Hedge funds finally waking up to the importance of bespoke systems

The changing nature of alternative investment, characterized by the increasing sophistication of the hedge funds and their customers, is also presenting new challenges for systems suppliers.

Historically, hedge funds have been relatively agnostic about systems, but this has changed as they have become better served by the vendors, according to Denise Valentine, a senior analyst at research house Aite Group, which last week published a report on hedge funds.

She said: “There is an increasing range of options and prices now, comprising specialist hedge fund system vendors; providers to traditional money managers and banks moving into the hedge fund space; new service providers; and prime brokers which are enhancing their services by adding new technologies.”

Valentine claimed the increasing number and range of systems for hedge funds has driven down the cost of these products and boosted their adoption to the extent that “hedge funds are realizing more than ever the benefits of technology”.

Her research, though, suggests a definitive hedge fund system has not yet come to market. She said: “Different vendors from the industry tend to have different strengths, but the survey feedback is that no one system meets all of a hedge fund’s current requirements.”

The hedge fund industry is also in a state of flux, which adds to the challenges faced by hedge funds and systems suppliers.

Valentine said: “There is increasing pressure on hedge funds and the systems they use from institutional clients, auditors and an atmosphere where regulation is hovering. The market constantly changes and their clients are more demanding.”

Chris Cattermole, European sales manager at Advent, a supplier of hedge fund systems, said the influx of institutional money into alternative investments had forced hedge funds to raise their game.

He said: “When investing monies into hedge funds, institutional investors will put a hedge fund firm through more rigorous due diligence process of how their investments are managed; this would include operational processes – but especially operational systems.”

Cattermole has noted the growing importance of up-to-date information, something that historically has been a problem for hedge funds because of their reliance on fund administrators.

He said: “Institutional investors are increasingly attentive to how quickly a hedge manager can spot and react to a change in market conditions – a manager with flexible access and good control over a consolidated operational process will be more attractive to an institutional investor.”

Gary Mills, a director of the alternative investments division at SunGard, a systems vendor, said hedge funds are forced to pick between contrasting systems strategies.

He said: “Hedge funds are faced with choosing between the best-of-breed system for the specific requirements of each of their business functions, or more of an integrated solution.

“The best-of-breed approach makes most sense where there is no system that can do everything, but it does raise potential operational risks about how the systems work together.”

Mills said the diversification of hedge funds’ investment strategies was bringing the failings of the best-of-breed strategy into sharper focus.

As a result, integration between systems that “mitigate the risk of data entry and reconciliation errors by minimizing manually entered data” is considered a potential solution.