1. Introduction
Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
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Introduction
Although relatively small in dollar terms, hedge fund IT
investments have a disproportionately large impact on advancing
the capabilities of the overall fnancial services industry.
Hedge funds’ innovative infuence on investment strategies is
well documented, but not as much attention is given to the
dramatic impact hedge funds have had in driving fnancial
services technology evolution. As organizations that succeed
upon the strength of their investment returns, hedge funds
are always on the lookout for opportunities that offer them
an “edge.”
For many of the industry’s leading hedge funds, their
technology investments were seen as helping them capture
such edge as they sought to exploit divergence between what
standard industry platforms offered and what the hedge fund
itself felt that it could accomplish with technology through
their own customizations.
Since this is our inaugural publication,
one goal of this report
is to provide an overview of the evolution of hedge fund
software
and discuss how a few pioneer managers’ pursuit
of differentiation through their IT investments have had a
profound impact in transforming the offerings available to the
entire capital markets landscape. We will also focus on where
today’s hedge funds are looking to differentiate themselves
and spend money on IT customizations.
Since 2000, we at Citi Prime Finance have identifed three
distinct waves of technology innovation driven by hedge
funds seeking differentiated capabilities. As will be shown,
while the impact of these innovations has been extreme, the
duration of such benefts for the fund itself is often limited.
Efforts to commercialize their technology investment and
commoditization pressures quickly erode the edge such frms
enjoy. The result is the emergence of new service providers
and more robust systems that offer previously discrete
capabilities more broadly across the entire hedge fund
manager community.
Understanding these waves will help a manager determine
the right approach in spending their IT dollars. For functions
that have become commoditized, managers should look
to buy systems or take advantage of outsourcing options
that already incorporate advanced functionality defned by
earlier generations of hedge fund pioneers. These systems or
services can typically be adapted with few upgrades to meet a
new manager’s specifc needs.
Custom development or “build” dollars should be focused on
those functions where broadly available systems do not meet
the hedge fund threshold or on new types of data management
tools that evolve the manager’s entire approach and ability
to manipulate and combine information to achieve unique
insights.
The second goal of this paper is to show how cloud
technologies offer up a completely new model for a
hedge fund on how to establish and support their core
infrastructure.
Cheaper bandwidth, exploding availability
of data centers and the rise of managed service providers
is creating a foundational shift in the way start-up or spin
out hedge funds establish their infrastructures and build
their core capabilities. Cloud or off-premises technologies
are offering hedge funds a light-weight, nimble approach to
market that matches their organizational intent to be small,
entrepreneurial low-cost businesses. These innovations also
offer established funds new paths to realize cost savings and
effciencies in upgrading or replacing their legacy platforms.
We have dubbed this important shift in approach as “Hedge
Fund 3.0.”
The fnal goal of the paper is to provide a look through to
the actual metrics that inform hedge fund IT investments
in 2011
and to understand how these metrics vary by the size
and the vintage of the fund. These benchmarks should provide
each reader an opportunity to assess their own organization’s
approach relative to their peers.
By repeating this survey each year, we hope to provide our
hedge fund clients insight that helps them maximize their
focus and spend on IT related matters and provide them
relevant metrics they can cite in explaining their IT approach
to interested investors.
Introduction
By examining metrics provided by survey respondents, we project total hedge fund industry IT spend to be
$2.09 billion in 2011. This fgure covers IT personnel, hardware / networks, software and data costs. While this
spend averages ~9 basis points of total industry AUM, hedge fund IT spending accounts for only a small portion
(2.8%) of total securities and investment industry spend (estimated at $75.1 billion in 2011 according to Celent).