Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
I
9
Larger Managers Charge Back More IT Expenses
at the Fund Level
In accounting for their IT spending, there is a noticeable change
in approach as a hedge fund manager’s AUM rises. Chart 3
shows the amount of expense being charged back to both the
fund and the management company.
Small and medium-sized hedge funds charge only a small
portion of their IT expense back at the fund level. Nearly their
entire IT spend is absorbed by their management company. As
AUM grows that approach begins to change.
Large hedge funds report that they allocate 20% of their
IT costs back to the fund level. On average, this equates to
about $630,000 annually. Franchise frms charge 30% of
their IT spending out to the fund level or about $2.4 million on
average annually.
The increased willingness of these managers to charge back
IT costs to the fund (where these fgures get factored into
the calculation of the performance fee) can be seen as an
additional expense investors pay in order to have access to
the capacity these managers offer. Moreover, the ability of
the fund to absorb these costs without signifcantly impacting
performance is much greater than for smaller managers.
Ratio of Internal to External IT Personnel Sourcing
Changes as Funds Mature
Chart 4 provides insight into the size of a manager’s overall
hedge fund organization and to the share of such resources
focused exclusively on IT. Several points stand out in these
fgures.
As would be anticipated, the numbers confrm that hedge
funds do indeed run large amounts of money with extremely
small teams. The average number of employees for each size
hedge fund is listed as follows: small hedge funds, 11 employees;
medium-sized frms, 68; large frms, 121 and franchise frms, 163.
For both small and medium-sized hedge funds, IT resources
equate to about 1/3 of the total organization’s size. This fgure
declines for large funds and then returns toward this 1/3
threshold as frms enter the franchise stage. To understand why
this pattern changes for large funds, it is important to look at
the mix of internal to external personnel.
For small and medium-size frms, the ratio of internal to external
IT resources is nearly 1:2 as managers look to limit their fxed IT
personnel expense. Small hedge funds on average have only
one dedicated IT resource and 2 external IT resources whose
services they contract. Medium-sized managers that are rapidly
accumulating assets grow their internal IT teams signifcantly,
increasing to an average of 8 resources, but they continue to
contract nearly double that fgure externally. By leveraging
outside resources to augment their internal IT resources,
these hedge funds can obtain specialized expertise and interim
manpower to create advanced capabilities without committing
to long-term obligations.
Source: Citi Prime Finance
0
50
100
150
200
Non IT Employees
Internal IT
External IT
Franchise
Funds
Large
Funds
Medium
Funds
Small
Funds
Source: Citi Prime Finance
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Fund
Management Company
Chart 4: Average Number of Employees: IT & Non-IT
Chart 3: Average Charge Back of Hedge Fund Expenses
Source: Citi Prime Finance