Hedge fund IT spending in North America is expected to grow at a compound annual rate of 4.4% (USD231 million) from 2009 to 2014, with Asia estimated to grow the fastest at 7.2% (USD36 million), according to a new report, Hedge Funds 2011: Navigating Tumultuous Waters, from Celent, a Boston-based financial research and consulting firm. In Europe, IT spending will see an increase of 5.6% from 2009 to 2014.


Despite the contraction that followed the financial crisis, the report says that the hedge fund industry has since rallied, concluding 2010 with the largest quarterly increase in assets in its history: USD149billion. Total AuM grew to USD1,917 billion, an indication of confidence.
The financial crisis has had not only short-term influence on financial performance and investor allocations, but also long-term sway on market structure and business models. Hedge funds are confronted with the challenge of deciphering the new dealer landscape, de-risking their portfolios and operations, stemming the regulatory tide, broadening the investor mix, and increasing competition in a rapidly consolidating space.
In a trend, institutional investors and pension funds are seeking more exposure in the hedge fund space, which bodes well for fund launches. The crisis increased scrutiny on hedge funds’ operational resilience. Collateral management, counterparty risk, transparency, operational due diligence, and reporting are the foremost investor concerns in this new landscape.
The hedge fund industry is expected to consolidate. Two tiers-multibillion funds and boutique funds-will emerge. Costs will increase and barriers will rise.
In 2011, investments are expected to accelerate as hedge funds embark on projects related to growth. However, the bulk of the IT budget will be spent on system maintenance; most firms will wait to see the final regulations before implementing solutions. By 2012, IT spending will return to a solid growth pattern, with firms spending at a pre-crisis level. Firms will also seek to differentiate by achieving operational alpha through technology.
High priority items in 2011 include risk analytics, risk monitoring and control, legal and compliance, reporting, pricing and valuation, collateral management, liquidity risk management, performance measurement and attribution, and front end growth investments (i.e., algorithmic trading and smart order routing). Some of these priorities will be driven by investor demands; others will emerge through de-risking efforts, an evolving regulatory environment, or the instruments/strategies used to generate alpha. Celent’s analysis shows that operational and portfolio de-risking presents the most critical driver, followed by investor demands.
Appetite for outsourcing is likely to grow because funds unloaded the burden of non-alpha generating activities to vendors. Celent also expects the "buy versus build" debate to evolve. Providers should increase their flexibility in terms of providing off-the-shelf packages in modules or add-on components with customisation capabilities built in.
