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Benefiting from Compliance Technology

A tough economy has one hedge fund exploring trade-compliance technology and finding creative ways to finance it.

Equinox Capital Management Ltd, a buy-side firm that runs its own hedge fund, as well as investing in other hedge funds, recently implemented Misys Eagleye, a .NET-based compliance solution to minimize trading risks.

Equinox is using the system to manage "customer compliance," such as asset allocation, exposure and credit ratings.

The firm, which specializes in institutional and high-net-worth clients in Europe, the United States and the Middle East, chose Eagleye because of its ability to provide pre- and post-trade compliance, something that Equinox had never formally addressed since its inception in 1997, says Philip Brown, head of IT at the firm.

Rob Hegarty, vice president of securities and investments at Massachusetts-based TowerGroup, explains that, although compliance is necessary, by definition it places restrictions on what a trader can do and how quickly he can do it. While pre-trade compliance allows a trader to catch violations before execution, many traders have a hard time adjusting to the practice.

Despite these challenges, Brown says Equinox plans to implement the technology now to enhance its relationship with its clients. "If we can report a little more quickly and be more transparent, it can only enhance our relationship with our investors." Enhancing the level of trust, he notes, is increasingly important in this tough market.

Brown adds that, despite the possible benefits of the compliance technology, the addition of Eagleye technology was more of an "evolution" than a formal search for a compliance solution.

Brown says he first noticed Eagleye while examining products for a separate strategic division of the firm's parent company, the Equinox Group. "I thought that the product would also be suitable for the hedge-fund sector," he explains, differing from the large asset managers that Eagleye had originally targeted. "We got involved as a BETA tester to verify that the product would actually work in our arena, (we) liked the product and decided we'd like to become a customer."

Brown explains that by BETA testing the product and helping Misys to customize it to suit his hedge fund, Equinox provided the company with a whole new market --- other hedge-fund clients. As a result, a unique relationship was formed which allows Equinox to share profits from any new hedge-fund clients that buy the product.

"We've formed a joint venture," he says. "We've proved that their product works for hedge funds. We have agreed on a split of commissions on each hedge fund that signs on, so we're hoping for a quick return on our investment in this technology."

Tower's Hegarty says that while the practice of joint ventures between asset managers and technology firms is unusual, it is not unheard of in the alternative-investment world. "Hedge funds tend to find creative ways to generate revenue that other firms do not," he explains.

Brown says that the implementation process has been gradual, with Equinox implementing post-trade compliance first, in order to ease the traders into the compliance process. Pre-trade compliance, he says, may be more of a challenge, due to its intrusive and time-consuming nature.

"Hedge funds would be particularly sensitive to anything that slows down the trading process. They have to make very quick trading decisions, quicker than traditional money managers and pre-trade compliance can slow that down," he says. "So you try to move the minimal amount of compliance checks into the pre-trade cycle and leave the real processing-intensive-compliance checks for the post-trade."

While Equinox explored other products, including Beauchamp Financial Technology, Brown says that Eagleye offered the greatest pre- and post-trade compliance for the firm's specific trading goals, which include attracting more institutional investors who are interested in hedge funds that can demonstrate the ability to manage compliance risk. Officials with Beauchamp declined to comment.

Brown says that Equinox was also drawn to Eagleye's .NET base, enabling the firm to integrate to a single Microsoft SQL Server 2000 database. This aspect allowed the firm to cut costs on administrating and supporting Unix and Oracle legacy systems, as well as added a level of mobility for messaging.

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