Hedge fund technology develops across the value chain
By James Williams – Getting the right technology solutions in place for today’s hedge fund manager is a pressing concern. Tighter trade margins and growing regulatory/compliance costs are hardly conducive to ramping up a hedge fund’s annual IT budget. Where possible, they need cost-efficient solutions for their technology infrastructure, yet at the same ensuring the highest standards are being upheld.
One significant push in recent times has been a concerted focus on developing truly integrated front-to-back platform solutions for the buy-side. From portfolio construction and analytics, pre-trade risk assessment, through to order and execution management, reconciliation and reporting, getting a single consolidated version of the truth, based on the same consistent data set, is fast becoming a top priority.
Bloomberg has been well placed to develop such a solution. Bloomberg Trading Solutions includes modules such as EMSX, PORT (portfolio and risk analysis), MARS (Multi Asset Risk Solution), Bloomberg Tradebook, and AIM (Asset & Investment Manager), a blended OMS, EMS solution ideal for start-up hedge funds as it is able to support them from front through to back.
“AIM has a rich blend of execution tools with position management, pre-trade compliance engines etc, meaning we have a compelling total cost of ownership argument,” says Richard Pascoe, Bloomberg Trading Solutions – AIM.
“Historically our clients have been more focused on the front end, and order management, but where we’ve gained a great deal more credibility and gained market share in the hedge fund space, is by building out the infrastructure to become a fully matured position portfolio management system.”
As clients start to harness the full capabilities of Bloomberg, the more they are looking to consolidate their data streams. “Since traders and decision makers favour the Bloomberg data, they would like all of their other systems to be fed by the same data. In other words they want to ensure that the numbers used in the back office are the same as those in the front office,” says Ulf Svensson, Enterprise Products & Solutions – Strategy & Business Development, Bloomberg LP.
“A lot of the work we’ve been doing lately is to help clients in providing that data. It could be end-of-day data, reference data, security master data, all the way to real-time streaming data.”
The key feature of platform integration is that hedge funds can pick and choose which solutions they want to add, or subtract, from the infrastructure as they evolve.
“It’s a plug and play approach, and that’s a key advantage. It avoids clients having to spend millions of dollars buying best-of-breed models,” adds Svensson.
Citadel Technology is a technology services company and part of the Citadel family. Having an umbilical cord to one of the world’s most technologically innovative multi-strategy hedge funds (Ken Griffin’s Citadel fund) means it is well placed to respond to the demands of the hedge fund industry.
One key drive has been the creation of a truly integrated OMS, EMS solution – referred to as ERAM OEMS – to provide seamless order, execution and trade management across listed, OTC cash and derivative asset classes.
“Our view is that OEMS represents the future,” says Pranat Pathak, Global Head of Client Relationship Management for Citadel Technology. “Our solution combines the best-of-breed features of standalone OMS and EMS systems. You need to provide a solution that is truly multi-asset in nature; one that allows a portfolio manager to seamlessly convert their investment thesis into an order.”
A report published last month by Greenwich Associates estimates that annual buy-side spending on OMS and EMS has increased 10 per cent over the past two years. This is largely in response to growing investor demands and tougher regulation and compliance.
Citadel Technology understands this. Its OEMS solution aims to help managers overcome these cost pressures, and at the same time provide the sophistication necessary to operate in an increasingly complex environment.
“We need to think in terms of technology that truly offers support to complex Investment Management Agreements, complex compliance processes. How do we integrate with a risk engine to enable user-defined pre-trade risk checks before an order is sent to the market? How do we allow users to look at different slices of data that pertain to their unique workflows rather than simply providing a black box solution that forces users to modify their workflows?”
Managers not only want an integrated solution where a trader can automatically send an order from the portfolio management solution to the OMS. They also want to ensure that IMA and compliance checks are performed before those orders get routed for execution. In effect, a real-time automated process.
“Some vendors might be state-of-the-art when it comes to the back office but then try to vertically integrate their solutions via acquisitions into the front office and offer a solution, which is not necessarily their core competence. From my perspective, that kind of solution does not work unless the vendor is truly skilled front-to-back.
“Our OEMS solution integrates with other components of the overall platform in a plug and play mode and helps managers work in a more automated manner. This helps to diminish operational risk, which is more pronounced when using disparate systems,” states Pathak.
Another growing technology trend is the use of cloud-based platforms. One of the leading providers is Eze Castle Integration, whose Eze Private Cloud has enjoyed significant uptake in recent times: currently growth is 40 per cent per annum.
According to Bob Guilbert, Managing Director at Eze Caste Integration, the two main concerns that hedge fund managers have before deciding to use the cloud are: 1) How secure is my data, and would it ever be commingled with another fund on the platform? 2) How does the cloud work with respect to regulatory/compliance requirements?
Guilbert comments: “With respect to security, there is no chance that any data would ever be commingled. Every client’s data and applications are isolated on the cloud and virtualised at multiple levels. With respect to regulation/compliance, we’ve worked with a variety of third parties to build solutions. One such solution is “Eze Archive”, which we’ve developed with our partners at Global Relay.”
Security has recently been the source of innovation for the Eze Private Cloud with Guilbert confirming that ECI has partnered up with a Canadian firm called eSentire, which proactively monitors the cloud infrastructure for security threats targeted at alternative fund managers.
“To guard against cyber attacks, eSentire has developed a solution called AMP – Asset Manager Protect. If a fund is being attacked or someone is trying to gain access, they will apply the remedy not only to that client, but to all clients using the eSentire AMP service.”
Should there be an attack, the eSentire Security Operations Service (eSOC) identifies IP address hosts that are confirmed sources of malicious activities, and submits these IP address hosts to the eSentire AMP blacklist.
In addition to security innovations such as AMP, Eze Castle Integration is also looking at ways to enhance the performance attributes for hedge funds that choose to run applications on the private cloud.
One such solution is solid state drive (SSD) technology, the benefits of which are two-fold.
“Firstly, they have no spinning media so it reduces the risk of physical breakage,” says Guilbert. “But the key advantage is that the IO can traverse through the drive much faster than a traditional hard drive. For managers who are using our cloud, and maybe working with large volumes of historical data to run sophisticated models and algorithms, higher performance is a compelling benefit, and a competitive advantage.
“We are looking very closely at incorporating this SSD technology into the private cloud.”
Mobile technology is pushing firms like Maples Fund Services and SunGard to update their user interfaces. This is to ensure that their solutions – be they middle office reporting solutions, front-end portfolio management solutions (e.g. SunGard’s Front Arena) – can extend across different platforms.
“Many of our client-facing applications were originally developed in Microsoft Silverlight. However, in order to be on top of the next wave of developments, including compatibility with all mobile devices, we are currently re-writing all of our user interfaces in HTML5,” confirms Tyler Kim, Chief Information Officer at Maples Fund Services.
This same technology is also being utilised by SunGard. Last year, the firm launched Hedge360, an integrated cloud-based platform that supports, in real-time, a series of SunGard modules including Front Arena, APT (a risk analytics solution), and VPM (fund accounting and reporting).
“Right now we are adding two areas: we are powered by IntelliMatch Operational Control, which is a reconciliation engine and a collateral management system, Apex, to Hedge360,” says Dae Kim, Director of Hedge360 at SunGard, who confirms that, given the enormous reporting burden being placed on managers, the firm’s recent focus has been to build a solution for Hedge360 that provides consolidated reporting and dashboarding: the result is the Hedge360 Web Portal.
“The technology has been designed to accommodate mobile users as well as browser-based users. The portal has been built using HTML5. The end user will be able to open up the portal within an iPad for example, and see various data visualisations, heat maps, bar charts etc, on the portfolio.
“We’ve worked with CIOs and marketeers to ensure that this web portal can become a key part of their marketing tools when presenting to prospective investors. In addition, clients will be able to add their own logos to reports, customise menus, so that the web portal becomes an extension of the firm,” explains Kim.
By sitting above the different modules that make up Hedge360, the web portal solution is able to take all of the data running front through back, in a hedge fund firm, and neatly summarise it. This is a big advantage to CIOs and CEOs who need to make quick, strategic decisions, and reinforces the integration theme that is now becoming so important to the industry.
More importantly, it means that managers will be better able to handle different reporting requirements ranging from OPERA to Form PF and the AIFM Directive, not to mention investor reporting, which is becoming evermore customised.
“We are beta testing the web portal right now. We aim to officially roll it out to the market later this year,” confirms Kim.
Maples Fund Services’ Tyler Kim believes that with the onset of greater transparency and accurate reporting, it will become even more vital to provide a first-class data management function. With so much data coming in, and multiple reporting requirements, hedge fund managers need all the help they can get.
“You need people with deep industry experience who know what they are looking at. You need strong data professionals who can process things at scale, which we have in our Hong Kong office. And at the same time have a high calibre of analytical skill to look at that data, spot anything that doesn’t look right, and resolve issues before things go live, which is what our team in Montreal does. It’s vital to standardise and normalise the data set,” says Kim.
“In addition, you need a good development team that knows all of the different modes of data integration and ways to present it through web-based portals, static reports etc.
“We are able to do this on a timely basis because our data management team work closely with the IT team and knows how best to leverage technology.”
Institutions are becoming more hedge fund-like and starting to hire their own internal hedge fund teams. As a result, Kim believes that the middle office reporting expertise that Maples FS currently provides to its hedge fund clients will, over the coming years, be increasingly adopted by pension funds as the nature of their portfolios becomes more complex.
“I think the next big technology trend will be all about big data; that is, the ability for managers and institutions, to absorb and distil information and present it in a meaningful way. The big data warehousing trend that started in the ’90s is coming back with the explosion of data that managers are now having to work with and manage.”
For Citadel’s Pathak, integration and the ability to make fund managers lives as easy as possible will be the main development. There will, he says, be a focus on automating manual processes to reduce errors and associated costs: “We spoke to a fund manager recently, who told us that he rates systems based on the number of mouse clicks that he needs to make to go from portfolio construction to order management to order execution.
“Fund managers need to focus on investment management, but they also need technology to help them implement their own regulatory and compliance checks in order to demonstrate to investors that they have all the necessary checks and processes in place. More and more we are going to see solutions that facilitate client workflows.”
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