Robert Perdock, CFO and COO at Mill Hill Capital, explains the benefits of strong vendor relationships for fund technology ahead of launching an alternative investment fund. In this comment piece, Perdock outlines why Mill Hill chose to partner with Gravitas and how the collaboration has created smarter scale for his firm.
As an emerging manager preparing to launch a new fund, the primary technology concern for us was to partner with a technology firm that would enable us to maintain strong, scalable network infrastructure.
Like any other start-up, we started light on the network infrastructure side since our proprietary models and risk management platform were the initial focus when I joined in 2015. For both economic and practical reasons, we decided to appoint an outsourcing partner.
We decided Gravitas was an excellent solution because of its combination of onsite desktop computers, servers, firewalls and their cloud-based solutions.
We looked at different providers; some offering traditional big data server locations, while others were 100% cloud computing. We wanted something in between the two and needed to take pricing into account. Also, one of the most important things we had to look at is who is going to work with us on a pre-launch basis.
Fortunately, many vendors have AUM-based pricing models, so as you grow your pricing grows and eventually you reach a certain point where you equalize the fees and achieve economies of scale.
Another consideration – and a major plus side to outsourcing – is there is always a risk that as an emerging manager that you don’t launch the fund. Therefore, we were seeking the flexibility of short-term agreements and the ability to exit the contract if we don’t launch.
We also liked that Gravitas has a solution for co-sourcing the risk function, middle and back office, which we are not using currently but will have an option to do so if and when we grow large enough. So, if we get to $1bn and want one or two middle-office persons in-house, we could instead use our provider to outsource reconciliations of positions, trades and movements that an administrator is already doing but we shadow anyway.
In this environment, emerging managers are held to very high standards in terms of what we need to have in place on day one compared to five or 10 years ago. We are now expected to have a much more robust operational and institutional-grade investment platform in place, and rely less on the administrator, while also shadowing their primary functions in-house.
That means we are striving to create everything pre-launch that an investor would expect if we were $100m AUM or $1bn AuM. There are certain things that are achievable pre-launch and certain things that are cost prohibitive.
One major consideration we have is the SEC guidance on cybersecurity. We worked with Gravitas’ CISO who helped us develop a response plan and a roadmap for what we can do pre-launch, post-launch, at $500m AUM and at $1bn AUM.
It’s not conceivable to cover every aspect of technology upfront, but a large part of our Business Continuity Plan (BCP) also needs to contemplate my technology partner’s BCP and how each relationship is handled in any type of business disruption event.
We go through our own vendor risk assessment and will perform a cyber-risk assessment with all vendors, tech and non-tech, to understand how they store and protect our data and proprietary information. To do that effectively, we will hire a specialist cybersecurity firm to assist us in penetration testing, network monitoring and vulnerability testing, etc.
Another important consideration for any emerging manager is their portfolio management solution. We spoke to peers that use their administrators for some of those functions, but investors expect you to have everything shadowed in-house, from trade capture through to valuation, financial statements and NAV reporting. Automated feeds to your prime brokers and administrator are also necessities.
A portfolio management solution is also an important selection in relation to the products being traded, and because we will trade CDSs, indices, futures, options and securitised products, we need a solution that handles those well.
We decided to implement Fund Studio from Objecutive because it was a robust solution encompassing the trade life cycle from execution to settlement, but it was also a full general ledger and NAV investor reporting solution.
Also, as important, Fund Studio offered a hosted platform solution, so did not require further equipment purchases nor maintenance to implement the platform.
A difficult task in terms of system implementation is integrating that system into the existing environment, but emerging managers have the benefit of not having legacy systems that need to be altered or integrated, so it was easier for us to switch it on and build around it.
Finding the right platform can be challenging, but technology is not an area to cut corners. If you have the ability to invest in proper technology functions up front, we believe investor due diligence will be a much smoother process, so we will market our infrastructure next to our investment philosophy.