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Are hedge fund managers getting the best value for their technology investment?

Truss Edge recently published our first white paper on hedge fund portfolio management systems, looking at the priorities of small to mid-sized hedge funds when it comes to allocating their technology budgets. We also asked service providers what they thought. Most believe that hedge funds are still not spending enough on IT, but it could also be that hedge fund managers are not spending effectively enough.

Are hedge fund managers allocating enough budget to trading / data management activities (% respondents)?

Our research found that many hedge fund managers are turning to their peers when it comes to recommendations for their portfolio management technology, but are they getting the right advice by doing so?

Our white paper also discovered that many service providers, including prime brokers and fund administrators, are still encountering substantial challenges when it comes to integrating with the reporting suites of the funds they support.

Automation is high up on the wish list for smaller hedge funds because it allows them to run their operations on a tighter budget and with a smaller head count. Without automation there is a tendency to rely on spread sheets as the cheap option for reporting, something that can inevitably lead to errors.

Hedge fund managers that leave a larger firm, including those coming out of banks, are naturally very focused on trading. But there is an assumption that a cheap, off the shelf technology solution can fix all their problems. They reckon without the demands of regulators and investors, for starters. Investors are expecting to see more sophisticated reporting systems, even from start up hedge funds.

The assumption that a fund’s administrator will somehow sort this out is also incorrect: administrators have numerous different funds to cater to at one time. Without sufficient focus, operational risk is being injected into the reporting process at a very early stage of a hedge fund’s life cycle.

Reducing costs and head count

How do you get around these operational weaknesses while still keeping your costs and head count down? The answer for many hedge funds is outsourcing to a technology partner that CAN devote the time and resources that you need.

This has the advantage of also leveraging the latest technology developments and innovation that a mature software developer can bring to the table, backed up by highly experienced personnel. In an era where the latest generation of startup funds is launching without a full time COO, outsourcing many of your middle and back office reporting functions to a seasoned partner firm makes a lot more sense.

Outsourced portfolio management technology helps fund managers to also keep up to date with the latest changes in regulations. Reliance on in-house, jury-rigged platforms will get expensive for your fund if you have to keep updating them every time regulators issue new directives, and they will continue to issue them on a regular basis.

The numbers speak for themselves: in our white paper we found that 40% of hedge funds polled had increased their IT budget, with 25% of them hiking it to cope with new reporting requirements.

The majority of service providers interviewed for our survey, that deal with hedge funds on a daily basis, say that technology has become a major cost for hedge funds today, yet this does not need to be the case.

How much of an operational cost hurdle has IT become for new hedge funds (% respondents)?

Technology becomes more expensive when too many systems are involved, when they are not properly integrated or where there is considerable operational overlap. If you are forced to start hiring more bodies to cope with an overly complex middle office, you are also creating unnecessary costs.

For further information on how Truss Edge can assist your fund with its operations, contact sales@trussedge.com

Download a PDF copy of our white paper here.

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