Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
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Much of what has been discussed in this paper thus far has
focused on what a hedge fund would do if they were free to
pursue their “optimal” solution. Most hedge funds are not in
such a position however.
While there may be tremendous appeal in the emerging Hedge
Fund 3.0 technologies, older vintage funds with sunk investment
costs may have little fexibility to pursue these options. It may be
primarily the smaller and newer funds that can take advantage
of these innovations.
Conversely, the opportunity to achieve differentiation through
deploying customized data management and investment
decision-making tools may only be available to larger hedge
funds with mature infrastructures. As will be discussed, there
is a sequence to which hedge funds should look to create
capabilities, and pursing differentiation is only relevant when
foundational elements are in place.
To determine the best path forward, we recommend that you
think about the following three questions in relation to your own
individual organization: Is there a “trigger event” coming up that
would offer me an opportunity to leverage off-premises or cloud
technologies? Based on my existing platform, what capabilities
should I be looking to create next? For new functionality, would
the best approach be for me to buy / outsource such capabilities
or should I invest in building a custom solution?
Trigger Events & Leveraging
Off-Premises Cloud Technologies
As noted previously, start-up funds coming to market in
these post-crisis years are likely to embrace off-premises
cloud technologies as their de facto go-to-market model. This
refects their ability to think about their infrastructure options
with a “clean slate” and design an optimal offering. For hedge
funds that launched in earlier Hedge Fund 1.0 or 2.0 models,
however, that ability to shift their infrastructure approach is far
more limited.
Data obtained in the benchmark survey underscores this
sentiment. Small hedge funds were by far the “youngest” in
terms of having the highest percentage of respondents having
been in business for less than 5 years (39%). These participants
sourced 49% of their infrastructure from either third-party
managed service providers or from software vendors that
hosted their own data centers. Only 39% of these small hedge
funds hosted their own infrastructure.
By comparison, franchise frms were at the opposite end of
the spectrum. All of the franchise-sized frms had been in
existence longer than 5 years. They only sourced 24% of
their infrastructure from these managed service providers or
hosted software vendors typical of the Hedge Fund 3.0 model.
By contrast, 66% of franchise frms indicated that they hosted
their own infrastructure.
For organizations that remain primarily rooted in the earlier
models, it is likely that they will need to identify a “trigger
event” that gives them an opportunity to rethink aspects of
their infrastructure to make any signifcant strides toward
Hedge Fund 3.0 sourcing. In such instances, they may be able
to realize superior effciencies or identify relevant cost-savings
in discrete areas.
We have identifed 3 common trigger events that offer natural
segues for older hedge funds that may want to rethink their
infrastructure approach.
Inadequate Space to Expand Server Capacity:
Funds that
currently have locally hosted data centers on-premises may fnd
that they do not have ample server rooms within their existing
offce space as they look to add or upgrade their capabilities.
If the “comms” room within a small offce lacks enough
cooling capacity, it becomes much more effcient to host new
applications remotely than to engage in a lengthy renovation or
offce move.
Knowing how peer organizations plan to spend their IT dollars in 2011 and having insight into how the IT
environment for hedge funds has evolved in recent years is helpful, but applying that knowledge to allow a
hedge fund to make meaningful decisions on how to best deploy their IT dollars going forward requires that
a manager understand that there may be differences between the “optimal” and the most realistic approach
they should pursue.
Section 4: Making the Best IT Choices in 2011-2012
“In the old days, you bought your own cage, but it doesn’t
make sense now. The right model is to outsource your
network management unless you’re a very large frm.”
– COO of a U.S.-based hedge fund managing
between $3 billion and $5 billion USD