PA Consulting Group Survey: US Hedge funds spend USD 800 million on fund investment process and information technology (IPIT)
A new survey by PA Consulting group reveals that US hedge funds will spend approximately USD 800 million on IPIT annually.
This represents a significant proportion of the USD 30 billion total IT spent in the North American financial markets and the USD 4.4 billion spent by North American asset managers
The purpose of the PA study is to provide hedge fund managers with a better understanding of how the industry uses technology to support their investment process.
In this survey, PA quantifies how much the hedge fund industry spends on investment process information technology (IPIT), the projected growth of this spend and what features of this technology are most valuable.
In addition, PA provides benchmarks of technology spending for pre-trade, execution and post-trade processing, as well as an industry view on the most important risk management, position keeping and portfolio management features.
The conclusions are drawn from the responses of 51 US hedge funds. Respondents include senior management, portfolio managers, traders, operations personnel and technology support staff.
The main conclusions of the survey are summarized below:
* All hedge fund segments anticipate a steady or accelerated growth in IPIT spend over the next three years
* The top three drivers of IPIT spend are: investment information requirements, investment strategy and size of AUM. The size of AUM is an important driver for smaller funds whereas anticipated regulatory requirements is more important for larger funds.
* Functionality and price are the two main IPIT purchasing criteria.
* Pre-decision support represents the largest spend component (approx.60%) across IPIT
* An integrated IPIT solution appeals most to small and medium sized hedge funds, large funds will purchase components
* Hosted IPIT is acceptable to 1/3 of the hedge funds surveyed; small hedge funds are more likely to accept a hosted solution.
* Around 60% of all hedge funds expressed satisfaction with their IPIT providers.
* Hedge funds select prime brokers based on cost of execution, reliability of its operations and quality of execution
* Only a quarter of hedge funds consider the provision of an integrated IPIT solution by prime brokers important.
* Order execution, order management, portfolio management, position keeping and risk management (PKRM) are the most important components of an integrated IPIT offering.
* Most hedge funds use proprietary PKRM applications; the largest sized hedge funds use the least amount of proprietary PKRM applications.
* Small hedge funds are most likely to switch PKRM applications.
* The largest hedge funds are least likely to switch IPIT providers because of the complexity of the PKRM and portfolio management systems.
* The hedge fund industry is estimated to spend USD 800 million on investment process information technology in 2004
* Growth in IPIT spend is projected to be approximately 4 to 5 percent per year between 2005 and 2007.
* A majority of IPIT budget is spent on pre-decision support
* The budget breaks down as follows: 56% on pre-decision support; 23% on order execution; 21% on post-trade.
* 71% of respondents indicated that they would increase their IPIT spend if all of the required functionalities were included
* The top 3 required features of an integrated portfolio management system are: aggregation by strategy, performance management & attribution and aggregation by asset class.
* The top 3 required features of an integrated position keeping and risk management are: P&L monitoring, risk attribution and value at risk.
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