| THE 2006 ALPHA AWARDS | |
| Available Now | Introduction |
| Available Now | Prime Brokerage |
| Available Now | Administration |
| Available Now | Law - Offshore & Onshore |
| Available Now | Accounting |
| Available Now | Technology |
| Available Now | Methodology |
| Available Now | Hedge Fund 100’s Favorite |
| Available Now | Top Firms by Aspect of Service |
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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 Awardsª 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.
As a result of the inflow of pension fund and other institutional money into hedge funds, managers provide greater disclosure and more comprehensive reporting about how their investments are faring. Investor relations software makes the task more manageable.
Backstop Solutions Group wins the Alpha Award for top investor relations management system by a wide margin over SS&C Technologies and PerTrac Financial Solutions. Jeremie Bacon launched Backstop in 2003 with investments from four hedge fund and fund-of-funds managers. The company designed its investment partnership management software as a single, integrated platform that enables customers to reduce the number of technology systems they must support.
Chicago-based Backstop targets funds of hedge funds by allowing them to track and manage their relationships with investors, conduct portfolio management and fund-level accounting, and consolidate research on hedge fund managers. Hedge funds use a pared-down version of the platform for investor relations, including the creation of marketing materials and customized statistical reports for clients.
Second-place SS&C Technologies, a 20-year-old Windsor, Connecticut–
based financial services company, offers customers a range of investor relations and document management services. PerTrac Financial Solutions, which acquired investor relations specialist Whittaker Garnier earlier this year, finishes third. The firm, with offices in Memphis, Tennessee, and Reno, Nevada, edges out No. 4 London-based Sage Software, which provides customer relationship management software and related services across many industries.
Technology providers ministering to hedge funds are finding they must accommodate a demanding audience. This month, for the first time, Goldman, Sachs & Co. is giving users of its Rediplus execution platform access to algorithmic trading programs from a handful of other brokerage firms.
“It’s what customers want,” explains Greg Tusar, head of electronic trading at Goldman Sachs Execution & Clearing, the firm’s New York–based broker-dealer subsidiary, which takes top honors in trade order management.
The Rediplus global, cross-asset-class execution platform comes with lots of bells and whistles: smart order routing, program trading, algorithmic trading that lets customers manage their order flows efficiently and a suite of transaction cost analysis tools. Last year customers gained access to Goldman’s new Sigma X, a crossing system that combines liquidity from Rediplus customers, external crossing systems, a handful of third-party market-makers and Goldman itself.
In our survey top-ranked Goldman handily outpaces competing providers of trade order management systems and execution management platforms. The contest for second place is extremely close, with Boston-based Eze Castle Software edging out No. 3 Banc of America Securities. This summer, Eze Castle and BNY Brokerage formed a new, independent entity called BNY ConvergEx Group that combines the former’s order management system, which has more than 200 hedge fund clients, with the latter’s direct market access platform and research-related services.
In risk management, hedge fund managers give RiskMetrics and Imagine Software the equivalent of a standing ovation. RiskMetrics gets top honors, with Imagine in second place. New York–based Imagine has expanded its risk management and analytics platform in recent years and now has more than 100 investment management clients, mostly hedge funds. The versatile GlobeOp Financial Services places third in risk management, after a sizable gap. Morgan Stanley places fourth, holding its own against the field of dedicated risk management firms.
Risk management gained in importance during the past decade as hedge funds realized the importance of being better able to deal with their market and credit risk. RiskMetrics earns kudos by covering a comprehensive range of asset classes and instruments and by providing a full, sophisticated battery of risk management services, from its value-at-risk methodology and Monte Carlo analysis to real-time stress testing and scenario analysis. Although a trader may, for example, understand the risk associated with a particular trade executed in New York or Singapore, RiskMetrics enables that trader to compute the risk of the transaction in the context of the fund’s hundreds or thousands of other positions. RiskMetrics customers can reprice complicated securities in real time, benefiting from the computational strength of the firm’s hundreds of servers, which perform millions of calculations simultaneously.
As the hedge fund industry grows, managers are likely to continue the push to expand and integrate technology systems and software. And big hedge fund investors — with the wallets to back up their demands — will continue to insist on their managers’ using technology that is robust, scalable and as good as it can possibly be.