Infrastructure Capacity vs. Business Expansion
Background and Client Challenge:
To take advantage of favorable market conditions and increased investor flows into its funds, a global hedge fund started expanding its product mix and increased its transaction volume on its existing products. However, it soon became apparent that the firm’s infrastructure capabilities were lagging behind these new business initiatives because of a lack of experience with the new products compounded by the heavier business volumes. Trading errors started to increase, reconciliation differences between the prime brokers, custodians and inter-company balances themselves increased, the issuance of daily profit and loss statements were delayed and the back office personnel were working longer hours to just maintain pace with the higher business activity. Senior management questioned whether the status of the lagging infrastructure was temporary and would correct itself over time or was it in actuality a pre-existing systemic, structural weakness in the firm’s operating structure now exposed by the push of the business initiatives.
Senior management of the global hedge fund engaged C&A Consulting to review the operations, treasury and finance processes, the technology structure and its effectiveness in supporting the business and infrastructure of the firm and the operational risk control framework surrounding the overall enterprise.
C&A executed a thorough assessment of the “current state” environment in which the firm was functioning and inventoried the different gaps in structure, process and accountability to highlight the issues for the client.
C&A informed senior management of the state of the infrastructure and alternative ways to improve the firm’s operational capabilities. C&A worked with management to prepare both a high level “Roadmap” of a suggested course of action to remediate the material structural issues the firm was facing and a series of more specific, actionable “project tracks” to implement for immediate resolution of the most critical issues. C&A’s experienced staff augmented the existing management team and staff personnel to give the client an immediate resource lift for the firm.
- Blurred responsibilities across departmental lines – This led to lack of ownership and accountability of basic responsibilities creating operating gaps and potential financial exposure. C&A assisted management in restructuring of the infrastructure organization on a fundamental level.
- Manually intensive “work-‐around” procedures for operations and finance were created over time to process the daily transactions which worked fine until the higher volumes started to occur — This led to a downward spiral cycle of increased errors and over-‐reliance on staffing increases as the “process-‐solution” rather than improved technology tools or tight integration of data feeds between the systems. With “more staff” as the solution, the risk of intellectual knowledge leaving the firm and leaving a hole in the process also increased. C&A teamed with the client’s technology department and related infrastructure to engineer an efficient more automated operational process.
- The operational, treasury, and financial systems did not properly support the business
- Information was difficult to retrieve and the reliability of the information was questioned by the front office
- The systems that were in place were not properly upgraded by technology – this led to the various front, mid and back office systems to be exposed to an array of issues. Because the technology structure of the firm was not well maintained, certain systems were not able to properly handle the new products pushing work into manual processes between the systems
- Controlled normalization of data (quality control and integration) between business applications and operations, treasury and finance applications was non-existent. This led to numerous reconciliation issues between systems and difficulty retrieving information on a timely basis.
C&A teamed with management to tactically remediate the process and assisted in identifying and implementing an operational and accounting portfolio system.
- Closing the books and records each month took longer than necessary - due to the manual intensiveness of the work to process trades, service the assets and consolidate the business accounting across all entities. Quality of the reporting information was also impacted due to the inability to insure completeness of the record keeping on a timely basis. C&A worked with the clients fund administrator to provide a quicker turnaround