Hedge Funds Eye Broker Relationships

appeared on Markets Media Online on April 25, 2011

Although the practice of soft dollars is allowed under SEC ruling Section 28e, regulatory reforms have instigated scrutiny of the relationship between hedge funds and their service providers. In keeping in line with ruling Section 28e, MIK Fund Solutions has developed a broker and commission tool, which aims to provide hedge funds with an integrated, analytical, and sophisticated system for tracking and rating brokers, as well as recording data on soft dollar activity.

“We wanted to help solve the business problem of handling brokers in an organized fashion,” said Marshall Saffer, chief operating officer of MIK Fund Solutions. “Before, people were doing all of this in (Microsoft) Excel. They couldn't do trend analysis, couldn't project forwards, etc. Our new system facilitates a metrics-based discussion between hedge funds and brokers that is meaningful -- why certain brokers provide value to your firm and why you should be doing more trading with a particular broker.”

Since its inception in 2006, MIK Fund Solutions has built an eclectic client base of thirty hedge funds, ranging from start-ups to funds with assets over $1 billion. Saffer told Markets Media that vendors such as MIK, are becoming more important in a time where increased transparency is at the forefront of the markets.

“In a way, the more regulation that comes of out of the crisis (of 2008-2009), the better it is for us,” Saffer said. For vendors, the decision-making process for hedge funds will become easier and clearer through data automation and aggregation. “The idea is for us to provide an enhanced system that would aggregate data” across a bunch of disparate systems,” Saffer said. “We want to marry the data set to the investment piece of our clients' business -- a concept that can possibly aid in generating alpha.”

Though achieving high returns are still hedge funds' primary concern, investors will look for robust infrastructure as part of their decision to put their capital in a firm, according to Saffer.

Despite differences in fund philosophy, Saffer commented that MIK will concentrate on the continued effort to build better, automated data engines for their clients, to ultimately help lower costs. What initially started as end-of-day reporting has now become an initiative to have real time analytics on risk, performance, and attribution.