Hedge funds will spend approximately USD2.09 billion on information technology (IT) in 2011, representing an average of approximately nine basis points of assets under management, according to the Prime Finance 2011 IT Survey released today by Citi (NYSE:C) Prime Finance.
The report, “Managing Your Hedge Fund IT Spend to Achieve Differentiation”, which surveyed over 75 hedge funds in the US and Europe and 15 vendors , documents for the first time both the industry’s aggregate expenditure on information technology and the average expenditure per hedge fund.
“The Prime Finance 2011 IT Survey demonstrates the powerful impact of technological innovation on the hedge fund industry,” says Sandy Kaul, US Head of Business Advisory Services of Citi Prime Finance. “The survey, providing information on IT investment for the first time, enables industry participants to evaluate their own expenditures and see how they stack up against their competitors. While the USD2.09 billion spent by hedge funds is equivalent to just 2.8 per cent of forecasted total industry-wide securities and investment spending of USD75 billion, hedge fund IT investments have a disproportionately large impact on advancing the capabilities of the overall financial services industry due to their complex trading strategies and multi-asset focus.”
As the survey demonstrates, hedge funds are changing their approach to investing in new information technologies. While hedge funds have traditionally sought to differentiate themselves and to enhance their own performance through technological innovation, the current risk and regulatory environment is driving hedge funds to invest instead in more efficient use of collateral and financing. Software and solutions designed to improve portfolio management and trading have become standardized and disseminated across a broad group of hedge funds.
“The survey findings have important implications for hedge funds making their own plans for technology and other capital expenditures in 2012,” said Alan Pace, Head of Citi Prime Finance in the Americas. “We are committed to delivering this type of thought leadership on a consistent basis as part of our overall business advisory offering, as feedback from clients and other industry players indicates that such studies provide information that individual clients would find impossible to obtain on their own.”
Large or “franchise” hedge funds – those managing USD5 billion or more – realise significant economies of scale in their information technology expenditures. Franchise-sized firms with assets under management (AUM) in excess of USD5 billion are expected to spend an average of USD7.9 million on technology in 2011 – more than 13 times the amount forecast for small funds with AUM less than USD500 million. Small funds charge nearly the entire IT expense to their management company, but as AUM grows, more of these expenses are charged back to the fund level. The largest hedge funds are able to charge 20 to 30 per cent of these costs back to the fund.
“The allocation of more expenses to the fund, rather than to the management company, can be considered a premium that investors pay to access these managers and reflects the ability of the largest funds to absorb these expenses without significantly affecting performance,” says Bill Saltus, Head of Hedge Fund Technology Consulting, at Citi Prime Finance. “The hedge fund business is highly competitive and, as our survey also indicates, innovations in technology are making it easier for newcomers to enter the field.”