Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
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On the regulatory front, data can be easily extracted from
emerging data management platforms and fed to specialized
reporting software, such as that offered by Advise Technologies
or to other compliance workfow and checklist tools that are
available from compliance consultancies such as HedgeOp
and My Compliance Offce, whose software tracks employee
trading activity.
Internally, dashboards fed from data management solutions can
be leveraged as investment decision-making tools that supply
the CIO, risk managers, CFOs, treasurers or other hedge fund
management team members with the valuable insight they
need to monitor individual traders, portfolio managers, funds or
the overall portfolio.
As these tools often support the investment process, part of the
expense of contracting consultants to build such systems can
be allocated to the fund. This charge-back is more diffcult to
allocate if these custom systems are built by internal developers,
as the payroll expense is harder to delineate and apportion on
a project basis. This decision to charge such expense to the
fund is affected by the regulatory regime under which the fund
operates, the language in the fund’s offering documents and the
size of the fund. These factors will also infuence the manner in
which a fund will incur the expense, either via a direct expense
allocation or by way of commission sharing arrangements (CSA).
Newer tools are also beginning to come online to create
differentiation.
Research management is a growing discipline within the
industry whereby funds try to assimilate their various research,
analytics and models into a unifed data structure. The goal
of such work is to better gauge the effcacy of their internal
research department and of the sell-side analysts with whom
the fund interacts.
When frms are able to track the life cycle of a trade idea
from inception to execution to proft and loss, they can better
determine their star performers. When external research
sources are included in such tracking and this information is
combined with execution data, frms are more easily able to
justify the commissions they pay to certain brokers via these
custom “broker vote” platforms.
Assembling information is the frst part of the effort. Being able
to categorize and track the usage of this investment decision-
related information is another matter. Some of the largest
funds are spending millions to apply cutting-edge technology
to the problem. Tagging their research in such a way that it
is easy to recall upon demand, these frms believe that they
can streamline the alpha generation process by way of a better
research management regime.
Other frms are looking to leverage generic tools, such as
Microsoft SharePoint, or commoditized research management
applications like Code:Red and Advent’s Tamale to achieve
similar aims.
In all these various ways, custom data management solutions
are proliferating due to the introduction of hedge fund-specifc
development shops. As we are still early in the differentiation
phase of Wave 3, we have not yet seen many efforts to
commercialize these technologies to service alternate users.
However, we feel that the increased interest in direct investing
from emerging pension and sovereign wealth fund investors
may prove fertile ground.
These are the most rapidly growing segments of the institutional
investor audience and they are increasingly becoming more
sophisticated investors interested inmaking their ownallocations
as was discussed in our June 2011 Pension and Sovereign Wealth
Fund Investment in Hedge Funds; The Growth & Impact of Direct
Investing white paper. As such, these investors may offer an
attractive audience for hedge funds looking to repurpose
aspects of their more sophisticated analytic platforms.
Already, some of these pension and sovereign wealth funds
are requiring that hedge fund managers in their portfolio feed
position and exposure information to a third-party aggregator
like RiskMetrics. This was originally a sell-side platform that
got adopted by many buy-side organizations and is now fnding
traction with some investors. A similar pattern may unfold in
the coming period as internal hedge fund tools that provide
insight into the investment process may be commercialized to
offer increasingly sophisticated investors expanded capabilities.
“About half our clients utilize CSA, or soft-dollars, in varying
degrees. Most of these tend to be our smaller clients, who
manage between $1 billion USD and $3 billion USD. These
clients have a schedule that indicates how projects fall into
categories, and different percentages are soft dollar-able
based on category.”
– COO of Data Management Outsource Consultancy
“Our historical data expense, which drives our investment
models, is a heavy expense, and it stays with the manager.
FSA rules are very proscriptive about what you can and can’t
do with CSA, and our compliance group takes a hard line.”
– CTO of a U.K.-based fund managing between
$3 billion USD and $5 billion USD