IT Improvements Could Be Key to Hedge Funds' Survival
York Capital CTO details technology initiatives
April 27, 2009
As scandals and shrinking assets take their toll on hedge funds, strong operational controls and technology will be key to survival, according to Gary Maier, chief technology officer of York Capital Management.
For most firms, of course, improvements will need to come amid budget cutbacks. Global IT spending by hedge funds will fall 20 percent this year, to $1.35 billion from $1.7 billion in 2008, estimates Celent. Unless they are faced with a collapsing platform, funds likely will postpone acquiring or replacing large-scale systems in 2009, says the research firm.
But York Capital, a global, multi-strategy fund with $9 billion in assets under management, is in the process of launching just such a system-York for Information, or Y-FI, a proprietary portfolio management platform that ties together functionality from both third-party and in-house software. That initiative, along with a new Hong Kong office, telecommunications efforts and data center upgrades, have kept Maier busy since he joined the firm in July 2007.
Previously, Maier, who has 20 years of IT experience, spent about four years as CTO of Five Mile Capital Partners, a fixed-income alternative asset manager in Stamford, Conn. He has been head of financial services at middleware systems provider Iona Technologies and a managing director at KPMG, where he focused on enterprise integration. As VP and head of trading systems development at BlackRock in the 1990s, he was a critical contributor to Aladdin, the firm's highly regarded technology platform.
Maier recently spoke with Securities Industry News about his projects at York and his thoughts on the technology issues confronting the hedge fund industry as a whole.
Have there been more questions about your IT and operational due diligence due to recent market events?
There's clearly an increased interest in the efficacy of operational and compliance processes, valuation methodologies--especially for more complex asset classes and level-three holdings--and counterparty and issuer risk controls. This last point is probably most representative of the current climate. Previously, counterparty risk was focused almost exclusively on the sell side's oversight of the buy side. With the large, well-publicized failures in the industry, however, that dynamic has clearly shifted and the little guy can now have as much concern about counterparty risk as the big guy. Other questions increasingly revolve around portfolio construction, as investors dig deeper and seek greater transparency into a firm's holdings.
How are you using technology to improve transparency?
Like many firms in our space, York had historically relied on a collection of off-the-shelf vendor products, tied together with a lot of "sneakernet," to support front-, middle- and back-office requirements. In the early days, York was principally an event-driven equity manager with perhaps a small credit overlay. Off-the-shelf systems in the equity space, especially for small-to-midsized value- and catalyst-oriented managers, are abundant, functional and relatively cost-effective, so this was a prudent course. As the firm grew, and its organization, products and transactions become sufficiently diverse and complex, it was discovered that many of these off-the-shelf systems have considerable functional gaps and don't quite scale.
When I arrived, we performed considerable diligence on a number of third-party systems. We wanted to own our data, however, and not be held hostage to a given product's functional limitations, data accessibility or cost structure. One of our critical needs was to create a multi-tiered integration framework, backed by our own enterprisewide data warehouse, on top of which all functional and data components, whether third-party or internal, would sit.
