Investor Compliance a Logical Step for FOFs

By Susan L. Barreto, Senior Financial Correspondent
Friday, April 07, 2006 12:56:53 PM ET

BURLINGAME, Calif. (HedgeWorld.com)—Much of the software industry's focus in recent months has been on regulatory compliance, but one firm believes more attention should be paid to the ultimate end user: investors.

Cogency, a firm built on data aggregation expertise, is looking at what technology can do to help funds of hedge funds "comply" with their investors' wishes.

Jeffrey Axelrod, chief technology officer at Cogency, said his company improves upon an accounting process that has relied on spreadsheets to handle complex data and calculations. Funds of funds accounting can be complex due to layering of differing fund redemption periods, fees, risks and reporting periods.

The Insight platform monitors whether a fund is ERISA compliant, if it is sticking to its risk and volatility profiles and whether there is sufficient liquidity to meet possible redemptions.

Cogency Insight for Fund of Funds was not only designed to help funds of funds handle portfolio monitoring and construction, but is also showing promise as a tool for investors' peace of mind.

"Their money is now coming a lot more from the pension funds," Mr. Axelrod said. "They (pension funds) are looking for something that demonstrates responsible investing."

A 2006 Greenwich Associates survey of pension and endowment executives concluded that hedge fund investments will significantly increase in the next three years. Endowments were early adopters of hedge funds and 17.2% of those surveyed had already invested in funds of funds.

Part of that investor comfort comes in knowing that a manager can accurately model the portfolio's strategic allocations and provide a timely snapshot of asset valuation and performance to investors on something other than Excel.

Investors interested in seeing their own pro-rated exposure to certain strategies or to a specific manager can view each within the Cogency system. This capability appeals to funds of funds specifically since it can provide details at the master feeder level or drill down to the underlying domestic or offshore fund holdings of each investor.

Single manager hedge funds generally provide their investors with a weekly performance estimate and monthly numbers within the first week of the following month. For funds of hedge funds, compiling those estimates and final monthly figures can be time consuming, and it means a lag of a few weeks between getting the single fund reports and the fund of funds' aggregate final monthly performance.

Mr. Axelrod has found that funds of funds' tracking of performance data internally can often yield the best available numbers for their investors rather than relying on administrators to keep the tally.

In talking with accounting firms and administrators, Cogency has found yet another market for the software since most performance accounting, attribution and reporting modules are not built with funds of hedge funds in mind.

So far, 10 funds of funds are live on the system following its introduction two years ago. Cogency views its client base expanding to include administrators and accounting firms that serve funds of funds.

Cogency's developers plan on adding tax accounting tools and introducing a portfolio modeling and rebalancing module that would allow managers to handle "what if" scenario modeling in the future.

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