In modern finance, technology has the power to make a hedge fund. However, trading technology has historically been a closely guarded secret, kept under lock and key by large and successful hedge funds. For budding emerging managers, without the resources or expertise to emulate such sophisticated technology, a key ingredient in large hedge funds’ success has been just out of reach.
This, however, is changing. The powerful engines that drive hedge funds giants are no longer the preserve of the privileged few with vast teams of in-house developers and technologists. Vendor technology has made huge leaps in recent years, meaning that for ambitious emerging hedge funds looking to take on the goliaths of Wall Street, cutting edge trading systems are now at their fingertips. This shift is having a profound effect on the industry – changing the rules of the game and lowering barriers to entry.
While there are countless trading products in the market vying for managers’ attention, choosing the right technology is a challenge with lasting implications. The aspiration of every emerging manager is to grow and to compete with the very best – technology is therefore not a short-term choice, but a long-term strategic decision.
Plugging short-term gaps with one-off solutions, without a long-term strategic direction, risks deepening the issues that the technology was intended to solve – creating a tangle of products that do not work effectively together. Disjointed approaches over time increase inefficiencies, create extra costs and confuse workflows, inhibiting managers’ trading operations as they look to grow and mature. So, for those looking to make such a critical decision, what are the key considerations?
1. Seek simplicity: A sprawling tangle of disparate systems, accumulated over years as a firm grows and diversifies – bolting on asset classes, data providers and risk management capabilities – is a common problem for managers. Expensive, inefficient and not wholly compatible, the end result can become a messy, mediocre system. Second best is not an option in the highly competitive hedge fund space. Simplicity is therefore key. Managers should seek a single system covering multiple asset classes, as well as providing data and risk management capabilities all in one place to ensure that the front office works seamlessly across every aspect of trading operations.
2. Partner with native providers: There is a huge amount of choice when looking for vendor technology. Choosing the right partner is essential – pedigree and experience should be at the heart of this decision. Partners that develop purpose-built global cross-asset systems from the ground-up, with an understanding of how systems integrate to deliver the best results are invaluable. Beware of those chasing a quick buck, offering the next big thing without the expertise or infrastructure to support your long-term success.
3. Consider technology a long-term investment: Technology must be able to anticipate future growth and workflows. How and what an emerging manager is trading now may not be the same in five or ten years, therefore ensuring their technology easily allows for diversification and increasing volumes is crucial. While a firm may not use all features of a trading system at point of purchase, knowing that the technology can grow and adapt to the business as it scales is a worthwhile investment – saving long-term cost and avoiding the need to collaborate with inferior third parties.
4. Do not underestimate client service: Technology is only as good as the people who build and service it. Complex technology needs the expertise to match, via a global support network available at all hours of the day and night.
In often challenging markets, there is little margin for error. Technology allows firms to navigate risk and capitalize on opportunity – without it, managers are at a significant disadvantage. Unified systems able to grow and evolve over time are the answer. Emerging managers looking to break into the big league need to think carefully about their technology to futureproof their business and keep up with the very best in the industry.