Top 3 Technology Trends
3 Technology Trends for Hedge Funds in 2009
Below is a short guest post by Peter Curley of Nirvana Solutions:The turmoil that hedge funds have experienced in the last few months will ultimately have a significant impact on the technology and the infrastructure supporting this industry. The trends we will witness in 2009 will primarily be the result of the following drivers:
- Increased cost consciousness - This will be true for both new and more established funds.
- The new requirements of the next generation of hedge funds - These funds will be smaller, more opportunistic, and less likely to focus on any one strategy or asset class.
- Market volitility - All indications are that 2009 will continue to be as volitile as the latter half of 2008.
Three technology trends for 2009:
1 – Outsourcing – Historically hedge funds have resisted efforts to outsource. Funds preferred to build out their own middle- and back-office functions citing concerns around flexibility and privacy. Now, for many funds, the need to aggressively cut costs will trump these concerns and force outsourcing. Interestingly, taking a step back we can see that there has always existed incredible duplication of effort across the hedge fund eco-system. In many cases hedge funds, prime brokers, and fund admins, all conduct the same processes using the same legacy "T+1" portfolio management systems. The industry can no longer support this duplication. All hedge funds, except the very largest, will begin to look to third-parties to offload this operational burden.
2 – Restructuring of the industry's service providers. The biggest news here will be rise of the mini-primes. The leading primes can no longer be profitable in this new world of multi-custodial relationships. With the demise of the captive single prime model we are now seeing the top-tier primes retreat up-market to focus their efforts on servicing funds with greater than $1 billion under management. This leaves the lower-cost-structure mini-primes ideally positioned to fill the void. The new mini-prime offering is still evolving but will likely offer a complete multi-prime brokerage service platform that in some cases will also include hedge fund administration. These all-in-one multi-prime service platforms will be especially critical to the regeneration of our industry because they will act as the entry point for 100's of the new spin-off funds that are expected to form in 2009.
3 – Real-Time systems – In this new world of opportunistic alpha, hedge fund managers can no longer afford to rely on systems that offer "T+1" reporting. As noted earlier, legacy technology that can only offer this type of end-of-day and end-of-month reporting will become less relevant and ultimately be outsourced to third-parties. Hedge fund's instead will focus their resources on real-time systems that can aggregate risk and return across multiple prime relationships and multiple asset classes. Increasingly we will see the desktop of a hedge fund trader/portfolio manager feature only 2 types of real-time FIX based systems: 1/ Those connected to implementing the investment decision (i.e. execution management systems), and 2/ systems, that once an investment decision has been implemented, can offer a real-time understanding of risk and return (i.e. real-time portfolio management systems and risk management systems).
Article contributed by Peter Curley of Nirvana Solutions. Founded in 2006, Nirvana Solutions is a San Francisco based software company that provides real-time portfolio management solutions to multi-prime hedge funds and prime brokers.
