Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
I
13
HF IT Investment
Resulting Differentiation
Commercialization of IT Spend
Absence of Multi-Asset & Derivative Platforms
Customization of Trading
& Portfolio Management Systems
Shadow-Tracking of Service Providers
& Addition of Operational Alpha
Spin out of Platforms
to Fund Administrators
Proliferation of
Consulting Talent
Upgrade of
Vendor Offerings
New Industry Services
Broad Availability of Multi-Asset Trading
& Portfolio Management Systems
Emergence of Middle Office
Outsourcing Services
Consolidation of Industry
with Largest HFAs
Shifting Market Dynamics
These managers were able to “shadow-track” their prime
brokers and fund administrators, determining if their portfolios
were being properly handled. This included an ability to evaluate
whether the hedge fund agreed with the pricing and valuation
models being used by their providers. Up until that point in time,
hedge fund managers had not been in a position to assess the
quality of their prime broker and fund administrator reporting,
especially if they worked with multiple prime brokerage frms.
Hedge funds possessing these capabilities were also able to sell
their investors on the concept that their systems provided them
an edge that allowed them to add “operational alpha” to their
returns. The theory behind operational alpha was that by having
an independent portfolio view and the best possible pricing and
valuations, the manager would be better positioned to evaluate
and, if necessary, challenge their service provider’s view. With
their prime brokerage relationships, this could result in fewer
trade and position breaks, lower trade processing fees and lower
margin calls, freeing up more of the fund’s assets for trading
purposes. With their fund administrator, this could result in
more accurate attribution and performance calculations.
Some of the best internally developed platforms were
commercialized and licensed to fund administrators. Long Term
Capital Management was able to leverage their platform and
create the core for the GlobeOp fund administration offering.
Tudor Investments spun out their platform to be the foundation
for Citco’s Aexeo administration offering. Citadel was able to
spin out its own administration business on its Omnium platform
and, just this year, was able to sell that business to Northern
Trust’s Hedge Fund Services.
Firms that adopted this technology became some of the most
successful administrators over the course of the last decade.
As clients of these frms became accustomed to the newer
administrator’s offerings, they began to request additional
middle-offce support from these providers and from their
traditional administrators. Middle-offce outsourcing of hedge
fund trade and portfolio management was a new service that
emerged to help standardize the delivery of operational benefts.
With this new service, hedge funds could launch with superior
capabilities, or more fexibly take on new strategies and
products by leveraging the expertise of these outsourced
service providers. This approach proved quicker to market,
while keeping initial costs down, as the funds didn’t need to hire
operational experts to track the new strategies.
Another aspect of commercialization also occurred on the
back of Wave 1 investments. Hedge fund technology teams
or consultants who helped to realize trade and portfolio
management customizations for frms that invested in Wave
1 began spinning out and launching their own software frms.
Resources emerging from Perry Capital created VPM portfolio
accounting software that was later purchased by Sungard.
Resources from another hedge fund, Alexandria, created the
core Paladyne trade and portfolio tracking offering.
Chart 8: Wave 1 Hedge Fund Investment Cycle