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.
Peter is a founding managing partner at Nirvana Solutions. His areas of responsibility include managing all of Nirvana's marketing activities as well heading their west coast sales team.
Prior to joining Nirvana Solutions, Peter was the product manager for Advent Software's order managment system (OMS), Moxy. He oversaw all the product marketing activities for Moxy, which is used worldwide by over 800 firms. He had a special emphasis on trading and hedge funds and has authored a number of articles and whitepapers on these subjects.
After business school Peter joined IBM's Strategy and Change group as a strategy consultant. He was attached to IBM's Financial Services arm and completed a number of strategy assignments at major Wall Street firms as well as smaller start-ups.
Peter began his career as a registered representive at Charles Schwab and was a team lead for the introduction of Schwab's innovative e.Schwab electronic brokerage offering. He later was involved in the development of Schwab's active trader application, Velocity, which was merged with CyberTrader.
Peter holds a bachelor's degree in economics from University College Dublin, a Master's from University of Exeter and an MBA from Columbia Business School.