Accurate and proper record keeping is a foundational aspect of professional fund management, with digital assets being no exception. This new and emerging asset class has experienced explosive growth in recent years, moving from fringe to mainstream at unprecedented speed. While digital asset funds are obviously keen to capture the potential opportunities around such investments, the lack of established and functioning financial frameworks and infrastructure seen in comparable, well-developed TradFi markets creates challenges that fund managers must address in order to achieve scale and reduce risk that may be detrimental to fund operations.
It is common for digital asset funds to trade across multiple exchanges, with many counterparties in private transactions, and also directly on chain through DeFi protocols. No unifying systems currently connect all of these venues, creating significant challenges for fund manager teams and administrators. The process to reconcile activity across the many trading platforms will be slow and laborious if a systematic process is not implemented. Additionally, the very real potential for errors increases if manual solutions are relied upon.
Portfolio managers will require timely data from their traders to monitor exposures and make successful trading decisions. Post transaction, the fund finance teams are tasked with aggregating all data from the trading teams to produce the information needed by the front office and also to facilitate the data required by the fund administrator to produce the accounting book of records. Investors are relying on fund managers to have a record keeping program that will satisfy all of the aforementioned needs and ultimately safeguard their investment and ensure accurate and timely reporting.
How can a digital asset fund manager address these numerous operational challenges? MG Stover has been bridging the gap between the investment teams and finance operations teams at digital asset funds since 2014. Our multi-faceted solutions are tailored for digital asset fund managers, enabling them to produce the reporting needed to deliver on their mandate.
Building an institutional digital asset fund management system starts with having the right people to manage the many critical aspects. One large challenge for many managers is ensuring that those responsible for accounting and reporting are aligned with the investment team. Digital asset traders regularly move quickly into markets when and where alpha is able to be captured, with reporting needs often after-thoughts when opportunity to lock-in gains are present. Therefore, we advise our clients to have operational personnel in place and aligned with trading teams to ensure that trading venues are vetted and reporting capabilities analyzed to ensure that data may be captured in a timely and accurate manner. With the right personnel in place, a framework can be created for alignment of trading and reporting to the middle and back office.
Over many years of operating in the digital asset fund industry, we at MG Stover have built a wide network of talented individuals who have both fund operations and digital asset backgrounds, a scarce and increasingly sought after combination of skills. Given our unique market position, we were able to easily leverage this to identify both talent and client needs, and now offer a placement service within the digital asset fund management sector. Launched in Q1 of this year, it has been well received by the industry and we are working with many clients who are looking for team members with the right set of unique skills needed for their teams. It is yet another way we continue our commitment and service to clients and the wider digital assets industry.
In addition to personnel, funds must utilize the best technology available to ensure their investment and reporting process is accurate, timely and scalable. MG Stover utilizes a proprietary platform, otto, to bring together multiple, disjointed sources of digital asset transactional and pricing data. The platform collates, transforms, and normalizes data for ease of use among teams and ingestion into accounting and back-office systems. It provides automation and improved efficiencies for what were originally highly manual processes in these nascent markets, thus reducing risk and increasing processing speed and transparency. otto also provides a reporting engine for both investment and back-office teams to utilize. It is the start of a wider industry solution, addressing a lack of data standards and infrastructure, leading to improved communications among investment and back-office teams, as well as brokers, custodians, and the wider digital asset community. All of our fund administration clients have access to their fund’s real-time data reporting and monitoring through secure access to otto.
Additionally, we offer our technology solutions to a growing list of fund managers who need to integrate technology in their existing middle and back-office platforms and also to reconcile to other fund administrators. otto may be integrated into their middle office process to reconcile the investment team positions to the accounting positions. Supported by a middle office services team, otto enables fund operations personnel to automate their reconciliation process, ensure that complete data is captured from the trading teams, and ensure complete investment books of record are provided by the fund administrator.
Fund Administration that fully supports the middle and front office:
Over nearly a decade, MG Stover has worked with fund managers of varying sizes across all spectrums of digital asset strategies, crafting bespoke solutions as there is no one size fits all approach to developing the right solution for each fund manager. Some more established fund managers have opted to build their own trade capture systems. Although this allows the design, features and functionality to be highly tailored to that fund, it also requires a significant amount of engineering and development teams to create and maintain such a system, a skill set not native to fund managers thus creating an additional resource consideration, and not one all funds are willing to take on. Third-party solutions also exist, one of which is for traders to utilize an Order Management System (OMS) to access and transact across multiple exchanges and protocols. An OMS, by design, has established accounts at multiple trading venues and provides traders access on their behalf, eliminating the need for traders to open and maintain individual accounts. Order Management Systems are well established in TradFi but less so in DeFi, given the newness and nuanced differences of such transactions specifically and this asset class more broadly. Fund operations teams should still work closely with their administrator to ensure that they have the technological capability to integrate with new OMS platforms and properly consume the data.
As long-time administrators for digital asset funds, backstopped by even more longevity providing similar services to traditional funds, the team at MG Stover is well placed to readily identify and advise clients around the current challenges within digital assets. When MG Stover is engaged as the fund administrator, we work with each client individually to ensure potential operational and technical challenges and risks are clearly identified and advise clients around resourcing and best practices to manage such risks. MG Stover has long provided outstanding, white glove fund administration services to digital asset funds and we are well-placed to identify, advise, and solve operational and technical challenges within the new and rapidly evolving world of digital assets.
In our next blog, join us for a detailed walk-through of digital transactions, highlighting best practices and operational considerations when transacting across different DeFi protocols including the use of otto.