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Where to Spend in a Time of Crisis
Analysts, execs offer up ten key technology areas for smaller buy-side budgets
February 2, 2009
Technology providers that cater to buy-side firms are knocking on doors in an industry that has seen widespread losses and sharp reductions in assets under management, as well as mergers, bankruptcies and outright frauds.
According to Hedge Fund Research president Kenneth Heinz, 2008 was the worst year on record, with losses averaging 18.3 percent. Research firm Eurekahedge says assets under management fell from a peak of $1.9 trillion in 2007 to $1.5 trillion. But despite the financial damage, industry observers note that the buy side is still making select investments in technologies that can save time and money.
In speaking with analysts and executives from financial firms and technology companies, Securities Industry News identified ten areas that will remain a focus:
1. Offshoring. Whether it means using a third-party vendor or opening an office in a low-cost location, offshoring has become a common solution for saving money on salaries. Firms that had been on the fence--or merely experimenting with the lower wages in India and China--are expected to fully embrace the approach this year, due to economic necessity.
In a November survey conducted by Boston-based Aite Group, capital markets executives said they plan to offshore an average of 16 percent of their software development in 2009. Aite analyst Adam Honoré says that firms will bargain harder this year with their outsourcing providers to drive down costs, with chief information officers looking for quick returns on investment. "Overall, cost minimization is on top of the operational agenda," agrees Isabel Schauerte, a Celent analyst in London. However, according to Celent, many large capital markets firms have already taken full advantage of offshoring, making it difficult to eke out additional savings.
2. Automation. When times are good, it's easy to throw bodies at a problem. In a downturn, however, institutions face more acute pressure to rethink operations and find manual processes that can be automated or eliminated.
"We're always tweaking our compliance software to make the human component less labor-intensive," says Greg Hold, president of Hold Brothers On-Line Investment Services, a direct-access trading firm in Jersey City, N.J. Two or three years ago, when Hold Brothers had 300 traders, it did closeouts by hand. Now that there are 1,200 traders worldwide, the firm uses software that "allows us to automate what used to be done manually. Traders now have certain stop-loss parameters that automatically get closed out."
3. Cloud computing. Software companies have long known that economies of scale can be gained by keeping all applications in one central place. While hedge fund administrators offer fund managers back-office services, other vendors, inspired by the success of companies such as Salesforce.com, are offering hosted, or cloud-based, versions of their software. "You don't pay for implementation-flip a switch and you're on," says Aite Group analyst Denise Valentine, adding that companies that provide complex applications can charge implementation fees that are as much as 80 percent of the licensing costs.
"We certainly see interest increasing," says Paul McTigue, senior business development manager at Calypso Technology, a trading systems company that offers its products on a hosted basis. The approach is especially appealing to smaller funds, adds McTigue.
4. Efficiency. Many buy-side firms have overlapping systems and underutilized technologies. Rather than purchasing new software, they can save money by combining platforms and leveraging functionality that is already available. For example, says Rajiv Krishna, global head of the securities practice at Bangalore-based Wipro Technologies, firms that use different systems in Europe, Asia and the U.S. are now considering retiring entire sets of applications in a particular geography and replacing them with, say, those used in the U.S.
