HazelTree ended 2014 with more than 40 clients, a large proportion of which are hedge funds. What are they saying about their business at the moment, and where does HazelTree fit in?
Running a hedge fund is more complex than ever, and there are several important drivers underscoring this problem: ongoing regulatory change, the use of multiple counterparties, and new asset types to be managed. And, exacerbating these factors are increased demands from investors for sustainable performance, transparency, and accurate reporting, among others. This is the reality our clients face and is exactly what HazelTree strives to solve.
The HazelTree platform was designed specifically to facilitate operational processes, integrate financing and manage the cash, securities, and collateral flow internally and across counterparties for asset management firms. By developing a comprehensive treasury management platform to manage these critical business processes, HazelTree enables investment managers to seamlessly fund their strategies, manage their counterparty relationships and associated financing costs, and importantly, to gain a broad perspective not just of the markets they trade but in many instances, where and how best to transact. We help turn potential distractions into market intelligence and increase overall investment process efficiency.
How are your clients pushing you to develop your treasury management product?
Our clients have pushed us hard to continually improve our treasury management system, and with a strong increase in client acquisitions over the last year, that shared effort has given HazelTree significant momentum as a company and served to ensure that solutions being built are truly industry standard.
Also, as we have continually developed our system, we have been very mindful of the needs of the broader investment management arena. Our products are well-suited to private equity managers and fund administrators (among others) and we are beginning to see growth beyond our core hedge fund market.
Some of our larger hedge fund clients have launched regulated funds such as UCITS and 鈥�40 Act vehicles. We are working closely with these clients to ensure our team continues to gain expertise in the traditional asset management space, as we adapt our tools and technology to their distinct needs.
How is HazelTree different from competitors when it comes to securities finance and collateral management?
In a word it is 鈥榠ntegration鈥�. While other applications solve for particular aspects of a firm鈥檚 operational and financing needs, HazelTree provides a scalable business solution and technology platform that links critical operations internally, between a manager鈥檚 book and records, or externally, among a range of counterparties. HazelTree runs in real-time, near-time, and end-of-day processes to ensure a clear perspective and fluid management of cash, margin, collateral, and the like.
HazelTree has made it possible for a manager to continuously accrue securities financing costs and import the information into their portfolio/accounting systems in order to know true profit and loss, net of costs, at a position level. Our clients can automatically compare their positions against actual accruals reported by their brokers. Further, they can find inventory and the best rates to continually minimise costs and enhance their returns.
Another important distinction is that HazelTree can function as the system of record for managing pay-to-hold or pre-borrow inventory and related financing activities. While accounting systems manage most financing components quite well, there are challenges that arise from holding valuable financing without the associated position. If not accounted for, and utilised properly, these disconnects can have a profound impact on a fund鈥檚 performance. For example, a large family office came to HazelTree a few years ago and asked us to build that custom functionality for them. We built that into our core application and it has proven to be extremely beneficial to many of our clients, and in fact helped increase our market share.
We also do a very good job helping our clients analyse their long and short financing components. We can show them re-hypothecation details and their potential to optimise their book to find the best short financing rate.
How are new regulations pushing HazelTree to develop its product?
We make a conscious effort to stay ahead of the curve on regulatory requirements, especially when it comes to over-the-counter (OTC) collateral components. Clients need to be able to look at OTC and prime broker relationships and document information in great detail. They need to be able to look at the real cost of having collateral out and understand what they are paying their counterparties. That is a big part of what HazelTree has been working on.
There are a lot of analytic products out there that benchmark, but what really matters is the individual relationship between counterparties. A prime broker does not have the same relationship with a $200 million fund as it does with a $10 billion fund. A treasury management system needs to understand the specifics of those relationships so that it can know how both collateral and financing costs are allocated.
Counterparty relationships can鈥檛 differ that much, can they?
All funds are different in terms of how they allocate and attribute positions to various strategies and trading activities, and that needs to be correlated back to how the counterparty wants to work with the fund itself. We see ourselves as the facilitator of those conversations. We arm the fund manager with the details that the counterparties are really looking for to create a better relationship between the two.
This level of detail is going to be paramount going forward because there are increasing costs against moving collateral and financing business in general. Being able to judge each relationship on its merits, in that level of detail, is going to be a major advantage.
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