Technology Firms Overview

   Hedge funds live and die by their investment strategies, but they cannot survive without technology. They need technology to get up and running, and they need it to manage most aspects of their businesses — from identifying which positions contribute the most to their returns to managing investor subscriptions.

   Smaller hedge funds rely on their prime brokers for most of their technology requirements. But as funds manage more money and branch into new strategies and asset classes, their technology needs grow more complex. And as a firm adds a second prime broker — which most hedge funds do once they have a few hundred million dollars in assets — it begins shifting away from its prime broker’s technology. Suddenly, aggregating data across multiple prime brokers or calculating a real-time P&L on a portfolio is not so simple.

   To make the technology decision-making process easier for hedge fund managers, we have expanded our Alpha Awards™ survey of hedge fund service providers to include four major technology areas: investor relations management, portfolio management and accounting, risk management and trade order management. In each category we asked hedge funds and funds of hedge funds to tell us which services and features are most important to them and how their current technology providers rate in each of those areas.

   A few broad results stand out. Hedge funds place tremendous importance on a provider’s ability to integrate a vendor system with the other technologies and systems they use. In trade order management the hedge funds we surveyed say the ability to integrate the platform they use with other systems is more critical than the breadth of connectivity to exchanges and other trading venues a provider can deliver. In portfolio management, integration is more highly valued than performance measurement. Not surprisingly, given the emphasis on automation and integration, customer support ranks as one of the top four attributes in each category.

   Hedge funds also prize flexibility. They know that today’s investment strategies may not be the ones that make money for them tomorrow. Take swaps, structured finance and credit derivatives, which used to be the stomping ground only of niche hedge funds.

   “Now exotic derivatives are more bread-and-butter and almost every hedge fund has that capability,” says Ron Papanek, chief market strategist at New York–based RiskMetrics Group, ranked No. 1 in risk management. “If funds don’t trade them today, they are prepared and ready to trade them in the future.” That means technology providers must be able to grow with their hedge fund customers to support new businesses and strategies.

   Hedge funds are also aggressive purchasers of technology, making them a valuable source of customers. “Hedge funds spend generously when they perceive real value to be gained from an application,” says Matthew Nelson, a senior analyst in the securities and investments group at Needham, Massachusetts–based research and advisory firm TowerGroup.

   Hedge funds pride themselves on taking risks — usually calculated — in pursuit of better returns. And one of those risks is not having the best technology. “We often see hedge funds investing in and buying systems we haven’t even heard of,” says Nelson. “Many funds are far out on the innovation curve.”

   Few if any technologies are more crucial to hedge funds than portfolio management and accounting systems. Managers need them to view and manage their portfolios on a real-time basis. If they can’t gauge how their strategies are performing across funds or accounts, they can’t confidently assess their investment decisions. The data that feed their portfolio analytics must be accurate and synchronized with data feeding other systems.

   As hedge funds expand into new strategies, some are deciding to outsource their operations and portfolio management platforms, says William Keunen, global director of New York– and Dublin-based fund administrator Citco Fund Services. Not only does that free managers from having to maintain and upgrade their technology, Keunen says, it reassures investors to know that their funds are using independently developed platforms to manage their portfolios and perform fund accounting.

   Citco, which began offering a front-end portfolio management platform in 2002 for its fund administration customers, takes the prize in this category. Users praise its AExeo Technology product for portfolio analytics, performance measurement and reporting. Citco edges out No. 2 Tradar, a ten-year-old London firm, whose Tradar Portfolio product suite has 150 hedge fund customers. SunGard Data Systems, a Wayne, Pennsylvania–based veteran financial services software and processing firm, ties at No. 3 with GlobeOp Financial Services, a London- and Dublin-based firm that provides fund administration and middle-office and back-office outsourcing.

   Citco’s AExeo platform is based on a proprietary system originally developed by Greenwich, Connecticut, hedge fund firm Tudor Investment Corp. Citco expanded the system, which it licenses exclusively from Tudor, to include mortgage-backed securities, credit default swaps and other instruments, as well as new reporting capabilities. Hedge funds use the platform, which includes a fully maintained securities database, to manage their portfolios, run analytics and P&Ls on their positions and funds, and perform other tasks.