Kayenta formed in 2018 and you joined as CEO from UBS in May 2020. The treasury management solution was formally unveiled in January. What attracted you to Kayenta’s offering and what has the journey been like so far?
My first attraction came from understanding the hedge fund and bank landscape very well from my experience to date and knowing the huge opportunity that exists in solving inefficiencies in the financing space. I’ve seen the in-house technologies and I’ve seen what other service providers offer, and there is significant room for improvement given how important actionable data and transparency are to hedge funds today.
Fees from financing operations are a huge drain on most hedge funds and some of that can be attributed to allocation inefficiencies, booking errors and other very avoidable issues. But the data needed to get a clear picture of what’s driving those costs is hard for a fund to aggregate and decipher. That’s where we come in.
Kayenta has a simple vision of solving the financing and treasury challenges hedge funds are facing. We gather the data from their various financing counterparts, normalise it, and then compare it against our own calculations drawn from the fund’s golden source of position data and processed through our proprietary accrual engine. Moreover, we are providing this at a time when funds are under pressure from both sides with their prime brokers wanting more revenues and their investors wanting lower fees.
Beyond the product, it was the team here at Kayenta that caught my attention. When you look at our management and technology teams and the experience they bring from their respective fields, I had to be involved.
Hedge funds come in all shapes and sizes. How many would benefit from your treasury solution?
From our experience, we believe the current market penetration by more established service providers is very low compared to the number of funds out there that need technology like ours. Besides the belief that our solution is superior, we feel that our backgrounds and having actually experienced these pain points ourselves in previous roles, at both banks and hedge funds, bring a trust factor that clients will respond to.
Our clients know that we truly understand what they need and are sensitive to, which is vital when it comes to committing to an external technology solution. Combined with technology that is extremely modern and scalable it allows us to offer valuable solutions at a price point that is going to be compatible with hedge funds of all sizes and strategies.
The issue you’ve identified is not a secret to the hedge fund or prime brokerage communities. Why has no one resolved it yet?
Most larger hedge funds are very aware of this problem but the first hurdle is that the methodologies and calculations a bank applies are very specific and will therefore vary significantly with each relationship. A fund may have several prime brokers but each will calculate financing costs and margin valuations in a unique way that’s based on the bank’s internal processes and balance sheet needs. This makes it very difficult for a fund to reconcile and standardise those data points across the board.
Moreover, even if you do have an Excel spreadsheet and can get all that information in one place then it’s likely to be a manual and time-consuming process, and there’s no guarantee that the numbers are accurate. Just effectively monitoring the financing bills the fund pays its service providers each month is very difficult to independently verify and is hugely resource-intensive. It can take days every month for a fund to achieve an approximate accuracy and until now there hasn’t been a third party offering them a reliable alternative. Inaccuracies in this process can also accrue and resurface months later, which all requires further effort to quantify and correct. In a worst-case scenario, a sizable reconciliation inaccuracy can lead to a fund having to restate its performance or the bank having to write-off losses from the prior year’s revenues, alongside some inevitably difficult conversations.
Simply, Kayenta is offering a solution that will do all that automatically and daily so that an investment manager can quickly understand and trust their costs whenever they need the information.
What we’ve seen from early adopters is that clients have saved a lot more on their financing overheads than we charge them for this service. I’m happy to be on record and guarantee that if you implement our technology for a year you will be able to save money above and beyond our fees.
To be clear, when we say this is a product that will benefit both hedge funds and prime brokers it means that although a fund’s financing payments will decrease, overall wallet for the banks can increase. This happens because a truly efficient treasury function takes into consideration, and optimises for, the impact on both parties. It requires data transparency to flow both ways but will allow both parties to focus on the issue of the day rather than looking in the rear-view mirror to fix historic problems.
To underscore this point, we are in active conversation with some hedge funds because a prime broker sees our value and has introduced us to them.
Tell us more about the team behind the technology?
To develop our technology we were motivated to hire beyond established capital market technologists. We wanted to put together a team of specialists from fields outside finance that bring fresh perspectives to old problems. The result is we’ve created this great meeting of minds between a team that understands the problems intimately and a team of technical experts that bring novel solutions.
The modular platform is cloud-native and hosts full API (Application Programming Interface) connectivity, which allows for connectivity with other software while not burdening in-house systems under the full weight of the technology stack.
As part of the onboarding process, Kayenta will get authorisation from the investment manager to approach their financing counterparts to source all the relevant information, and the client themselves don’t have to do anything beyond an introduction.
Once Kayenta has collected the fund’s financing data and normalised it, we then offer an optimisation function to make the portfolio more efficient. This is from a cost perspective but also from an asset allocation perspective so that the banks get more of the assets they want and less that they don’t.
The next implementation phase for Kayenta will be entirely client-driven. The feedback we have had focuses on portfolio efficiency, which is a broad term, but for us means real-time and reliable information that provides simple actionable ideas to optimally allocate balances. Prime brokers are already providing funds with a wealth of information through their existing reporting stack, it just needs to be digested and understood. For example, we have a very detailed waterfall model that categorises collateral in the way each prime broker categorises it, meaning we can suggest a fair distribution in terms of the value each counterparty is likely to realise.
We are also currently enhancing our securities lending benchmarking, margin management, currency optimisation and financing wallet functionality.
This new window into treasury management also appears to offer greater transparency to a fund right when its investors are demanding greater insight into its activities. Beyond the primary cost-saving potential is this secondary transparency opportunity also attractive to clients?
Good point. On the surface, the data we can provide is great for a treasurer or COO, but it also brings a lot of useful information to a portfolio manager, CEO or anyone on the investment or marketing side. This information can provide confidence to limited partners that they are paying the right amount and that the fund is being efficient with its capital.
Take the recent example of Archegos Capital, a default situation that caused several billions of dollars in losses to its prime brokers. When events like this happen, other fund’s investors want to know if they are exposed and what it means for them. For most funds, answering this basic question means scrambling to look at multiple systems and amalgamating those numbers to come out with a simple figure. Our solution would give that to you straight away and would allow a fund to share its exact exposure and the risk profile as of that morning.
There will be other challenging situations like this in the future and funds need to be ready to communicate with their investors to demonstrate that they are on the ball.
There are several established treasury solution providers already in the market, but you mentioned that overall penetration into the hedge fund universe is limited. Why is that and why do you think you can do better?
We believe that our first-hand experience will ultimately allow us to articulate the problem hedge funds are having in a way that our competitors from other backgrounds have failed to do. The dialogue and direct feedback that we’ve been able to get regarding what people really care about and what they are willing to pay for is extremely valuable.
Our team is our secret sauce. Until 2020, I spent just over 15 years with UBS where I was head of global financing services for the Americas. Our founder and COO Matt Peakman brings 13 years of experience with Nomura, where he was most recently head of fund and corporate derivatives trading. Our CMO Mark Toone spent a decade with Morgan Stanley on the delta one structured product desk and also spent time with a multi-strategy hedge fund as a portfolio finance trader. Kelly Russo, who is focused on business development for Kayenta, was equities chief of staff at UBS and also a securities lending trader there and, before that, at Goldman Sachs. I could go on.
Between us, we’ve approached this problem from every angle for every client. We are multi-asset and service all strategies, from equity long shorts to quants and fixed income strategies, and we have solutions for all sizes. We recognise that if you’re managing a single entity with $100 million assets under management (AUM) you will have very different needs to managing a platform of strategies with multiple billions of dollars in AUM, but the benefits of an efficient portfolio extend to both. And the value isn’t just to the fund, it spans the whole length of the chain from the investors to the prime brokers.
We ultimately don’t think the existing solutions out there are backed up with the very personal, first-hand knowledge of the market that we bring. With this in mind, although we have a clear development roadmap, we will never try and be all things to all people. We are portfolio finance specialists and we want to set the market standard for hedge fund treasury solutions. We are determined to be best-in-class so that when people talk about treasury, they talk about Kayenta.
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