The following document is an approximate, but not exact, transcript of the Operational Leaders podcast conversation between host Terrance J. O’Malley and guest Paul Calderone.

Please support the production of this podcast by downloading the Paul Calderone episode.

Narrator 0:05
Welcome to the Operational Leaders podcast featuring leaders and innovators in the investment management industry, where we discuss the business of running the business with host and top industry executive Terrance J. O’Malley.

Terrance O’Malley 0:21
My next guest has over 30 years of experience in the alternative management space. He has focused his career on operations and alternative asset management, working both for prime brokerage firms and technology firms. For the past eight years, he has served as the chief operating officer of Hazeltree. Please welcome Paul Calderone.

Paul Calderone 0:43
Thanks, Tery. Great to be here with you today.

Terrance O’Malley 0:46
Paul, thanks for joining us. Can you introduce us to Hazeltree? How did the firm gets started and what are some of the core offerings?

Paul Calderone 0:52
Sure. So Hazeltree got started about nine years ago. It really came out of the last crisis after 2008-2009, from a hedge fund that invested pretty heavily into multi-prime technology. It was one of the more complex, larger equity long, short hedge funds at that time. And having invested into that technology, it lifted it out to really create the beginnings of Hazeltree. So it was that core data warehouse solution with many of these treasury-focused solutions, middle office solutions as well. Early on, we tried a few different things around front office order management or even regulatory-type solutions. But very early on, we did decide to focus it in on the Treasury, middle office, part of the world which we figured was underserved.

Paul Calderone 1:45
So again, that’s the core premise of Hazeltree is really around managing complexity. And we kind of go on this “aggregate, optimize, execute” concept. So number one, it’s aggregating data from disparate sources. That’s a really core part of the offering – is aggregating and normalizing data from really a multitude of sources. Two is optimization and analytics. So now you’ve got a clean view of your cash, let’s say, but what do you want to do about it? So applying rules, applying optimization rules around that, and generating suggested actions that are actionable. So that’s the second step. The third step is, is execute. Push a button, make a wire payment, make a security transfer, act on the optimal actions that have been recommended. So we thought that was important. Some of the other solutions were much more focused on analytics. So we kind of thought of it as this front to back solution as being very important that we feel is still a differentiator today.

Terrance O’Malley 2:48
So Paul, you’ve had a pretty illustrious career. You’ve been in a number of key positions during your career. How did you end up getting into this part of the business? How’d you end up at Hazeltree?

Paul Calderone 2:58
Yeah, well, thanks. It was an interesting one. I think I had been at Morgan Stanley for many years and worked up the ranks of operations and was in sort of an early part of the development of the prime brokerage business at Morgan Stanley. So I got to see firsthand how the hedge fund industry evolved, how the prime brokerage industry evolved. From there I ended up in sort of a product development role at Morgan Stanley. I left in 2007, right before the crisis hit, and joined Credit Suisse in more of a business development role that was more of a client facing role for institutional business development. The crisis hit. We quickly almost overnight became one of the tops tier primes at Credit Suisse. We were lucky enough to be in a good position where we were able to capture a good amount of market share that was adrift post the crisis. So through the end of 2011, I left Credit Suisse and really decided I want to do something different. And through my network, just kind of lucked into Hazeltree. It had just been started about a year before that. And it seemed like a really good fit for my skill set.

Paul Calderone 4:04
So we started out with – like a typical startup – we had two or three clients, and we made a go of it from there. So it’s been a lot of fun. It’s been quite the roller coaster ride, but really has been a lot of fun building the business to where it is today. We’re about 200 clients today, about 150 employees. So it’s a global business that we’re pretty proud of and has a lot of growth in front of it as well.

Terrance O’Malley 4:31
So you’ve seen a lot of changes, what do you think are some of the more significant ones from your perspective, thinking about this as an operations and treasury management issue?

Paul Calderone 4:40
Yeah, so some of the things are the same in terms of what you would have thought would have been something that a lot of these clients had solved for already. It’s always somewhat surprising that they’re just doing stuff on spreadsheets. So I think seeing that as a really strong trend over the years now with the general outsourcing of these types of functions. So even post crisis, you had some of the larger hedge funds still maintaining technology operations investing into IT and technology in house. And that is kind of a sea change over the years where they’ve outsourced more and more of these functions, especially in the middle office to providers like us, in some cases, with heavy collateral management. Let’s say it’s been outsourced to services providers like middle office services that were the administrator. But that’s one very clear trend, the outsourcing of these functions.

Paul Calderone 5:37
I think the other one is clearly cloud based. So years ago, on servers, even if they had outsourced technology, they would have still maintained it on servers in-house. That’s a big change there, of course, with the advent of cloud computing. So almost everything we do these days is cloud based. It’s just so much more efficient and less costly than the old way. We certainly do still deal with some very large organizations that are still married to the idea of maintaining the technology on their own infrastructure. But overwhelmingly, things are moving to the cloud. And, you know, other than that, I think just more recently, we’re seeing kind of this shift toward alternatives, toward private markets, where hedge funds have had some mixed bag of performance over the last few years. A lot of the allocations to alternatives are clearly going toward private markets, private equity, private debt, as part of their core alternative allocation. So we are geared to serve that market as well. It’s a very good fit for us in terms of the products that we offer.

Terrance O’Malley 6:46
Paul, let me ask you, what are some of the impediments or some of the challenges for some of the legacy firms to take advantage of these new offerings, the cloud, these products that are out there?

Paul Calderone 6:57
Well, I think that’s cultural as much anything. So some of the larger firms that have been entrenched, and we certainly work with some of those today that have got these legacy technology platforms that they built over many years. And it’s kind of a multi-year, if you will, sunsetting process of moving to an outsourced solution. So it’s working with the entrenched kind of cultural attitude, if you will. You could imagine, as a technology provider, you see this a lot where someone’s set in their ways, and whether that’s with technology they built or with their spreadsheet routines that they run with their teams in-house every day, It’s kind of a shift in culture as much as anything. So that really hasn’t changed. You know, we still see, if you ask me who our number one competitor is, I would say it’s spreadsheets. So that still remains the same. So I view it as kind of a cultural shift as much as anything.

Terrance O’Malley 7:58
So we talked a little bit early about your core products. Can you go into a little bit more detail? Is it focused almost exclusively on management of the portfolio? Cash management? Portfolio financing? And what are some of the problems you’re trying to solve, and what are some of the solutions?

Paul Calderone 8:18
So the first core product for us is really around cash management. Again, the genesis of that is a hedge fund manager going to the CFO and saying, “Hey, I got to do a deal today. How much cash do I have to work with?” And you know, taking 24 hours to get an answer. So that remains a challenge, right? That the more complexity that’s come into the system – multi-prime, multi-bank, multi-counterparty – the harder it is to really dial that in and zero in on what’s my true usable, free cash today right now. So that was what we were trying to solve for. So number one is aggregation. As I said, aggregating data across a multitude of sources, normalizing it, and getting a single dashboard view of “Okay, here’s all my cash at all my counterparties.” And then applying rules to that: accounting for projections, accounting for the complexities of margin excess deficit, accounting for the complexities of short sale proceeds, all that stuff. There’s quite a bit to it and refining rules around, “okay, well, this is what your true, lets say, cash excesses or buying power or, you know, whatever the term that people use,” there’s quite a bit that goes into that. So that’s number one is cash management. Like I said, a nice segue for us into the private world because private market participants are really very involved in cash projections much more, in a much different way, than a hedge fund would be, let’s say, with just settlement date ladders. So number one is certainly cash management.

Paul Calderone 9:50
Number two, I would say portfolio finance, transparency around borrow rates from the short book. There were some services that were already out there that were being done in more of a service way than a technology product way. But we were certainly in that world as well. With our acquisition of ENSO recently, we’ve really beefed up that part of the product. We’ve got a market leading securities finance portfolio/finance product for hedge funds. And again, that’s about aggregating data and analyzing and really recommending actions to save money on your borrow costs at a high level.

Paul Calderone 10:27
Third would probably be the collateral management. That’s something we’ve invested into early on – that is collateralized derivatives, any OTC collateral listed, cleared derivatives, you can manage versus your counterparty. So again, that was capital usage. Very often you find that you’re over pledged to your counterparties in the derivatives world. So it’s an ability to free up that collateral and bring it back, as well as dispute calls that you may be receiving from your counterparties.

Paul Calderone 10:59
And then the fourth leg is margin, which is more prime broker rules-based margin. So the commingled margin account that you have at your prime broker account – we’re delivering transparency through that. So again, it’s a capital usage tool. And then finally, really the core product is counterparty management. We think of it as wallet spend/counterparty exposure, looking at the health of counterparties that you deal with across financing, trading, and any of your external counterparts that you have those types of relationships with. We have analytic tools around that. I guess final pieces is the execution engine that I mentioned before, which is when you’re looking at these things and making decisions about it, you push a button, you make a wire. We’ve invested heavily into that part of the system to enable wires, security transfers, money markets, FX trades, things like that. So there’s a very rich layer there as well.

Terrance O’Malley 12:00
Paul, what do you think some of the biggest mistakes are that people make in terms of their middle office, in terms of managing their financing, their portfolio?

Paul Calderone 12:09
You know, I think what I’ve seen is some clients come at it from more of an accounting orientation, rather than a true finance orientation. So we think there’s true alpha here. We think there’s money to be saved, there’s money to be made in the middle office. So we’ve done quite a bit of work on doing some case studies around this. We published some white papers. So from the simple, you know, collapse your unintended up and down, debit/credit cash, to the more involved, “where should I move this short, to save money on the borrow fee,” to as I said, releasing and freeing up capital, for the fund to invest. So, you know, we think that tends to be overlooked in the sense that the function, forget about what products you’re using, but the function can drive alpha. We’ve used different terms “operational alpha,” “treasury P&L,” we’ve sometimes use that term. But yeah, there’s real money here. It’s a fine line between balancing – what you find, which is some so-called treasurers at hedge funds would be much more focused on just protecting assets and protecting capital, and being ready for contingencies. And that’s, of course, very important. So as I said that counterparty management’s function and having contingencies in place when something happens with one of your counterparties in crisis pop up. But it’s others – and we had some very healthy debates at some of the events we’ve hosted – about should I focus on generating P&L? Or should I really just focus on protecting the assets? So there’s a pretty good healthy debate But without question, there are dollars to be saved and dollars to be earned by focusing on the function.

Terrance O’Malley 13:55
Paul, you have a lot of clients on your platform, you see a lot what’s going across the market. Where has your firm been able to bring some transparency that has helped your clients obtain alpha?

Paul Calderone 14:07
Yeah, I think transparency is the theme. It really holds across all those modular pieces of the product I mentioned. So cash, transparency around that. It’s not easy, right? It’s not easy to understand quickly, what is your free, unencumbered cash that you have to use on hand? Securities finance, it’s very, sometimes very difficult to understand what’s the true color in the market on this security or group of securities or portfolio of short securities or repos, let’s say. So that is clearly a big one – transparency across borrow cost and being able to compare to benchmarks as well as other providers. The more providers you have, the more data points you have to compare against.

Paul Calderone 14:54
Collateral, again, understanding what I think the call should be based on my own valuation in my own negotiated terms of ISDAs and CSA. And comparing that to statements that are coming in from counterparties. This stuff has got much more standardized over the years. So we’re set up to immediately consume those collateral statements when they come in from counterparties and give you a comparative analysis. That’s very hard to do without the automation and the technology products. So transparency of what I think the cost should be and whether or not I should dispute with my counterparty. And the same thing with margin. What’s my PB charging me for this portfolio? What are the add-ons? Why did I see a spike in my margin requirement? Because of a concentration add on today? What was behind that? So drill-down capability there, and transparency into the underlying [cause].

Paul Calderone 15:50
And finally, as I said, counterparty health and counterparty management, what’s my wallet spend? This concept of net and gross wallet. What have I paid them gross, what do I think they’ve approximately made off for me net, is an important one that we’ve been out with for several years. And as I said, the just the exposure itself. So if that counterparty goes under, how much of my assets are at risk, or exposed at any given time? So, all these metrics, transparency, really strong theme across all of these.

Terrance O’Malley 16:25
Paul, is there a point in the evolution of an investment management firm, where your products, your services make more sense than maybe for a startup manager that’s got one prime broker and a counterparty or two?

Paul Calderone 16:38
You know, again, just a little bit of the evolution. Hazeltree was much more focused on the larger, more complex hedge funds with having a more workflow solution. ENSO had been focused a little more on the core long, short equity players with analytics and had come out with some offerings that were more geared toward emerging managers. With the combination of the two companies now, with the acquisition, we kind of cover a good spectrum. And likewise, we do have distribution partners with administrators as well, like HedgeServ. So smaller, much smaller hedge funds can get access to the products through our distribution partners now, increasingly. So yes, even startup, even if they’ve got a couple of prime brokers, can use it and can make good use of it. So, you know, if it’s a pure startup, one prime broker, you probably don’t need it yet. But we feel like as soon as you start to introduce some of this complexity, as I say, you can make good use of the products.

Terrance O’Malley 17:36
So Paul, we’d be remiss if we didn’t talk, at least a little bit, about the impact of the Coronavirus and what that is having on the business and your firm. And have there been a few lessons learned from that so far?

Paul Calderone 17:50
Yes, sure. We put out a white paper a couple of weeks ago. So three things. The impact toward cash and liquidity. Again, this time around, during a crisis, a de-leveraging, a buildup of cash, a flight to quality, a flight to safety through mechanisms where it’s easy to push a button and sweep excess cash out to money market funds. That’s a very strong theme that we’ve been seeing. So you know, we’re in the middle of all that. We’ve seen a lot of flows to money funds, and we’re an enabler of that. So that’s a good one for us to be in the middle of.

Paul Calderone 18:24
The second one is really around collateral calls. So again, like the last crisis, strong spike in collateral call volume, some of the middle office teams got overwhelmed with their managing of calls with counterparties – with all the volatility in the markets and the valuations going haywire. So we’ve actually seen an increase to our sales pipeline because of that, because people sort of threw up their hands and said, “Oh, yeah, we need a solution now, once the for all.” And then finally would be managing of counterparties. As often as you can, you want to be watching the health of those counterparties. Luckily, this time around, we haven’t seen banks be in crisis. But last time, it was very much a crisis around banks. So that idea of being able to understand how much exposure you have to a given counterparty and then do something about it, potentially move your business away if you have to, is an important part. So counterparty management and monitoring of their health and the relative exposure you have to those counterparties. Yes, so we’ve covered those in the white paper and continuing to watch this space.

Terrance O’Malley 19:30
Paul, a couple of quick thoughts about the future. I mean, we talked a little bit about how Coronavirus is impacting firms in the market. Beyond that, are there some broader trends that you’re seeing in terms of automation? Are there areas that you would want to share with us?

Paul Calderone 19:44
Yes. A few quick things, especially that are being highlighted now. Again, cloud, absolutely. The security, the cyber security that just keeps getting beefed up and more and more people are accepting of it. Mobile. So in our execution management layer, “You know, okay, I’ve done a wire and I need three people to approve it, let’s say.” We do see that quite often. You want to be able to do that on mobile devices. And so we have recently come out with a mobile enabled app that’s out there now, publicly available for that part of the system. We will continue to do more of that over time – mobile device enabled solutions. And then yes, the other trend is really around, in alternatives for us, is toward private markets. Private equity really keep reading about the flood of cash there. There’s supposedly a trillion and a half of uninvested committed capital in private markets. So that is something we’re positioned for. We continue to see a focus obviously.

Terrance O’Malley 20:47
Thanks, Paul. very insightful, really appreciate you joining us today. If people want to know more about Hazeltree, where can they find that information?

Paul Calderone 20:56
So That’s our website, you’ll see an all new version of that. So, yes, for any questions. And thanks again so much for the time today.

Terrance O’Malley 21:06
Great. Thank you again for being here today.