Last night at dinner, an investment-banker friend commented that he did not understand how the Madoff scam could be carried on so hugely and for so long, given the amount of reporting that would have had to be done — or falsified — over the years. After all, $50 billion ain’t chump change.
I looked around and found that in an article for the British Bankers’ Association’s current November/December 2008 newsletter, Kevin Connelly, an officer of Dublin- and Dallas-based Trintech Inc (Nasdaq:TTPA), says that a large percentage of approximately 10,000 active hedge funds in the US (he says it is a $2 trillion industry, but that valuation was most likely calculated before the recent changes in market valuations) use manual spreadsheets to track, manage and reconcile complex financial transactions. http://www.bba.org.uk/bba/jsp/Login.jsp?returnPath=%2Fbba%2Froad%2FClassic%2Fdepartment%2F503%2Fjsp%2FRender.jsp%3Fd%3D164%26a%3D15050. Unfortunately BBA (the newsletter) requires a log-in to read the entire article.
Connelly says that the “traditional” approach to the task uses basic reconciliation tools that are built into trading or transaction systems, downloading data into spreadsheets, and matching data to general ledge or bank statements. A tool-based approach focuses on sophisticated solutions to automate the majority of the transaction reconciliation. He knows about these things because his company, Trintech* (http://www.trintech.com) , is a leading supplier of such tools in the US and around the world.
By automating the reconciliation of accounts, a fund can protect the trade validation process in the front office. It can provide position management, post-trade compliance, settlement and trade matching; and it can provide enhanced reporting for decision-making.
That may sound like double-talk to you (it fogs my glasses a bit as well), but what it means is that the principal means of reporting and verifying hedge-fund transactions and results are not yet automated, which means they are, at least to some extent, put together by people with green eyeshades. Of course if such reports are fully automated, the back office guys cannot rejigger them to make them look better.
If you are interested to find out more about automating the reconciliation process — or if you want to find out if YOUR hedgie is still using manual spreadsheets with their potential for, um, error — have a look at Trintech’s Unity Financial Governance Solutions (http://www.trintech.com/solutions/trintech-unity/).
If you can log in to the BBA newsletter, I encourage you to do so. Otherwise I think Trintech will send you a copy of the article if you ask them for it. http://www.trintech.com/contact/