HedgeNews Africa sits down with the team at Aurum Fund Management (Pty) Ltd to discuss the challenges and changes around investor reporting in the hedge fund industry.
Based in Bermuda, Aurum Fund Management Ltd (Aurum) is an established global fund of hedge fund manager with assets under management of $3.7 billion and a 27-year history of managing hedge fund assets. Aurum has subsidiary operations in the United Kingdom and South Africa.
A lot has changed in the hedge fund industry in the past decade, notes Bryn Sandison, head of operational due diligence at Aurum Research Limited, a UK-based subsidiary of Aurum, which provides it with investment advice and recommendations. “Big problems like Lehman and Madoff have helped drive change, with the industry coming together as one to improve operating standards. Pre-2008, funds could get away with no external administrators and opaque reporting, but those days are largely gone,” he says.
Sandison joined the Aurum Group in September 2007 to build out its due diligence team, which was created in 2005. He was previously at PricewaterhouseCoopers for five years, working on their technology risk framework.
He notes that the industry has come a long way in the 10 years since OPERA (Open Protocol Enabling Risk Aggregation) was conceived, in the wake of the global financial crisis, which allows investors to streamline the collection and aggregation of data at a portfolio level based on the use of standardised templates.
Yet a one-size-fits-all template can only go so far, particularly in the hedge fund world where complex strategies, ranging from event-driven and quant funds to multi-strategy products, make it difficult to achieve consistent levels of reporting.
“Templates are useful particularly when it comes to data taxonomy, which is classifying data into categories and sub-categories,” says Sandison. “But some managers require help building out the framework. You can’t shoe-horn them in.”
Building the tools it needs
When Aurum started out 27 years ago, there were no known third-party tech vendors for hedge funds, so it developed its own technology, meaning that today it is not reliant on third-party systems, which tend to take a one-size-fits-all approach. In tandem, it has over the years also focused on being an industry leader in education, transparency, ESG and corporate governance.
“We build tools that Aurum need as investors and their clients are able to leverage off that,” says Sandison. “Aurum’s technology spend has been significant, and the business has benefited from the engineering and programming backgrounds of the founding families. Some companies have less incentive to spend on tech, but Aurum’s ownership structure via the Gundle and Sweidan families has brought benefits. Aurum wants to be an industry leader in this area.”
On the reporting side, Aurum has been a driving force in moves by big allocators post-2008 to insist on funds using independent administrators – offering an increased level of reporting independence.
“’Trust but verify,’ is our motto,” says Sandison. “How do we verify? We go to the independent administrators. If a manager says he trades only large-cap equities, does it marry with an external source?”
Given vastly improved reporting standards across the industry, Sandison notes that these days, over-reporting can be as much of an issue as under-reporting.
“Some data providers take the ‘my dataset is bigger than yours’ approach. The question for us is: ‘What are you doing with that data?’ Given that portfolios can undertake millions of trades a day, what would one do with portfolio transparency across every fund? Do we have tools that are sophisticated enough to do something meaningful with the data?”
Making sense of the numbers
Aurum is among other major allocators to build online investor portals, allowing investors to delve into past periods and understand portfolio drivers, to bore down into the data and analyse performance.
Its ProximityTM client software solution is designed to bring reporting to Aurum’s large institutional investors in a way that’s digestible and usable, with the goal of increasing industry transparency.
“We have put a huge amount of work into building out the visuals on the Proximity system,” Sandison says. “A common reporting problem over the years has been how to collate data. In the past investors have relied on monthly emails and paper searches to understand monthly valuations. Once a year, investors want to do due diligence on their portfolios, which is difficult to do by email/paper. Investors want to understand the story – to see the direction of travel in their portfolios.”
Aurum has also built an industry data analysis tool, the Aurum Hedge Fund Data Engine, which as at June 30, 2021 has data on almost 4,000 live hedge funds accounting for US$3.2 trillion in AUM, using in-house visualisation tools to make sense of the numbers.
In addition, the team spends many hours with underlying fund managers that Aurum invests with, helping them build out reporting frameworks and design reports that provide meaningful interpretation of data, in a process Sandison says can require a lot of “hand holding”, particularly as the industry has transitioned from static paper or pdf-based reporting to more interactive data-driven online reporting methods.
As an investor, Aurum does not always require daily portfolio transparency from managers, but certainly does ask for it if there are benefits.
“We can and do get daily portfolio transparency when suitable. But you need to be able to analyse the data, not just collect it for the sake of it. Even a basic long/short fund can have thousands of line items and then you need to understand the notional exposure behind derivatives. Even then, given high hedge fund turnover when you have, for instance, a 60-day reporting lag – so the data you get may not be representative of today’s portfolio. Lagged portfolio transparency can be useful but you might be trying to hedge out exposure that no longer exists.”
For example, Aurum invests with several funds that turn over their portfolios several times a month, compared to activist managers in the event space that might hold positions for years in certain cases.
“It goes to the strategy and to the complexity of their underlying investments,” says Sandison. “If you are asking for daily portfolio transparency, there has to be a benefit.”
Stimulating investor conversations
Jason Sweidan, head of investor relations, and Adam Moir, product specialist, both of Aurum Funds Limited and representatives under supervision at Aurum Fund Management (Pty) Ltd, note that today’s investors are much more demanding in terms of their reporting needs.
While fund manager reporting standards have improved significantly in the past 5-10 years, investors’ requirements continue to increase.
“One criticism of fund of funds historically is that they have been very opaque and don’t give enough information,” says Moir. “Today’s investors might want to look at correlation statistics, risk metrics or even their top five portfolio positions by size, attribution or return. Most importantly, they need an overview of their portfolio, an easily accessible track record and an idea of where their capital is allocated.”
Aurum’s ProximityTM software solution has evolved into a web-based investor portal, accessible even via mobile devices, which gives investors a direct line into parts of its back-end systems.
Moir says: “The database is built around systems which give insight to investors. You can toggle down into key statistics, different share classes, or even get live month-to-date estimates. Large institutional investors can view their portfolios with a full track record of historical performance and portfolio changes, giving them an idea of where their capital is allocated at all times. The rich dataset and visual representations helps to stimulate conversations with investors. ProximityTM brings us closer to investors, offering the kind of transparency that has historically been lacking for fund of funds.”
As an investor itself, Aurum relies on its extensive relationships with hedge fund managers, and has taken care to build an environment with which both sides are comfortable. In order to provide maximum transparency, managers need to feel secure with the level of disclosure provided, and to whom.
“Aurum typically invests with great managers with strong track records but what is important to investors is the money they have made. You can’t eat a track record. A percentage return compounded over the last 30 years is one thing – but what I really care about is the last six months.”
“Investors are increasingly looking for full-service partners and the trend is very much towards bespoke solutions,” says Sweidan. “Aurum’s job is to help people on their journey through the asset class and that requires transparency. Aurum provides broad interaction across the spectrum, from the implications of regulatory change to specific strategy insights. We consider this to be a base level service for clients.”
Raising the bar on ESG
Bolstering its reporting and investing efforts, Emily Forsyth-Davies joined Aurum Research Limited as head of ESG last November, bringing 12 years of consulting and financial services experience, and strengthening what is already a fundamental part of the group’s business.
She notes that hedge fund industry reporting on environmental, social and governance factors (ESG) is at a nascent stage, and largely built on qualitative but not quantitative information.
“There is a growing awareness on ESG issues, but hedge funds are relatively behind other asset classes due to their nature – they typically rely on proprietary research and portfolios often trade actively, creating reporting complexities. Aurum, as an investor, is looking to close these information gaps.”
ESG reporting extends from corporate policy on staff diversity and environmental issues, right through to political and governance factors in emerging markets, or even company-specific portfolio allocations.
Forsyth-Davies says nearly all of Aurum’s underlying managers integrate ESG into their processes in some way, and it is building more qualitative and quantitative data on both the investment and corporate sides so as to provide more consistent reporting as investor demands increase.
Aurum has for many years worked with managers to improve governance standards, right from investment committee level. In the ESG arena, Forsyth-Davies notes that while US investors are increasingly focused on diversity and inclusion, including racial diversity, European allocators are typically more concerned with environmental issues, such as carbon footprint and biodiversity.
“You can’t have an ESG focus in your fund and not your business or vice versa,” says Forsyth-Davies. “Proper integration works well. If ESG is silo’d in one area, it probably won’t work.”
She acknowledges that ESG reporting can be a burden for smaller managers and Aurum works with them to provide customised relevant reporting and prioritise their efforts.
“What does good practice look like right now for the hedge fund industry? ESG is no longer thought about as a ‘fluffy’ add-on. Managers need to share both quantitative and qualitative insights that are relevant to the market. It is not about giving out proprietary data, but about meaningful numbers that can reflect how you grow a business and build an inclusive investment culture.”
While adapting to increasing ESG demands is difficult for hedge funds, Forsyth-Davies notes that the industry has been very receptive. On the investment side, issues such as high turnover, number of positions and the huge range of tradeable asset classes make for complex reporting. There are also business challenges, such as increasing front-office diversity, attracting new talent and improving corporate governance.
“Aurum’s underlying managers are focusing energy and resources on ESG and significant progress has been made in the last few years,” she says. “The industry’s starting point has been behind that of the traditional asset management industry, but there will be convergence sometime soon. No hedge fund manager wants to be seen as a laggard. These are very successful and forward-thinking people.” Copyright. HedgeNews Africa – October 2021.
 According to Aurum, the Aurum Hedge Fund Data Engine database contains data on just under 4,000 hedge funds representing in excess of $3.2 trillion of assets as at June 2021. Information in the database is derived from multiple sources including Aurum’s own research, regulatory filings, public registers and other database providers.