When conducting business on a day-to-day basis, fund managers incur expenses that are then paid on behalf of investors in the funds they manage. Although a somewhat sensitive matter due to the fact that it’s not always clear whether an expense should be billed, managers will sometimes send them through if permitted by the fund covenants.
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With the sheer volume and complexity of expense allocation rules, managers that currently rely on manual processes significantly increase their risk of costly errors. Adding to work-from-home and remote challenges, funds face additional risk and issues with the coordination of key stakeholders to approve invoices, and collation of the AUM number, investment holdings and ownership ratios.
Expense allocation is a critical process for private equity, hedge funds, pension funds and other asset managers often performed manually through the use of Excel-based spreadsheets. However, due to the complex nature of fund expense rules that differ from fund to fund, managing this process manually can lead firms down a path of operational risks that have the potential to result in hefty regulatory fines, a loss of reputation or monetary loss to the management company.
Although the industry has largely moved towards automation in recent years with the introduction of new tools and technology, several hedge funds and private equity firms are still grappling with the nuisances of manually managing their expense allocation process. While a few managers have made great strides by achieving partial automation of this process through reference data integration and invoice coding, many still rely on complex spreadsheets that are both tedious and error-prone.
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A small number of funds have the luxury of a simple and straightforward expense allocation process and execution model that requires little to no oversight. Most of the clients that we have worked with have complex allocation policies and business cases that require a lot of supporting data sets. As a result, managers face the grueling process of determining the accurate allocation and an equally demanding vendor payment process.