Hedge funds offer a bedeviling challenge for financial advisors trying to marry their wealthy clients' investment goals with specific hedge funds and then manage that relationship.
For starters, each hedge fund is different, with its own extraordinarily complex strategy. And there are lots of them, and more every year since the barriers to entry are pretty low. Recent industry estimates put the number at about 12,500, up from about 1,200 in 1994. But that doesn't tell the whole story.
If it was just a matter of keeping up with the 15 to 20 percent yearly growth in hedge funds-assessing their managers, judging their strategies-that would be tough enough. But Larry Tabb, CEO of the Tabb Group, estimates 15 to 20 percent of hedge funds close each year because their strategies don't pan out. In other words, it takes even more new hedge fund entrances each year to keep high industrywide rate of growth sustained. For investment man-agers trying to keep their clients' money properly allocated, this $1.3 trillion corner of the financial market is a maddening array of new funds, closing funds and shifting strategies.
Hoping to make some hay out of this dilemma is New York-based Strategic Financial Solutions (SFS), which is best known for its PerTrac product, an asset allocation and investment software. In January, it purchased Whittaker Garnier, a provider of contact and information management solutions for the alternative investment industry. The combined company's tools will allow users to screen hedge funds for the desired performance and strategy and then manage that relationship going forward.
PerTrac is used by more than 1,500 clients in 45 countries, including banks, brokerage firms, consultants, plan sponsors, family offices, investment managers and funds. Founded in 1996 by Milt Baehr and Frank Smith, SFS was purchased in July 2005 by Insight Venture Partners with $63 million in cash.
Meanwhile, since Whittaker Garnier's inception in 1998 it has grown to serve more than 200 clients globally, who collectively manage over $180 billion in assets. Terms of the PerTrac/Whittaker Garnier deal were not disclosed. The company's Microsoft Outlook-based client management system provides contact and document management, tracks and facilitates investor communications and reporting, integrates information from back office accounting packages, and provides full investor relations and compliance tools for alternative investment management firms. Its products are widely used across all segments of the alternative investment industry in both Europe and North America. (Besides hedge funds, the product is used for other alternative investments such as private equity, commodities and real estate.) The company's strong European client and operations base brings local support and expertise to SFS's growing client base in Europe, and its Hong Kong operations will supplement SFS's existing Japanese operations.
In the opinion of analysts following the space, SFS may be onto something. Denise Valentine, a senior analyst within Celent's securities and investments group, says that SFS has "really built a better mousetrap, and faster, than competitors," which include the likes of Mobius and Ibbotson. Valentine says another reason that the SFS solution is preferable is because it is database neutral. Unlike Mobius, for instance, which forces clients to use its data base, clients of SFS can input their own data. It's also offering a robust set of tools to mine that data, she says.
Building on the flexible, research tools in the PerTrac product, the Whittaker Garnier component will give SFS a great client management tool that Ibbotson and Mobius don't offer, she says. "It will be a tool to analyze clients' current status, their positions, their investment profile," Valentine says. "They've created an architecture that can appeal to different markets, to the broad mid-to-small market, from a $50 billion regional bank to family offices. The CRM aspect is great for family office operations." (Her only quibble is that SFS is billing the solution as a front- to middle-office solution, but since it has no real trading component she and other analysts argue it is limited to the front office.)
Matt Nelson, an analyst with TowerGroup, says "CRM is generally lacking in the hedge fund world, it's lacking a lot of CRM tools, and yet there are very complex CRM problems, like compensation structures, legal structures, what's invested, who's invested. Any CRM tool that can integrate with transactions and balances and present information to clients in a polished manner is certainly something that is needed. Any type of tool that can take an investment profile through to the asset allocation and then manage through to strategic goals and performance is needed."
Meredith Jones, director of market research at SFS, says the combination of content management and CRM will boost productivity and efficiency for clients. Currently most advisors managing these relationships must use multiple document attachments and rekey information, which are prone to error and oversight. Noting the Securities and Exchange Commission is handing down new hedge fund rules, Jones adds that "it can be a compliance tool for hedge funds by logging emails and phone calls."
The Whittaker Garnier deal was very much driven by the demands of clients, according to Gerald Mintz, president and CEO of SFS. "Our clients want integrated workflow products that complement PerTrac, improve their investment management toolset and increase operational efficiencies. By combining the dominant companies in two of the industry's primary markets, we are providing proven solutions to our customers and have positioned SFS to better satisfy the unique needs of the investment industry," he says. "We are committed to fulfilling a broad spectrum of needs for our clients and will continue to integrate new components into the PerTrac suite of investment management solutions in the future."
Although SFS's Jones declined to be more specific about exactly what new components will be added, she reiterated that the company is looking closely into the matter. "We are actively talking to clients about what pieces of the puzzle they need to run their business. We know there are needs that are not being met, but the question is, is it best to buy or build, and is there even anyone to buy; and then, what's the best way to integrate?"
If SFS is going shopping, Celent's Valentine suggests the company take a hard look at Winnipeg-based Emerging Information Systems Inc. Privately held EISI has the NaviPlan product line, which offers detailed financial planning software, and is licensed to more than 70,000 financial services professionals across North America.
Valentine argues that the next logical step for SFS is life planning software, the kind of tool that can spit out various scenarios over long time horizons based on different investment strategies. "The next step is comparative analytics that can include all the things that will happen to me (such as retirement, a second home, college education for the kids) between now and age 65. The idea is to get very specific cash flow planning." Analysts note that even with the 15 to 20 percent failure rate of hedge funds each year, as a whole the industry continues to outperform other investment strategies; that fact will keep them popular and advisors in need of solutions such as the ones being offered by SFS. "Tracking all these funds and aligning them with investors is a significant task," Tabb says.
