Cost Containment for Hedge Fund and Private Equity Fund Managers

A sponsored article by aXpire LLC

When times are good, hedge fund managers and private equity fund managers tend to overlook the cost analysis and spend management area of their businesses. After all, if they’re generating solid IRRs, MOICs and/or alpha, a few thousand dollars here or there impacts the balance sheet significantly less than when things aren’t going to plan. When times are bad, however, every dollar counts.

The current market environment is taking no prisoners, and investment managers of all kinds are trying to figure out how to stop the bleeding. Cost analysis and management is likely taking a step into the limelight, with many managers focusing on how to vigorously protect margins. However, isn’t cost containment for the fund administrators to sort out?

Well, yes and no.

The standard fund model involves a fund administrator receiving a number of invoices from various vendors, in multiple formats, on behalf of funds, reviewing those invoices manually and then passing them into the accounts payable software. A fund administrator will likely process all of a fund’s expenses like their Bloomberg invoices, market research invoices, travel expenses, and more. These invoices can look totally different to one another in regards to formatting, so a team of people manually review these invoices and then enter them into an accounts payable system for payment. All of this is handled for funds as part of the fund administrator’s basis points fee.

Hedge fund and private equity fund managers who are happy with this arrangement might be doing their investors an injustice (and themselves – after all, every hedge and private equity fund manager is invested in their own fund). To give an example, a fund administrator based in New York might have team members drawing at least a $60K USD salary. Say there are 5 of them for a given fund administrator; that’s $300K USD a year to manually process invoices for twelve months. Even if this team is handling multiple accounts to spread that cost, a software with fewer people can handle the same invoice flow with less overhead for the same, if not more, funds. This is an area where digital transformation would make sense.

Hedge fund and private equity fund managers should consider software like aXpire’s Resolvr that is able to save funds 6-11% on their invoices, on average, and can turn invoices around, from input to payment, in a matter of hours. These per invoice savings are derived from a variety of expense management industry best practices, from early payment savings programs to billing noncompliance flagging and saving. Gamification is another notable aspect of Resolvr, with everything from dashboard traffic light systems to cost saving staff rankings and reporting. Gamification is a proven method to change behavior, and in the cost of cost savings, funds can incentivize their staff or their fund administrators to protect their bottom lines.

For fund administrators themselves, we’d imagine that they might be amongst the first to feel the pain of the market downturn. Even if basis point fee structures are not renegotiated (and it’s well known they’ve been under pressure for some years now), these basis points are now multiplied against a smaller AUM as the pull-back in markets shrinks the size of the funds run by managers not exercising market neutral investing approaches. Accordingly, the teams of workers within a fund administrator focusing on expense management becomes relatively more expensive, as their salaries stay the same whilst the fund administrator’s revenue decreases.

Hedge fund and private equity fund managers feeling the burden of fund administrator costs – and fund administrators themselves - need to incorporate technology into their expense management process as part of a responsible cost containment strategy. aXpire’s Resolvr product is  able to do all of the above via gamification of expense management, standardization of expenses into a LEDES format and establishment of interoperability within funds and fund administrator’s existing technology stacks.

Cost containment is an essential element of capital stewardship excellence, and regardless of the environment, saving money on fund expenses can be a significant contributor to loss minimization and alpha generation. Hedge fund managers and private equity fund managers have strong reputations for operational excellence, and now is the time to expand that definition to include spend management and cost containment.

Matthew Markham is COO of aXpire