, cash balance, cash activity, accruals, fees, expenses, and more. It also allows for multi-level approval of each reconciliation and records detailed audit trails of any communication and changes. Data acquisition and normalisation will also be automated to save time.


2. Cash Management

Our hedge fund clients often say “cash is king”, as ultimately every action in the fund is reflected in cash. According to the same  guide by AIMA, cash management is “probably one of the most fundamental and important functions at every hedge fund, and should be both preventive (i.e., a good signers list) and detective (i.e., reconciliations)”. It also advocates for daily automatic exceptions-based cash balances and margin requirements reconciliation to the prime broker and administrator, with sign-off by senior personnel. 

Messer’s Prodigy suite comes with a detailed daily and monthly cash balance and cash activity views, which allows the user to filter by any date period and drill down into cash movements. We are also one of the first providers to offer accurate automated cash activity reconciliation with detailed records of each transaction to aid investigation.


3. STP (Straight-through processing)

The more manual processes there are, the higher the likelihood of keying errors, inconsistencies, miscalculations, and inaccurate interpretations of information. When data exists in disparate systems, it introduces more manual processes to integrate the systems, which again creates more complexity and room for error. One of the key reasons for the prevalence of disparate systems within a firm, is that many start-ups opt for the most basic software for cost saving, and tend to add multiple vendors to satisfy different parts of their operational needs as they quickly outgrow the original system.

AIMA encourages managers to implement STP whenever practical, and adopt systems with a high degree of automation. This is in efforts to reduce errors and increase scalability for the future. A centralised, automated system, with the option to add more workflow configuration, is therefore the most desirable.

Messer’s Prodigy suite (including OMS, PMS, reconciliation and data warehouse) provides a complete STP solution. It is built based on an API-first model and seamlessly integrates with most third party systems. There is also the option to add additional workflow configurations such as swap financing, stock loan management and repo module, as the firm grows. Our underlying data warehouse architecture accurately and automatically extracts, transforms and loads information from disparate sources, eliminating the pain of manual integration. Automated alerts can be set up for file arrival, pre- and post-trade compliance, etc, to save time while improving accuracy.


4. Disaster recovery

Disaster recovery (DR) refers to the hedge fund manager’s ability to restore itself back post a disaster incident to the point it was before the disaster. It is of consensus in the industry that daily backups should be kept off site and all backups should be tested by restoring data periodically. The offsite servers should be located on a separate power grid from the primary server. AIMA recommends that “the offsite data centre should be located in a reputable third party facility or purpose built office space managed by the manager”.

All of Messer’s software modules come with full DR and redundancy. We partner with AWS so all your historical data are backed up on the cloud. By using our complimentary DR services you can enjoy access to data centres in Singapore and Ireland managed by a reputable brand at a low cost, without having to manage your own office space for backup.


How we can help

AIMA recommends fund managers to ensure the infrastructure is appropriately tailored to the business.

We can design a tailored solution for your operational needs based on a combination of our plug-in modules, which are 100% integrated with your system and have zero switching cost. If you are interested in improving the above areas, or unsure about what your fund needs for your ODD, check out our list of plug-in workflow configurations or contact us for a free consultation

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