Hedge Fund Technology
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Hedge Fund Technology: What Drives Innovators?
June 26, 2006
Are innovations in hedge fund technology largely a response to the growing demands of a rapidly evolving industry? Or are they driven as much or more by the need to accommodate to technology advances outside the hedge fund industry, such as the revolution in electronic communications?
The issue came up at a Security Traders Association (STA) conference in Washington, D.C. in May, where attendees repeatedly asked about the implications of new applications of instant messaging (IM), which until recently was considered more a novelty than part of the market's infrastructure. Now, however, regulators and hedge funds alike are being caught off guard as traders are transmitting securities orders via IM. This is spawning concern in compliance departments at the same time that it is giving birth to new companies like Pivot Solutions, whose IM Trader turns IMs into compliant trades--an example of how e-communications are pushing technology in new directions.
The use of IM is hardly surprising, said a trader at the conference, since hedge funds have no choice but to accommodate the generation of traders that grew up using Sony Corp.'s PlayStation. "We grew up using instant messaging, and that is the way we communicate," he explained.
It's certainly true that the communication habits of the videogame generation are helping to shape hedge funds and the rest of the securities industry as well. Other changes roiling the hedge fund industry, such as the ever-widening quest for unusual and specialized products, are also behind many of the changes. This Securities Industry News supplement has plenty of evidence to support both explanations for what is propelling one of the most dynamic and fastest-growing areas in all of IT today: hedge fund technology development.
One of this issue's stories pinpoints four key trends in the hedge fund industry that are fueling technology innovation: the push into derivatives, expansion into cross-border trading, institutionalization of operations and the retention and retrieval of electronic records, which includes IM archiving. As the article points out, intense competition for market-beating returns is propelling hedge funds into complex derivatives and multi-asset trading strategies, which in turn is creating opportunities for vendors offering "full suite," or front-to-back-office, solutions.
In another feature, we explain how one company is meeting the market's demands for sophisticated risk management tools. At a time when outsourcing is expanding from the back office to the middle office, we examine this new trend and the providers that are responding to it.
In a related development, we report that outsourcing is making it possible for hedge funds to locate virtually anywhere in the world, prompting firms to put down roots far from major financial centers like New York.
For hedge funds determined to make the best possible use of available technology, we offer advice from the experts on picking--and staying with--the right vendors. Other reports look at the possible pitfalls of side deals, blog-watching for profit, technology that tackles derivatives trading, and Thomson Corp.'s evolving tool kit for quantitative traders.
So which is the dominant trend? Are the growing demands of hedge funds pushing the technology, or is it the other way around? "Ultimately, it is the business that drives the product," Greg Woolf, CEO of software provider Vantage Reporting, told SIN. "Companies that have their eyes open to the evolution of the hedge fund business and are able to evolve products to match the needs of the business will emerge as leaders and dominate in the long term."