TKS Solutions Identifies 3 Key Trends in Hedge Fund Accounting

Hedge funds are known for their ever-changing search for investment opportunities; however, that dynamic nature goes beyond their portfolios. It is pervasive throughout the DNA of the funds and their investors, and embedded into the entire alternative investment eco-system. TKS Solutions (www.pennyitworks.com), a developer of back office automation tools, has a birds-eye view of this fluid environment and have compiled the 3 most common trends for the fall of 2014.

Trend #1: Complex Terms for Withdrawals

The first trend is more complex instructions from investors, particularly when it comes to withdrawals. According to TKS’ Founder Ron Kashden, “there has been a swing away from the simple request of ‘redeem $5 million’ and more instructions with a variety of complications, particularly percentage withdrawals. Funds are reporting that requests such as ‘withdraw 15% of last month’s ending balance’ are becoming more of the norm. There are even investors that want a percentage of estimated balances, such as ‘redeem 25% of the 9/30 estimate and pay me on August 31’. So long as significant capital balances remain, the tendency of most funds is to accommodate the investor. Of course, without a complex accounting system to handle such requests, either the fund’s investor service team must calculate these amounts off to the side or burden their administrator with this complexity.”

Trend #2: Demands for Increased Transparency From Investors

From the fund administrator perspective, the added burden doesn’t stop at problematic investor requests; there is an overall trend toward funds seeking additional value from the administrator. Some of these desired improvements come in the form of additional services from the administrator —such as producing financial statements or even draft tax returns.

However, according to TKS’ Managing Director of Client Services, Sue Walsh, “we are seeing that funds are looking beyond the existing menu of services and are even looking for refinements in communication and data flow. While receiving a month-end package consisting of a PDF file was sufficient in the past, more funds are looking to build internal data warehouses.” The desire to have data flow seamlessly into their warehouse has resulted in an increasing number of funds seeking a richer form of communication. Some administrators have responded by starting extensive data portal projects as a way for interactive data exchange between themselves and their fund clients.

Trend #3: Evolution of Ever-more Intricate Fee Structures

The market itself also continues its never-ending movement toward more complexity. From the securitization of almost any asset through the increasing demands of regulatory agencies, all aspects of the market are evolving in an increasingly complex manner. Changes are even being seen with the fund’s investors. Increasingly, they are demanding fee structures that are more sophisticated and able to handle a wider diversity of scenarios. While the investor community might have accepted a 2/20 fee structure in 2010, they are now looking toward funds with fee structures containing loss-carry forward terms that will compensate them for an overall downturn in addition to handling under-performance of the manager.

Says Kashden, “focusing on a variety of “what-if” scenarios, there is an increasing number of fee hurdle bases that account for an under-performing year, catch-ups to compensate for lost opportunity, and overall preferential treatment after benchmarks are missed. Back-office personnel are often functioning more as mathematicians rather than fund accountants just to keep up with newly-inked fund documents.”

With the 3rd quarter of 2014 beginning we hear a chorus of “more”. Funds and their investors are looking for more in terms of investors adding complexity to their capital requests; more in terms of funds looking to expand the value proposition of their administrators; as well as more complexity in fee terms to help investors recapture lost returns for under-performance. Certainly, while it’s no surprise that the envelope gets pushed by the hedge fund community, the fact that this pervades throughout the entire alternative investment ecosystem does make one wonder, will it end? If these trends are indicative of the future and we can rely on the past as a guideline, the answer is “no, it won’t be ending anytime soon”.

About TKS Solutions

TKS Solutions is the firm that brings you the acclaimed software, Penny It Works®. TKS is a registered Microsoft partner offering specialized partnership and shareholder accounting solutions for the financial industry. Penny It Works® is used to manage upwards of 9500 onshore and offshore funds with more than $490bn in AUM. The award-winning system provides automated and instant access to detailed investor data, performance, fees, and transactions. Penny’s open architecture facilitates easy integration with portfolio accounting systems, data warehouses and proprietary solutions. Penny is tailored to the specific needs of leading hedge funds, fund of funds, private equity firms, fund administrators and management companies with assets under management ranging from $100 million to $60 billion.