By Hardeep Mehta • Data Management • December, 2018
One way to quickly measure the operational efficiency of a hedge fund is to see how tightly coupled the decision-making process of an investment manager is with vast amount of data available to the hedge fund. Most hedge funds have access to multiple sources of data, but a lot of that data is not utilized to its full potential, because it is not available during the decision-making process. In fact, most hedge funds continue to struggle with maintaining consistent and accurate data.
So, how can hedge funds ensure that consistent and accurate data is available readily within the various departments, from the decision-making process, front-office, to real-time P/L calculations, and all the way to the investor reporting? By centralizing the data. There are numerous advantages of this approach. We will take a look at the top 3 advantages of centralizing the data for hedge funds.
Having decentralized data from multiple data sources creates redundant and inconsistent datasets. By creating a central database and storing all relevant data not only eliminates redundant data, it results in consistent data being available to all departments within the hedge fund. This also makes updating and maintaining the data much easier, as any change or update only has to be made at one place, and it is reflected consistently in all screens, tasks and reporting.
Improved data integrity and consistency presents a strong ROI for a hedge fund. Consider some of the time-consuming, error-producing disadvantages of not having a centralized database that has processes to integrate all data from any source:
Let’s say Employee #1 receives data from a third-party that is only received once a day. Employee #2 may receive updated information from that third-party at some point during the day. To keep this data completely accurate, these two employees must interact and communicate about what the changes are. This is time that could be spent elsewhere making more business and supporting the hedge fund.
Let’s go back to the example of the two employees exchanging data. What if the information was communicated incorrectly? What if it was recorded wrong? By having a centralized database that pulls and updates this data on a regular basis will save these employees the hassle of manually updating the information in their control and decreasing the chance of inaccuracies.
These employees are in charge of the data they receive. It is their job to record it, and have it flow into the database. Since this is a manual process, there is a chance that an employee could miss or forget to record information. Is there another employee in charge to remind them? Since that seems unreasonable, the most viable way to show that data could be missing in a database is to create an alert that goes out to whoever is related to that data. A centralized database makes it easier to notify the persons involved and have the data updated in one simple way.
Having a central database means all access, updates and deletes can be logged and accounted for. The database administrator can implement standards, controls and audit trails on the on data being accessed.
Once all information is centralized in a database, a customized data security plan can be implemented. Depending on the types of data being stored and what the data sources are, certain factors need to be considered for data security to be completely successful. Some of these factors include:
Many sources of data could be coming from other companies or vendors. Each vendor has an individual way of handling data. They can provide it in different formats, at different times of the day, and possibly through different file transfer methods. A database administrator can help in determining the best way to secure communication with each service.
The most sensitive information can receive an extra layer of security to prevent cyber spying or theft. Not only can files or data be encrypted in the database, meaning it’s transformed into a “secret code” that a viewer cannot unscramble, but a encryption password can also be made necessary, making it impossible for one to even access that data.
Does it make sense to make use of on-premise storage backup procedures or use a cloud-base setup? Is it more cost-effective for the company to have control over their hardware in-house or take advantage of cloud scalability?
Having a secure database is a necessity for hedge funds, since the data stored is highly sensitive. If all of the data becomes centralized, there is greater safety and peace of mind within the company that employees can focus on other aspects of the business.
A central data source leads to improved operational efficiency, as there is minimal manual processing of data for various purposes. It also means, data once updated is reflected correctly in all places it is being used. There is also cost savings from not having to maintain multiple data sources, duplicated data and making sure that they are all in sync. Some specific benefits include:
While it could be their job to report and consolidate data, a layer of work has been taken off with a centralized database. There is no need to double-check with others or even compare other data sources, since it is known that the information in the database is accurate and updated.
There is complete sense of confidence when viewing data from a centralized database. Because of its accuracy, employees have no problem discussing possible trades and allocations with clients. It makes it easier for them to determine the right plan of action for others.
It does sound dramatic, but it is absolutely true. Any misstep in data at a certain time and place can lead to litigation from clients or other companies. If someone were to believe that a buy or sell was made at a price that was out of sync, that is cause for someone to move forward with a resolution to that.
The top 3 advantages of centralizing data for hedge funds are improved data integrity and consistency, improved data security and reduced risk, and improved operational efficiency and cost savings. According to the EY - 2017 Global Hedge Fund and Investor Survey, of all hedge fund managers interviewed, 57% said their organization is investing, or will invest in, operational efficiency. The more a hedge fund gets on top of their data governance, the more it will have an advantage over other hedge funds. There is more time to focus on making more money for clients, and providing the business the hedge fund knows and wants to offer.