Navigating Complexity and Optimizing Investment Strategies

In the intricate landscape of hedge funds, characterized by rapid market dynamics, the need for effective corporate actions (CA) processing systems is crucial. Hedge funds deploy various investment strategies such as long-short, alternative investment, and algorithmic trading to generate alpha. This requires the management of diverse portfolios across multiple prime brokers and exposure to complex asset classes.

As more traders become multi-asset traders, they transition to managing a multitude of corporate events that significantly impact their investment strategies ranging from stock splits and dividends to complex voluntary offers, requiring swift and accurate processing to make informed decisions.

The challenges intensify in Over the Counter (OTC) derivatives with short positions, where the complexity of transactions amplifies the importance of streamlined corporate action processing systems to automate and synchronize information across multiple brokers. These systems are indispensable tools, enabling hedge funds to navigate challenges seamlessly and optimize their investment strategies; staying agile and competitive in the fast-paced world that they operate in.

Challenges Faced by Hedge Funds in Corporate Actions Processing

Throughout the corporate actions processing cycle, hedge funds also grapple with hurdles and limited automation posing a significant challenge. With the focus primarily on cash securities, derivatives and shorts are reliant on manual processes.

As per our recently conducted survey on corporate actions automation on OTC derivatives - 66% of hedge funds process CA manually and 11% have limited automation. As most funds heavily rely on in-house teams and prime brokers to process corporate actions, managing multiple prime brokers introduces management complexities.

Although the usage of ISO messaging and non-ISO messaging by prime brokers seemed balanced, complexities arise with different deadlines and supported asset classes.

In this same survey, approximately 71% of hedge funds quote lack of consolidatedview across asset classes as the main challenge in systematically addressing lender liabilities, followed by 22% of respondents who heavily rely on manual handling based on lender reports.

As the corporate action announcements are typically received on the underlying security; lack of a consolidated view across cash securities as well as OTC derivatives, such as Contract for Differences (CFD), Total Return SWAP (TRS), single name and baskets instruments; increase the risk of mixing up corporate actions between systems, heightening the possibility of manual errors.

Scalability issues persist, impacting operational efficiency and the risks associated with delays or inaccuracies become apparent, especially in short position elections, where real-time visibility on lender elections may be lacking.This can lead to potential delays or incorrect choices for linked long derivatives.

The Importance of Streamlined Corporate Actions Processing

Efficient corporate action processing plays a crucial role in enhancing fund performance and minimizing risks for financial institutions. The below highlight the ways in which streamlined corporate action processing contributes to these objectives:

• Risk Mitigation: Prompt and accurate processing reduces the risk of errors, such as missed deadlines or incorrect elections. This risk mitigation is especially significant in complex financial instruments, including derivatives and shorts, where errors can have substantial financial consequences due to heavy leverage.

• Competitive Advantage: Funds with efficient corporate action processing gain a competitive edge. The ability to adapt swiftly to market events and navigate complex corporate actions positions the fund as more agile and responsive compared to competitors.

• Timely Decision-Making: Efficient processing enables timely identification and evaluation of corporate actions, allowing fund managers to make informed decisions promptly. This agility is crucial in capitalizing on opportunities and avoiding potential pitfalls.

• Optimized Portfolio Management: Streamlined corporate action processing ensures accurate and timely adjustments to portfolios. This optimization is vital for maintaining a well-balanced and diversified trading strategy, aligning the fund with market trends, and maximizing returns.

Enhancing Hedge Fund Efficiency and Accuracy

By embracing S&P Global Market Intelligence Corporate Actions Solution for automation, hedge funds can navigate the intricacies of corporate actions with precision, ensuring that investment strategies remain aligned with market opportunities while minimizing the potential for errors and operational disruptions.

Additionally, hedge funds can also get access to the S&P Global Market Intelligence Managed Corporate Actions (MCA) Solution, which provides access to a centralized source of validated corporate actions data for four million equities, fixed income, and structured securities across 170 countries and territories. (MCA) accommodates the hedge funds' need to identify patterns, trends, and anomalies for correct alpha generation.

The S&P Global Market Intelligence Corporate Actions SaaS Solution is a highly automated, cloud-based solution that delivers the control you need to manage corporate action processing seamlessly. Utilizing intelligent exception management, a robust risk engine, advanced state-of-the-art decision-making election capture, and a full event processing solution.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.