With tremendous pressure facing the industry resulting in fewer hedge funds and reduced total assets under management, a recent Tabb Group report, "Hedge Funds and Technology: Automation and the Feedback Loop," predicts hedge funds will reduce their IT spending by 40% in 2009 to $882 million due to reduced revenues. But front-office trading operations will not suffer as radically as other areas of the firm, according to Cheyenne Morgan, research analyst and author of the study. "Any software or service that directly supports the investment process stands a far better chance against this inevitable tide of cost cutting," writes Morgan, who based the report on interviews with 61 U.S.-based hedge funds with a combined $227 billion in assets under management, representing approximately 15% of total U.S.- based hedge fund assets. More than 75% of these firms appreciate the benefits of electronic trading and want to trade multiple asset classes electronically, including listed options, listed futures, fixed income and FX.

As hedge funds attempt to move their budgets from fixed to variable costs, Tabb Group believes that there will be an increase in buying rather than building solutions to help hedge fund traders execute orders within a complex structure of lit and dark markets. "Competing within Wall Street's new ecosystem, technology vendors that develop smart order routers, order management systems and execution management systems need to insure that their solutions are flexible enough to accommodate several asset classes, addressing the interoperability of systems throughout the life of a trade, backed by end-user support services." Although known for their sophisticated clientele and complex strategies swiftly and accurately exploiting market fluctuations, there are actually few hedge funds at the cutting edge in applying technology to generate returns, according to Tabb Group analysts. The majority use traditional investment techniques, which is why Morgan says that although nearly 80% use an OMS, it is difficult to use efficiently, particularly for non-equity trading. She adds that as firms implement new technology, nearly a third say that their trading desks are the most challenged area of the automated operation. Because the feedback loop between the front office and other systems is short, with firms now holding positions for minutes, if not seconds, "over 40% are committed to making improvements, recognizing that the back office can become compromised as a result of their fast-moving front office."

Adam Sussman, TABB's director of research, commenting on the study, says, "Speed will always be important but there is a focus is on integration as well. Hedge funds are now trying to 'feng shui' their desktops, creating environments that allow for the smooth transition of liquidity and process. The front office will continue the effort to shave microseconds from each trade without leaving the back office trailing far behind."