Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
I
11
Specialized Hedge Fund Needs Trigger Successive
Waves of Investment
The systems designed for these long-only managers were
poorly suited to cover the more expansive trading profle
employed by leading hedge funds of the time. As the most
successful funds of this vintage sought solutions to handle
both their long and short positions and became more complex
in terms of their use of varied listed and OTC instruments,
they were compelled to build their own core multi-asset trading
and portfoliomanagement systems to accommodate specialized
functionality that vendors and service providers could not
provide. Creating these capabilities was seen as offering an
edge to hedge funds of the time, helping them to better attract
and retain investor capital. This set of circumstances drove what
we now consider to be Wave 1 of hedge fund IT investment focus.
A similar pattern has emerged repeatedly in the hedge fund
industry in recent years. Divergence between the existing
system offerings and the needs of the highly specialized hedge
fund industry prompt hedge funds to build customized solutions. The investment in these customized solutions is viewed as
establishing a perceived edge over competing frms. The types
of systems being targeted change over time, but the impetus
that launches the wave remains the same.
The need to customize trading and portfolio management
systems to address more complex hedge fund portfolios was
the impetus that launched Wave 1 of recent IT investment in
hedge funds. Subsequently, we have identifed two additional
investment waves. Our view is that the industry is currently
in the latter stages of their Wave 2 investments and that
industry leaders are actively engaged in their pursuit of Wave 3
capabilities. These waves and the industry’s current positioning
are highlighted in Chart 6.
What is also clear from Chart 6, however, is that the perceived
edge or potential differentiation the hedge fund receives for
creating their customized solution wanes over time. Discussions
with various funds and our observations of the hedge fund
technology landscape show a consistent pattern whereby
commoditization pressures emerge as a wave crests.
The entire hedge fund IT investment wave cycle is illustrated in
Chart 7.
Section 2: Hedge Fund Pioneers & Their Impact on Software Evolution
Time
Trading & Portfolio
Management Platform
Customization
Risk, Financing &
Collateral Management
Platform Customization
Systematization
of the Investment
Decision-Making
Process
Wave 1
Wave 2
Wave 3
2000 - 2008
2005 – 2012/13
2009 to ?
A decade ago, hedge funds could almost be considered a cottage industry, making do with a patchwork of vendor
solutions that catered to the long-only asset manager. From a vendor’s perspective, the hedge fund industry
was not an attractive enough target to warrant the development of focused offerings. In 2000, HFR estimates
that total hedge fund industry AUM was only $490 billion. This compared to ICI’s estimate of worldwide net
assets held in mutual funds of $11.9 trillion.
Potential for
Commercialization
using Unique
Platform
Investment in
Customized IT
Solutions
Unique
Capabilities
based on
Differentiated
Solution
Market
Dynamics
Shift & Limit
Commercialization
Options
New Service
Providers Emerge
that Offer Similar
Capabilities
Divergence
between
HF needs &
Existing System
Offerings
System
Customizations
Offered Broadly
bySpecialty
Consultants or
Vendors
Chart 6: Hedge Fund IT Investment Focus:
2000 to Present
Chart 7: Hedge Fund IT Wave Cycle