Leveraging Data Governance for a Strategic Advantage
February 12, 2024
Hedge Funds
The value of assets that hedge fund manage reached new heights in 2023 at a staggering $5 trillion.[1] So too have industry complexities. As the importance of a strong data strategy increasingly takes priority for asset managers and hedge funds, the need for better data governance is rising to the top of the agenda.
Improving transparency is at the heart of data governance. By implementing purpose-built solutions, asset managers and hedge funds can effectively manage regulatory changes, adapt to shifting priorities, and ensure open lines of communication. These purpose-built solutions play a vital role in strengthening market positions and enabling hedge funds to navigate the evolving landscape of the financial industry.
In an interconnected world, data governance has become a strategic imperative. By prioritizing transparency and leveraging purpose-built solutions, institutions can effectively manage their vast portfolios, mitigate risks, and drive sustainable growth.
Hedge funds have seen demands for greater transparency from an ecosystem of regulators, investors, broker dealers, law firms, central banks, and the investment itself. Each entity has its own individual agenda, yet they all share a common dependence on the larger financial system.
In recent years, stricter reporting requirements have put hedge funds on alert for greater transparency. Consider the daily requests of Form PF, amended AIFMD legislation, or the regulation of private fund advisors, just to name a few. That’s why each entity in the ecosystem plays a valuable role in maintaining a healthy financial system. As the industry continues to evolve, hedge funds must be ready to work collaboratively with regulators, investors, broker dealers, law firms, central banks, and the investment itself to meet transparency demands.
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Regulatory technology sits at the intersection of the various agendas. Hedge funds focus on the minutiae of a trade — what an engineer might call floats, strings, and timestamps — whereas regulators focus on crafting the policies, regulations, and legal actions that overlay a fund’s investment choices.
Technology is undoubtedly part of the solution to manage compliance expectations. For me, the fast turnaround timelines to settle trades and other demands of T+1 settlements immediately come to mind. Establishing a robust data governance structure is the X factor that will enable firms to create that robust technology to meet regulatory obligations.
By implementing a strong data management solution, funds enhance how they collect, aggregate, and normalize information, while also incorporating risk analytics and preparing data in a format they can easily submit to regulators. This streamlined approach, supported by the right tools and reliable sources of information, empowers compliance teams to better comprehend and efficiently meet their regulatory and reporting obligations.
Data must relate to similar data to be enriched and ultimately produce artifacts for external parties, including investors and regulators. Data must be permanent for accountability and traceability and malleable so that firms can share it with relevant parties.
To meet new and evolving regulatory standards, firms should consider how they manage and access data on several key components:
The underlying technology must be dynamic to support the full needs of the ecosystem. By maintaining high data quality with defined policies that adhere to compliance obligations, organizations can make informed decisions, improve operational efficiency, and enhance customer satisfaction.
Data taxonomy with common language serves as the building blocks to help solve for the unknown. To effectively solve for the unknown, firms must have a strong understanding of their underlying data sources, variability, and methods for organizing and utilization.
Let’s take a security as an example. First, we must agree on what a security is and how it varies. Once we understand how the security moves based on various numerical attributes, such as prices, coupons, and fees, it allows us to tally, compile, and sort that security to wind and unwind based on how we want to analyze the security. The attributes for a given security can then serve as identification and allow systems to relate the security to any number of other attributes.
We refer to this concept as domain awareness. Unified systems capturing trades, transactions, positions, aggregations, accounts to counterparties, brokers, and more enable you to understand your firm’s data taxonomy. In this context, gathering, ingesting, and harmonizing data is the priority. Technology is just how you get there.
An inventory of domain-specific datasets, ready to mix and match, offers a broader set of use cases for data – whether for analytics, to enhance team collaboration, or to collect and report data to regulators. As your firm masters its data taxonomy, solving for challenges, such as regulatory reporting, becomes forward thinking and less reactionary.
When you have the right building blocks, data that aligns with compliance needs also supports a more strategic relationship between the front, middle, and back offices, and enables your firm to deliver comprehensive front-to-back information with external parties.
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A good data governance platform enables you to aggregate, document, error check, and report on your data. And equally important, it lets you repeat those steps when jurisdictions or securities change. With the right data components, your business is in a stronger position to think strategically and use data as a true differentiator.
Data governance is as much art as it is engineering. It reflects the reality of how governance will always be changing to support the evolving ecosystem of hedge funds and asset managers.
Want to learn more about how to navigate your compliance obligations? Watch our on-demand webinar: Navigating the Evolving Regulatory Landscape with Data Governance Solutions.
Sources:
[1] Value of assets managed by hedge funds worldwide, Statista, September 14, 2023
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