HedgeServ: Challenging the Status Quo

Date: Friday, October 22, 2010
Author: Bloomberg Businessweek

Jim Kelly talks about how the fund administrator creates a "no-politics culture," why it doesn't outsource, and the fallout from Bernie Madoff

Jim Kelly is not afraid to challenge the status quo. He first did so in 1995 when he launched International Fund Services (IFS), a fund administrator that soon became a leader in the field. The firm's model of daily processes, middle office support, and timely and accurate Net Asset Values (NAVs) set a new standard in the industry.

By 2005, Kelly and his team realized that fund managers needed more from their administrators—what was missing was real-time access to their data. "There was a gap between the service requirements of hedge funds and what administrators could provide because they were all sitting on legacy technology platforms," he says. "No one was investing in new technology that was answering the needs of portfolio managers in need of data. Instead they were spending money on maintaining old systems."

So in 2007, Kelly joined industry veterans Bob Aaron and Gene Mannella to launch HedgeServ, a fund administrator that offers hedge fund managers real-time access to their data through a current "shared technology platform."

He recently spoke with Businessweek.com Management Editor Patricia O'Connell about the team he has assembled and his second act in the fund administration business. Edited excerpts of their conversation follow.

Patricia O'Connell: Are the barriers to growth in the hedge fund services industry different now than they were when you started IFS?

Jim Kelly: Yes. When we started IFS, there really wasn't a viable model for where the industry was at the time. We came out with daily processes and middle office services. This became the standard because it was what hedge fund managers needed.

These days, it's important that we demonstrate the strength of our platform to managers and investors. It used to be the guy who had the best model got hired. But after Madoff, investors started looking at who was marking the books. They wanted a name they recognized. It was a game-changer. Now we are selling to the investors and due-diligence folks as well as the managers. We have had some major wins and we are getting good traction with investors.

You don't outsource any work to India—or anyplace else. Could you talk a little bit about the thinking behind that?

We will keep our operations in the U.S., the Cayman Islands, and Ireland because these business centers operate in the time zones most important to our clients. By not outsourcing, we also reinforce and preserve our culture of excellence. All of this is important when your staff is client-facing.

I have operated in Ireland for over 15 years and I know where the good schools are, I know where the well-qualified graduates come from, I know how to recruit them, and so we get them in and we've created a great culture and good energy. You have to recruit, hire, then you have to train, manage, incentivize.

What about the cost factor of not choosing to outsource to, say, India?

While it may be marginally more expensive to operate in Ireland than, say, India, the most important thing for us is to deliver excellence. Our clients would rather have better performance than save a small amount of money. The consequences of not having excellence on the service side can be very high. Philosophically, I don't believe in the lowest cost of production—I believe in excellence.

You seem very proud of the culture you say HedgeServ has created. What characterizes that culture?

We try to hire the best candidates and that creates a culture of excellence within the firm. When you hire people who have worked very hard to achieve, to be at the top of their class, and you create a community of people like that, you've got good energy. Our philosophy is that everybody has to act as a manager and you have to support the person next to you. So you're creating an environment of excellence and support. We try to discourage politics within the organization.

How does HedgeServ actually avoid office politics?

We've created a culture where you don't need politics. If you give people a clear career path and say, "Look, here's what we need you to do. If you do it very well, this is how you'll advance within the company," you don't need politics. … I'm sure that there is some organizational dynamic that if you get over a certain number of people, that doesn't work as efficiently. … We don't know where it is. We haven't seen it yet.

How flat is the management structure?

Everybody really has an operating responsibility. That's another key point. How we create the culture is that we have the expectation that everybody that we bring in has the potential of becoming an equity holder, and therefore a partner, a managing director, and potentially a member of the management committee, so you treat each person as a peer. Anybody in the firm can walk into my office and talk to me any time they want and I'll do the same with them. I encourage that. Good communication makes an organization more effective, more efficient. It makes it better.

How do you keep the people part so vibrant in a place that is largely about technology and data?

Maybe a third of it is about the technology, two-thirds of it is about people. In a way, we become an extension of the organizations we interact with. I see our people share in the good feeling when a hedge fund is successful, when it's all working well. So it's not just data, it's smart people making good decisions.

What has it been like to manage and grow a company during the last two years, particularly one in the financial-services industry?

It's challenging because the game is changing. Investors are taking a much larger role in the process.

Do you think investors' taking a larger role is a positive thing?

Very positive. I always thought investors were a very, very important part of the equation. When I was involved in running a hedge fund, the investors would be seeking information and the hedge funds would try not to share a lot of information for the fear that it could create a disadvantage to them in the marketplace. So the challenge for me was to find ways to give investors information that could give them some comfort without putting the hedge fund at risk. A lot of the smart fund managers found ways to share information with their investors. But now the investors are demanding it.

Our contract is signed by the fund and my client is the investor.

So you're in a situation where you're a small startup. How do you stand out? How do you prove to people that your value proposition is greater when you don't necessarily have a track record with a new firm?

We have a veteran senior management team and a solid track record from our days at IFS. We have the same excellent process and people that produce a consistently accurate work product. We have never had to restate a NAV. We've received feedback that people are impressed with the quality of our staff. … And our technology platform is different. It's very powerful and people are impressed with how well-thought-out it is.

What distinguishes your technology platform?

It allows our clients to have access to the platform exactly the same way we do. … Clients can access a very well-organized platform on a real-time basis, they can slice and dice their data, pull whatever they need, and create their own reports. We use a push technology that will stream their data to any application or system.

Is that a cost savings for them?

It can be a cost savings. There is a single database so there is no duplication of data. Clients can put more controls in place to ensure that there is less error in the data and strong compliance capability to give them alerts when certain thresholds or events occur. And you can set up almost any algorithm. If a manager wanted to put parameters around one of his traders, he could do that.

You've spoken about some of the challenges of starting from scratch. What are some of the advantages of building out your own technology platform?

We were able to hire the best people and then "whiteboard" a new platform. The industry is moving to same-day reporting and our model is ready for the transition. Also, our clients can write apps and drive those apps off of our system.

So you're the Apple of fund administration?

Well, in a way we are. Our capabilities are just current ideas that we have introduced to an industry that really seems to be mired in an older technology. This industry needs innovation. We defined the model when we launched IFS, and we are innovating again with HedgeServ's new shared technology platform.