The Infrastructure Advantage: From Risk to Alpha
The only way for hedge funds to achieve the independence, control, and flexibility necessary to responsibly oversee clients' investments is to own their technology environments. Period.
The buy-side, and in particular the hedge fund segment of the asset management industry, has long been insulated from the true costs of essential trade order and execution management systems and related market-facing connectivity infrastructures. But these products have never been free.
By and large, OEMS software utilized by hedge funds comprises an exceptionally capable set of mature, stable, and almost infinitely configurable technologies, developed at an equally exceptional capital expense. Yet, in turn, these systems have been provided to hedge fund managers by bulge-bracket and boutique brokers alike, at no hard-dollar cost, in return for prime services and/or execution business, or even as a differentiating element of any particular broker's suite of services.
The relentless cycle of fee compression across the Street, however, has definitely tamped the environment of "drop-off" technology, multiple EMSs on a single desk, etc. But for the emerging hedge fund manager, whether broker margins are sufficient to offset expensive software costs is now irrelevant – the consideration of large broker counterparty risk is the new reality, and prudent managers are now wise to consider what (or whose) infrastructure their indispensable tool-of-the-trade is plugged into. Moreover, government regulatory requirements aside, the manager's regulator-in-kind is the institutional fund allocator together with their accompanying due-diligence questionnaires (DDQ).
Managers should own their technology environments. Period. This is the only way to achieve the real measure of independence, control, and flexibility necessary to responsibly oversee a portion of the future pension of a third-grade teacher from the State of Ohio. Hedge funds large and small have a choice: Pay a huge premium for outdated legacy systems, or select forward-thinking solutions to achieve operational alpha alongside the alpha of your investment strategy.
And just what is operational alpha? It's about enabling hedge funds to right-size their operational expenditures and reallocate capital once reserved for unduly expensive infrastructure and operations to the front-office to invest in alpha-generating research, analytics, personnel, and core fund marketing activities over time. This is becoming the 'New Normal' for established and emerging hedge funds, as well as new launches. Focus on leveraging technology to simultaneously create operational alpha and enhance the investment decision-making process— as they compete in an industry filled with challenges, including changing fee models, the Volcker Rule, and investor mandates for transparency and operational credibility.
The buy-side, and in particular the hedge fund segment of the asset management industry, has long been insulated from the true costs of essential trade order and execution management systems and related market-facing connectivity infrastructures. But these products have never been free.
By and large, OEMS software utilized by hedge funds comprises an exceptionally capable set of mature, stable, and almost infinitely configurable technologies, developed at an equally exceptional capital expense. Yet, in turn, these systems have been provided to hedge fund managers by bulge-bracket and boutique brokers alike, at no hard-dollar cost, in return for prime services and/or execution business, or even as a differentiating element of any particular broker's suite of services.
The relentless cycle of fee compression across the Street, however, has definitely tamped the environment of "drop-off" technology, multiple EMSs on a single desk, etc. But for the emerging hedge fund manager, whether broker margins are sufficient to offset expensive software costs is now irrelevant – the consideration of large broker counterparty risk is the new reality, and prudent managers are now wise to consider what (or whose) infrastructure their indispensable tool-of-the-trade is plugged into. Moreover, government regulatory requirements aside, the manager's regulator-in-kind is the institutional fund allocator together with their accompanying due-diligence questionnaires (DDQ).
Managers should own their technology environments. Period. This is the only way to achieve the real measure of independence, control, and flexibility necessary to responsibly oversee a portion of the future pension of a third-grade teacher from the State of Ohio. Hedge funds large and small have a choice: Pay a huge premium for outdated legacy systems, or select forward-thinking solutions to achieve operational alpha alongside the alpha of your investment strategy.
And just what is operational alpha? It's about enabling hedge funds to right-size their operational expenditures and reallocate capital once reserved for unduly expensive infrastructure and operations to the front-office to invest in alpha-generating research, analytics, personnel, and core fund marketing activities over time. This is becoming the 'New Normal' for established and emerging hedge funds, as well as new launches. Focus on leveraging technology to simultaneously create operational alpha and enhance the investment decision-making process— as they compete in an industry filled with challenges, including changing fee models, the Volcker Rule, and investor mandates for transparency and operational credibility.
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