Hedge Funds Take a Hit

Hedge Fund Issues
The current environment speaks for itself: Barclays, as well as untold other firms, has reduced its prime brokerage resources by roughly 30 percent; Citibank announced that it will no longer provide “free” technology support to hedge funds; and Wealth Bulletin predicts that hedge fund assets under management will fall from $1.93 trillion in the first half of 2008 to $900 billion by the end of 2009. With reduced liquidity for the underlying collateral backing loans in the repo and securities lending markets, credit for highly leveraged funds is increasingly expensive or simply not available. Also, as the remaining investment banks turn their attention toward restructuring into bank holding companies, their risk tolerance decreases and their capital reserve requirements increase, affecting their ability to extend lines of credit. Regulatory overhead for hedge funds is also likely to increase, and prime brokers, in general, will direct their reduced services toward bigger players.

All this suggests a major, global contraction in the space and, very likely, only the strong will survive. As a result investors will increasingly look to hedge funds with institutional organization, operational controls and other enterprise-class capabilities — including strong technology — and the cost of developing and/or maintaining such capabilities, especially with less help from the prime brokerage community, will eliminate many managers.

Technology Focus
Especially in tough times, pursuing strategic initiatives is vital, as it provides a huge differentiator when conditions improve. Often, when economies recede and flex, there’s a tectonic shift in the business landscape, allowing new firms with a vision and a bold agenda to assume a mantle that may have previously been held by more-established participants.

Clearly the financial services sector has seen such a tectonic shift, and firms that continue to pursue strategic objectives will be rewarded coming out of the recession. Most firms, however, tend to become virtually catatonic when trouble hits and focus only on tactical needs and expense reductions. Sometimes this is the prudent course so that a firm can live to fight another day. But it doesn’t improve the firm’s competitive position. In either case I’ve always tried to run an efficient, lean, IT organization, so the “do more with less” philosophy isn’t much of a departure from how we already operate.

Even before the recession we sought to reengineer our infrastructure to make it more robust, reduce costs, increase scale and improve connectivity among our global offices. To accomplish this we introduced an array of new technologies, including a global MPLS network, WAN acceleration, iSCSI SAN arrays, live data replication, VOIP, IP video conferencing, blade servers, virtualization and additional network/power redundancy. In addition to the significant functional gains, these moves have saved us real money by providing a consolidated global infrastructure, reduced management/consultancy overhead, more-efficient resource utilization, reduced communication costs and reduced power consumption.

On the software side, we’ve built and are now beta testing a new enterprisewide portfolio management system. The system presents a dynamic, service-oriented technology platform that utilizes a rich Internet application (RIA) delivery mechanism and promotes the concept of just-in-time integration — that is, the ability to fully and quickly integrate new services (from virtually any supplier, in-house or third-party) into a cohesive, custom application suite. Given the opportunistic nature of many hedge funds, the speed and efficacy with which new application and data services can be integrated and delivered is a critical factor in how effectively a firm can pursue and manage new investment opportunities.

In our system everything is a service, which makes the architecture incredibly pliable. The system will deliver a broad range of enhanced, multistrategy and multi-asset-class institutional functionality to our users, including portfolio management, trading, operations, accounting, risk, compliance, investor relations and marketing. It’s the kind of initiative that’s a strategic differentiator and that will ultimately serve to enhance the franchise.