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Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
Methodology
This pattern shifts for large hedge funds as the ratio of internal
to external IT personnel moves to just over 2:1. This change
refects both the desire of these managers to “internalize”
control over their IT infrastructure and the stabilization of their
platform as capabilities they had contracted outside resources
to build come online and the need for external expertise
diminishes. Indeed, large funds on average expand their internal
IT resources modestly to 9 resources, but their use of external
personnel drops from an average 14 to only 4 resources.
Franchise funds fnd that the ratio of their internal to external
IT resources reverts back to that of the small and medium-sized
funds at a 1:2. This refects a desire to control costs and move
back to a more fexible sourcing model. It also refects the
need for a larger IT team to handle the increasing complexity
of the manager’s platform that must service investment teams
that are typically spread across multiple geographies and often
across numerous funds and investment strategies. Benchmark
data shows that the average IT team size at a franchise frm is
49 individuals—16 internal resources and 33 external.
The breakdown of IT personnel across the hedge fund industry
shows that 38% of resources focus on software development,
integration and support whereas 62% are network engineers
or network support personnel. The ratio of infrastructure
resources increases as AUM grows, refecting the need for the
largest funds to bolster the building and maintenance of their
expanding infrastructure.
Clear Buy vs. Build Preferences Emerge for
Main Software Applications
In looking at the types of software hedge funds will be
investing in during 2011, there was a defnite mix in approach.
In some instances, there was a clear preference to “buy” that
functionality, either by licensing it directly from an established
market vendor or by approaching an outsourced service
provider. For other functions there was a bias toward taking a
“build” approach where the manger would either have internal
developers or specialized consultants work with them to create
their own customized platform. Benchmarks around where
these buy-versus-build preferences lay in 2011 are shown in
Chart 5.
Investment decision-making support tools, risk management
and compliance platforms were the areas where hedge funds
were most likely to “build” their required capabilities in 2011.
As will be discussed, these are the areas where hedge fund
managers are still looking to align standard industry offerings
to their more complex investment strategies and specialized
portfolio needs or, in the case of compliance, adjust to rapidly
shifting regulatory mandates.
Hedge fund managers showed a more mixed approach with
regards to data management platforms, fnancing and collateral
management systems. Upgrades to core vendor platforms
realized in recent years and the emergence of new services,
such as collateral management outsourcing, have created
offerings that serve the needs of small and medium-sized frms.
Large and franchise frms are likely to still have complexities
in these areas that make it easier for them to custom build
their applications.
Portfolio management, trading and marketing / CRM platforms
are those that hedge funds are most likely to buy. These are
the platforms that are either the most generic (CRM) or that
have become the most fully aligned to the specialized needs of
the hedge fund industry (trading and portfolio management).
Understanding the story behind how these platforms came to be
suffciently standardized to allow the majority of managers to
buy such capabilities provides important insights into how these
buy-versus-build decisions are likely to shift in the future, and
insights into how a set of large, franchise-sized pioneer hedge
funds look to use technology as a differentiator and create an
edge in their investment strategies.
Source: Citi Prime Finance
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70
Build
Buy
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Chart 5: Software Approach (Across All Funds)