Although hedge fund managers now find themselves in a rather precarious position, due to their close relationship with struggling banks, roiled markets and nervous investors, firms that survive will continue to make investment decisions, trade, manage risk and report to investors, according to the TABB Group. A new research study from TABB Group, “Hedge Funds and Technology: Automation and the Feedback Loop,” examines the impact of electronic trading on the hedge fund industry, analyzing the effect of automated trading and the feedback loop between the front office, other systems and the entire marketplace.
Due to a variety of alpha-generating tactics within the hedge fund community, there is a wide range of trading needs that depend on the strategy, size and structure of a firm. This study explores the role of technology within these firms, and according to TABB Group, hedge funds are already upgrading their trading systems to handle automated markets and increasing back-office efficiencies. With tremendous pressure facing the industry resulting in fewer hedge funds and reduced total assets under management (AuM), TABB Group found that over 75% of these firms clearly appreciate the benefits of electronic trading and want to trade multiple asset classes electronically, including listed options, listed futures, fixed income and FX. Despite a 40% drop in total IT spending to $882 million in 2009, due to reduced revenues, Cheyenne Morgan, research analyst and author of the study, said in a press release that front-office trading operations will not suffer as radically as other areas of the firm. “Any software or service that directly supports the investment process stands a far better chance against this inevitable tide of cost cutting,” according to Morgan, based on interviews with 61 U.S.-based hedge funds with a combined $227 billion AuM, representing approximately 15% of total U.S.-based hedge fund assets.