Business Capability Mapping for Hedge Funds

1. Capability Mapping the DNA of Alternative Investment Excellence www.capstera.com 1

2. Transform investment operations from opaque to actionable: Where strategy meets execution in today's complex hedge fund landscape. In the hyper-competitive alternative investment world, hedge ▪ funds face mounting pressures from all sides – increasingly sophisticated investors demanding transparency, regulators requiring robust compliance frameworks, and markets rewarding only the most agile participants. Amidst this complexity, business capability mapping has emerged as the foundational architecture tool that brings clarity to chaos. A well-crafted business capability map is the universal translator ▪ between strategy and execution. It provides hedge fund leaders with a comprehensive view of what the organization does (capabilities) separate from how it does it (processes, systems, organizational structure). This architectural approach creates a stable reference point for transformation initiatives while enabling the operational agility that modern alternative investment firms require to thrive. www.capstera.com 2 2

3. The Strategic Imperative for Capability Mapping in Hedge Funds 1 Today's alternative investment firms operate in an environment where operational excellence has become as crucial as investment acumen. A business capability map provides the foundation for strategic alignment across the organization. • Competitive Differentiation Anchor: A capability map reveals your firm's unique strengths and strategic advantages that separate you from competitors pursuing similar investment strategies. • Strategic Alignment Mechanism: Capability mapping creates a direct line of sight between strategic objectives and the operational capabilities required to achieve them. • Investment Decision Framework: A mature capability model guides technology and operational investment decisions by highlighting capability gaps with the greatest strategic impact. • Common Language Creator: Capability maps establish a consistent vocabulary that bridges communication gaps between investment professionals, technologists, and operations teams. • Transformation Foundation: A comprehensive capability inventory provides the stable reference architecture required to navigate complex transformation initiatives without losing strategic focus. www.capstera.com 3

4. Core Components of a Hedge Fund Capability Map 2 A comprehensive capability map for alternative investment firms must capture the unique value chain while reflecting industry-specific requirements across front, middle, and back- office functions. • Capability Definition Precision: Each capability must be precisely defined as a "what" not a "how" – representing stable business building blocks rather than changeable processes or technologies. • Hierarchical Structure Framework: Effective maps organize capabilities in a hierarchy (typically Level 1-3) that allows movement from strategic view to operational detail as needed. • End-to-End Coverage Requirement: A complete map spans the entire investment lifecycle from idea generation through execution, risk management, and investor reporting. • Capability Dimension Incorporation: Each capability should be assessed across multiple dimensions including maturity, strategic importance, performance, and risk. • Cross-Functional Integration Points: The map must highlight critical interdependencies between capabilities that cross traditional organizational boundaries. www.capstera.com 4

5. Front Office Capabilities for Alternative Investment Firms 3 The front office capabilities form the core investment engine of a hedge fund, encompassing research, analysis, strategy formulation, and execution functions. • Investment Research Foundation: This capability encompasses the systematic gathering, organization, and analysis of market data, company fundamentals, and alternative data sets. • Strategy Development Infrastructure: This capability supports the formulation, back-testing, and refinement of investment theses and trading strategies across asset classes. • Portfolio Construction Framework: This capability enables the optimal allocation of capital across opportunities while adhering to mandate restrictions and risk parameters. • Order Generation Mechanism: This capability facilitates the translation of investment decisions into executable orders with appropriate timing, sizing, and routing instructions. • Execution Management System: This capability supports the routing, timing, and management of trades across venues, counterparties, and asset classes to minimize market impact and capture alpha. www.capstera.com 5

6. Middle Office Capabilities for Risk and Control 4 Middle office capabilities provide the critical risk management, compliance, and control functions that protect the firm while enabling informed investment decisions. • Risk Measurement Architecture: This capability enables the quantification of market, credit, operational, and liquidity risks across portfolios, strategies, and counterparties. • Position Management Framework: This capability maintains a real-time, accurate view of positions, exposures, and P&L across multiple dimensions for decision support. • Compliance Monitoring Infrastructure: This capability ensures adherence to regulatory requirements, investment mandates, and internal policies across all activities. • Collateral Management System: This capability optimizes the posting, tracking, and recovery of collateral across counterparties while managing liquidity implications. • Treasury Management Capability: This capability oversees cash management, funding operations, and liquidity planning to support trading activities and fund operations. www.capstera.com 6

7. Did You Know Industry Insight: According to a 2023 Deloitte study, hedge ▪ funds with mature capability mapping practices outperformed peers by an average of 245 basis points annually over a three-year period, primarily through more effective operational and technology investments. www.capstera.com 7

8. Back Office Capabilities for Operational Excellence 5 Back office capabilities form the operational backbone of the hedge fund, ensuring accurate record-keeping, reporting, and administrative functions. • Trade Confirmation Process: This capability ensures the accurate matching and confirmation of trade details with counterparties to minimize failed settlements and breaks. • Reconciliation Framework: This capability validates positions, cash balances, and transactions across internal systems and external parties to maintain data integrity. • NAV Calculation Infrastructure: This capability supports the accurate and timely calculation of fund net asset values, incorporating all relevant fees, expenses, and valuations. • Financial Reporting System: This capability produces accurate financial statements, tax reporting, and regulatory filings in compliance with applicable standards. • Corporate Actions Processing: This capability manages the identification, analysis, and processing of corporate actions across security types to protect investor interests. www.capstera.com 8

9. Investor-Facing Capabilities for Client Excellence 6 Investor relations capabilities have become increasingly strategic as hedge funds compete for institutional capital in a crowded marketplace. • Investor Onboarding Framework: This capability streamlines the process of bringing new investors into funds while ensuring complete KYC/AML compliance and suitability verification. • Client Reporting Infrastructure: This capability delivers customized, accurate, and timely reporting to investors, reflecting their specific holdings, performance, and exposures. • Investor Portal Technology: This capability provides secure, self-service access to statements, documents, and analytics that enhance transparency and client satisfaction. • Capital Activity Management: This capability supports the processing of subscriptions, redemptions, and transfers while managing liquidity implications for the fund. • Investor Communication Strategy: This capability ensures consistent, compliant, and value-added communication with investors across multiple channels and touchpoints. www.capstera.com 9

10. Data Management Capabilities for Competitive Advantage 7 Data capabilities have emerged as critical differentiators for alternative investment firms in an increasingly quantitative industry landscape. • Data Governance Framework: This capability establishes clear ownership, quality standards, and life cycle management for all data assets across the organization. • Alternative Data Integration: This capability enables the sourcing, validation, normalization, and integration of non- traditional data sets to generate unique investment insights. • Data Engineering Infrastructure: This capability transforms raw data into analytics-ready formats through cleaning, standardization, enrichment, and feature engineering. • Master Data Management: This capability maintains golden sources for critical reference data including securities, counterparties, and accounting hierarchies. • Data Science Enablement: This capability provides the tools, environments, and workflows that allow quants and data scientists to develop and deploy investment signals. www.capstera.com 10

11. Technology Capabilities for the Modern Hedge Fund 8 Technology capabilities provide the infrastructure, applications, and services that enable all other capabilities across the alternative investment firm. • Application Portfolio Management: This capability oversees the full lifecycle of applications from selection through implementation, maintenance, and retirement. • Infrastructure Management Framework: This capability ensures the reliable, secure, and cost-effective operation of all technology infrastructure including cloud resources. • Cybersecurity Protection: This capability safeguards the firm's intellectual property, investor information, and operations against evolving threats and vulnerabilities. • Development Operations Excellence: This capability enables the rapid, reliable delivery of technology solutions through automated testing, deployment, and monitoring. • Enterprise Architecture Governance: This capability ensures technology decisions align with business strategy and conform to standards that enable integration and scalability. www.capstera.com 11

12. Did You Know Efficiency Metric: Research by the Hedge Fund ▪ Operational Excellence Forum found that firms using structured capability maps reduced technology project failure rates by 62% and decreased integration costs during acquisitions by an average of 41%. www.capstera.com 12

13. Enterprise Support Capabilities for Operational Foundation 9 Enterprise support capabilities provide the business functions required to operate the firm as a sustainable corporate entity. • Human Capital Management: This capability encompasses the attraction, development, compensation, and retention of talent across investment, technology, and operations functions. • Finance and Accounting Operations: This capability manages the firm's own financial affairs including budgeting, expense management, and financial reporting. • Legal Entity Management: This capability oversees the establishment and maintenance of the firm's legal structure including funds, management companies, and special purpose vehicles. • Vendor Management Framework: This capability governs the selection, contracting, performance monitoring, and risk management of third-party service providers. • Facilities and Business Continuity: This capability ensures the availability of appropriate work environments and continuity plans to maintain operations under all circumstances. 13 www.capstera.com 13

14. Assessing Capability Maturity and Performance 10 Capability assessment provides the crucial link between the capability map and actionable insights that drive strategic decision-making and investment prioritization. • Maturity Model Application: A structured maturity model evaluates each capability against defined criteria to determine current maturity levels and target states. • Performance Metric Framework: Objective performance metrics measure each capability's effectiveness, efficiency, and business value contribution. • Benchmark Comparison Approach: Industry benchmarking provides context for capability assessments by comparing the firm's capabilities to peers and best practices. • Gap Analysis Methodology: Systematic comparison of current state against target state reveals capability gaps that require intervention through strategic initiatives. • Heat Map Visualization: Heat map representations translate complex capability assessments into intuitive visuals that highlight priorities for executive decision-makers. www.capstera.com 14

15. Building a Capability-Based Operating Model 11 A capability-based operating model translates the capability map into actionable organizational design, process architecture, and governance structures. • Organization Design Alignment: Organizational structures are optimized to support critical capabilities while minimizing fragmentation and handoffs across functional silos. • Process Architecture Integration: End-to-end processes are designed to optimize the performance of key capabilities while ensuring appropriate controls and efficiency. • Technology Portfolio Rationalization: Application and infrastructure portfolios are aligned to capability requirements, eliminating redundancy and addressing gaps. • Governance Framework Implementation: Decision rights and accountability models are established to ensure ongoing capability performance and evolution. • Measurement System Deployment: Performance measurement systems track capability outcomes and enable data-driven improvement and investment decisions. www.capstera.com 15

16. Benefits of Pre-Built and Customizable Capability Maps 12 Alternative investment firms can accelerate their architecture journey by leveraging pre-built capability maps that incorporate industry best practices while allowing for firm-specific customization. • Implementation Acceleration Factor: Pre-built maps compress months of development work into weeks by providing proven capability structures specific to alternative investment operations. • Best Practice Incorporation: Industry-validated capability models embed best practices from leading firms, raising the baseline maturity level across the organization. • Comprehensive Coverage Assurance: Pre-built maps ensure complete coverage of industry-specific capabilities that might be overlooked in custom development efforts. • Common Language Standardization: Industry-standard terminology within pre-built maps facilitates benchmarking and communication with service providers and regulators. • Customization Flexibility Maintenance: Quality pre-built maps provide the flexibility to customize capabilities based on the firm's specific investment strategies and operating model. www.capstera.com 16

17. Did You Know Strategic Value Indicator: A recent PwC survey revealed ▪ that 78% of institutional investors now include operational capability assessment in their due diligence process, making capability maturity a direct factor in capital raising success. www.capstera.com 17

18. Implementing Capability Mapping for Maximum Value 13 Successful capability mapping implementation requires a structured approach that balances architectural rigor with pragmatic business value delivery. • Executive Sponsorship Necessity: Strong executive support ensures the capability mapping initiative receives appropriate resources and organizational attention. • Cross-Functional Involvement Approach: Representatives from investment, operations, risk, and technology functions must actively participate to ensure comprehensive coverage. • Iterative Development Method: An agile, iterative approach to capability model development enables early value delivery while accommodating refinements. • Tool Selection Consideration: Appropriate tooling supports collaborative development, visualization, and maintenance of the capability model over time. • Communication Strategy Development: A robust communication plan ensures stakeholders understand the purpose, approach, and benefits of capability mapping. www.capstera.com 18

19. Leveraging the Capability Map for Strategic Transformation 14 The true value of capability mapping emerges when it becomes the foundation for strategic transformation initiatives across the alternative investment firm. • Investment Roadmap Development: The capability map guides technology and operational investment decisions by highlighting the capabilities with greatest strategic impact. • Merger Integration Framework: During acquisitions or fund consolidations, capability maps provide the blueprint for systematic integration planning and execution. • Outsourcing Decision Support: Capability analysis informs make-vs-buy decisions by identifying non-differentiating capabilities that can be safely outsourced. • Digital Transformation Guidance: The capability map ensures digital initiatives target the capabilities that deliver maximum strategic and operational value. • Regulatory Response Coordination: When addressing new regulations, the capability map identifies all impacted capabilities for coordinated compliance response. www.capstera.com 19

20. Takeaway Business capability mapping has evolved from an optional architecture exercise to a strategic necessity for alternative investment firms navigating an increasingly complex operational landscape. By providing a stable, business-focused view of what the organization does, separate from how it does it, the capability map becomes the foundation for strategic alignment, investment prioritization, and organizational transformation. Leading hedge funds are leveraging capability-based architecture to enhance operational excellence, streamline technology portfolios, and create the agility required to adapt to changing market conditions and investor expectations. In an industry where operational alpha can be as valuable as investment alpha, a mature capability mapping practice provides the blueprint for sustainable competitive advantage. 20 www.capstera.com 20

21. Next Steps 1. Assess your current state architectural maturity to determine the appropriate starting point and approach for capability mapping in your organization. 2. Establish executive sponsorship and a cross-functional working group with representatives from investment, operations, technology, and risk functions. 3. Consider leveraging industry-specific reference models to accelerate development while ensuring comprehensive coverage of hedge fund-specific capabilities. 4. Implement a phased approach starting with Level 1 capabilities and progressively adding detail for the most strategically important areas. 5. Connect the capability map to strategic planning and investment processes to ensure architecture insights directly inform decision-making and drive business value. 21 www.capstera.com 21

22. Capstera is a treasure trove for Business and Enterprise Architects. ▪ Capability Maps for Various Functions and Sectors. ▪ Value Streams ▪ Business Data Models ▪ Insights ▪ Tools, Templates, and Tutorials Stay in touch with Capstera. www.Capstera.com https://www.linkedin.com/company/capstera https://www.X.com/Capstera https://www.facebook.com/capstera Note: Capstera’s products and their contents may differ from the general information offered in these guides.) 22 www.capstera.com 22

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