Why Hedge Funds Need to Consider Spreadsheet Risk

Written by: Chris DeNigris
Risk undoubtedly plays a major factor in any business today, but for hedge funds in particular, with the complexity surrounding them, risk of any kind should sound alarm bells.One of the key operational risks that hedge funds face today is spreadsheet risk, which are still common practice but no longer viable in today’s operational environment where transparency and risk mitigation play a major role in the success of a hedge fund’s capital raising efforts.Both investors and regulators are pushing for more transparency; clients of hedge funds today are not only looking for performance, but detailed reports and an understanding on how performance is achieved – and keeping track of records using spreadsheets is not adequate.

As obvious as it may be, it seems firms are still naive to the common problems associated with spreadsheets.

Although spreadsheets do allow users to modify information simultaneously by more than one user, audit trails around this are not possible since the results of the saved work are merged into one common file. They are also open to viruses, subject to fraud, and most typically, human and mechanical errors are common.

Human errors are particularly placed under the spotlight when it comes to equalisation, where manual entries and calculations are inappropriate and hedge funds using several independent systems or modules for processing different types of administration functions leave plenty of room for errors.

With the danger of making key decisions on potentially inaccurate data and with investors asking for every inch of information in a timely manner, hedge funds must show they have suitable systems and reporting measures in place and can no longer afford to ignore the issue.

And with high profile cases such the Bernie Madoff scandal and several other fraud cases, the pressure to be as accurate and efficient as possible is greater than ever before.

As a result, a number of firms are looking to outsource these requirements to software providers to apply expert technology to meet demands, improve automation, and achieve greater efficiency.

Koger, which provides administration software to hedge funds, understands that transparency is one of the biggest operational issues hedge funds face. Investors want detailed information on everything – and for those firms relying on spreadsheets are open to scrutiny and are deemed to be operating in an inefficient environment.

Hedge funds cannot afford to ignore this, as the costs associated with spreadsheets risk are high and believe it or not can even result in fund failures. Spreadsheets, which involve manual entries and calculations, are not seen as reliable and simply lack integrity. If hedge funds are to continue attracting investors, then it is time to update the working environment.

Lastly, key man risk is an important issue that should not be over looked. These spreadsheets become extremely rich with many formulas to maintain, and it creates a very steep learner curve if a new person steps into the CFO role.

Koger’s transfer agency system, NTAS, for example, is designed to meet the needs of most modern fund complexes and their administrators.

NTAS manages subscriptions, redemptions, reporting, cash management, fund structures, trade processing, compliance and calculation of fees over complex fund structures, but most of all, it eliminates the dependency on spreadsheets by achieving accuracy and efficiency.

It is tailored specifically for the financial services industry, is cost effective, robust, and a scalable solution for the challenges of effective fund administration.

NTAS is already being used a number of financial organisations, mainly third party administrators, and presently a growing number of hedge fund managers are turning to Koger for support. When managers look to reconcile their books against an expert system like NTAS, it’s much more time consuming using excel than it would be using NTAS in-house and shadowing an administrator.

Having a fully automated system on both sides eliminates errors that result in high costs. Partnering with a quality software provider is already gathering momentum in the private equity space and hedge funds are expected to follow suit over the coming months as they strive to succeed in challenging times.

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