In the early 1990s, Frank Smith, a sales and marketing veteran who had grown up in the brokerage world, was working at a commodity trading adviser whose strategy had reached capacity. His firm decided to explore the possibility of becoming a fund of hedge funds, and Smith needed a software tool to help him choose managers, analyze their performance and blend them together to create a portfolio. At the time, most investment managers made do with Excel spreadsheets to analyze hedge fund returns and plan their portfolio allocations.
Milt Baehr, a computer programmer who had started his own commodity trading advisory firm, was running up against the same problem. Baehr had been among the early recruits at Westboro, Massachusetts–based Data General Corp., one of the first minicomputer firms founded in the late 1960s; in the early 1970s he went on to develop the first electronic automated credit card authorization system for MasterCard.
In 1995, Smith and Baehr, who had become friends after meeting at an investment management conference in San Diego a few years earlier, teamed up to build a software platform that could run statistical analyses of hedge fund returns and help with portfolio construction. The result was PerTrac.
“Whether you’re a fund of funds, a private bank in Switzerland advising clients, a family office or an insurance company allocating part of a portfolio to hedge funds, if your job is to allocate a pool of assets, the steps you go through are the same,” says Smith. By 1996 he and Baehr had created Strategic Financial Solutions, a company based in Memphis, Tennessee, and Reno, Nevada, to market PerTrac to hedge fund investors.
A decade later the hedge fund industry has tripled in size. There are now more than 8,800 funds, representing about $1.2 trillion in assets, according to Hedge Fund Research in Chicago. Few technology firms have benefited from that growth more than SFS. About 1,500 funds of hedge funds and other clients in 45 countries use PerTrac. The program aggregates monthly performance numbers on individual funds from a dozen external hedge fund databases. It standardizes and stores that information, enabling managers to run a suite of statistical measures and analytics on individual funds and to compare the funds’ performance with those of their peers and of industry indexes. PerTrac’s one- and two-page reports that lay out a hedge fund’s historical performance statistics in an easy-to-read format have become the industry standard.
“PerTrac is the workhorse of data collation and standardization in the hedge fund industry,” says Barclay Leib, a senior portfolio manager at Weston Capital Management, a Westport, Connecticut–based fund-of-funds firm that oversees $1.8 billion in hedge fund allocations. “I can scan a report and quickly decide whether I have any interest in pursuing a given manager.”
As the fund-of-funds industry has grown, so have its needs. The manager research and selection process is more intense and due diligence more cumbersome. Fund accounting and investor relations have become more rigorous. Risk management is critical. Larger funds of funds often have developers who build some of these systems in-house or assimilate external systems from technology vendors. But for many firms the systems do not interface with one another, creating inefficiencies.
“It’s about moving into an automated world,” says Denise Valentine, a New York–based senior analyst at Boston research and consulting firm Celent. “Funds of funds want tools that allow them to aggregate information from hedge fund databases, with front ends that enable them to be more proactive in finding managers and conducting their due diligence and back ends that offer better connectivity to other systems that will allow for error reduction, greater speed in reporting to clients and confirmation that the manager is on track.”
The PerTrac platform already offers some features to meet funds of funds’ increasingly complex needs, including style and sector analysis, portfolio optimization and stress testing. Yet for all PerTrac’s success, some fund managers complain that the software’s analytics come up short. Weston’s Leib, for one, says that his firm does not use PerTrac’s portfolio optimization tools.
“We use PerTrac to aggregate manager data from the different databases but have built our own advanced analytical tools,” he explains. “These tools attach to the PerTrac database but are far more sophisticated than anything within PerTrac itself.”
Andrew Kinsey-Quick, a senior analyst at Eden Rock Capital Management, a London-based fund-of-funds firm with about $1 billion in allocated assets, registers a similar experience. “PerTrac is a convenient way of getting basic comprehensive analysis and information out of a database,” he says. His firm runs single-manager evaluations and peer group reports through PerTrac but uses a separate statistical and quantitative analysis package for data regressions and other factor-based portfolio modeling.
PerTrac’s successes — and its shortfalls — have not gone unnoticed. Chicago-based Backstop Solutions Group is trying to challenge PerTrac’s dominance in asset allocation and investment analysis software by offering a broader suite of integrated technology systems for funds of funds. Several European technology companies, including Geneva-based FinLab and Tao Analytics in London, have introduced advanced asset allocation and investment analysis software. Riskdata, headquartered in Paris, now provides risk-based portfolio construction and advanced risk analytics to funds of funds.
SFS is preparing for battle. In July 2005 the company sold a majority stake to New York–based private equity firm Insight Venture Partners for $63 million. Two months later SFS brought in Gerald Mintz as CEO to succeed co-founders Smith and Baehr (Smith remains an active board member and Baehr has retained an advisory role at the company). Mintz, who has a Ph.D. in electrical engineering from the University of Toronto, works out of SFS’s New York office. He spent part of his first several months on the job visiting with customers to find out how they use PerTrac and what they want from it.
“Clients rely on PerTrac to do their manager analysis and reporting, and it is deeply entrenched in their organizations,” says Mintz, who was a president of a division at Gartner, a Stamford, Connecticut–based technology research and analysis firm, before joining SFS. “But out of those conversations came a broader vision for the company — that we should help them do more than just performance analysis and reporting.”
So PerTrac is adding enhanced analytics and new kinds of analyses. “We will also make some of the features more self-evident and make it easier for clients to interface PerTrac with other systems in their organizations,” says Mintz. The latter, he adds, is particularly important for big clients as they grow their businesses and take on more assets. SFS has issued one new major release of PerTrac this year, with a second due out in the third quarter and a third planned for later in the year. The recent update includes new factor analysis and impact analysis features and the ability to track daily and weekly performance of hedge fund managers.
The firm aiming squarely at PerTrac’s traditional customer base is Switzerland’s FinLab, whose fund research and analysis product is called PackHedge. “Some users are happy with PerTrac,” says FinLab CEO Denis de Pentheny O’Kelly. “But when you get into a zone of sophistication and professionalism, PerTrac becomes a frustrating tool to work with.” An electronics and computer engineer by training who has worked in the financial technology and telecommunications areas, O’Kelly served as chief operating officer of Telecel International, the biggest mobile phone operator in sub-Saharan Africa, in the late 1990s. He joined FinLab in 2002.
O’Kelly’s goal is to pry away PerTrac customers by offering a full suite of hedge fund research and analysis tools, as well as other technology services. Like PerTrac, PackHedge aggregates data feeds from multiple hedge fund database providers. One of PackHedge’s noteworthy features is that it avoids creating duplicate records by allowing users to rank each data source and then apply that ranking to the queries, analyses and reports they run. This improves the filtering process and the accuracy of reports, say managers at funds of funds who have used the system.
“We have a total integration of qualitative and quantitative information — from statistical analysis and charting to meeting notes, documents, subscription schemes, and names and addresses — everything to do with a fund and the decision-making process of investing in a fund,” O’Kelly says. The firm also has a fund-of-funds shadow accounting module that allows users to build a balance sheet, and capture investor subscriptions and redemptions. O’Kelly declines to divulge how many clients FinLab has but says the company’s customer and revenue base more than doubled in 2005. Most of the clients are fund-of-funds groups in private banks or investment houses.
Another firm encroaching on PerTrac’s traditional stomping grounds is Chicago’s Backstop Solutions. The three-year-old software company intended from the get-go to provide a single platform that could address a fund of funds’ varied technology needs. “The software was created to enable funds of funds to manage their research needs, manage their portfolios, handle portfolio-fund-level accounting and partnership accounting and run the whole contact-relationship management side of the business,” says Backstop CEO Jeremie Bacon, who worked previously in institutional equity sales at Goldman, Sachs & Co. “When you have just one piece of the overall puzzle, you inhibit your own ability to service clients.”
Backstop acts as a central repository for all of a fund’s information, which can then be pushed or pulled into other applications, including PerTrac. The firm currently has 40 clients, two thirds of which are funds of funds or family offices. “In the next six to 12 months, we may be PerTrac’s main competitor, instead of FinLab, because PerTrac is moving into our space,” says Bacon.
Although performance analysis and reporting remain central to PerTrac, Mintz says SFS is intent upon expanding the product into other areas. In January the firm acquired London-based Whittaker Garnier, which provides customer-relationship management software used by investment management firms to handle investor communications and reporting. Whittaker Garnier’s software is being integrated with the PerTrac platform, and customers of both packages can already access manager performance reports through their contact database and automatically send end-of-month reports to investors. Mintz says SFS is eyeing other acquisitions and partnerships that can help it meet clients’ growing needs.
Will anyone be able to dethrone PerTrac? Not easily. PerTrac’s vast installed user base and SFS’s increasing focus on satisfying customers’ needs make for a tough adversary. If Mintz has his way, SFS will reinvigorate PerTrac’s reign. But regardless of which firm prevails, the ultimate winners are likely to be fund-of-funds managers, who will get better products and more choices for running their investments and businesses.