Trade matching in the traditional and alternative markets

Pressures from investors and regulators are accelerating the pace of convergence in traditional and alternative asset management organisations and improving standards of practice. At present, in the traditional investment management arena, managers’ and brokers’ records are generally compared on a trade-by-trade basis and custodians are authorised by the managers to settle matched transactions. In the hedge fund world, prime brokers, often serving as both trading counterparty and custodian, either settle trades without any affirmation or issue the affirmation on behalf of the manager. After tracing the historical development of these two de facto industry standards, the author comments on the role of the administrator, illustrates how the absence of trade matching increases hedge fund managers’ costs, explores why the hedge fund industry has accepted an error-prone process, and outlines a resolution.