Moving off in-house spreadsheet applications and tools provided by its prime brokers, Seasons Capital Management, a hedge fund manager based in San Francisco, has moved onto the Derivatives.com hosted, real-time risk management service offered by Imagine Software.
An SEC-registered investment adviser, founded in 2003 with a long/short investment strategy, Seasons’ portfolios are mainly focused on equity and equity options, but also include fixed-income securities (including convertible bonds) and credit default swaps (CDS), according to today’s release. The firm has 36 employees and over $3 billion in assets.
Prior to selecting Imagine, Seasons Capital was previously relying on a combination of in-house spreadsheet applications plus tools provided by its prime brokers. “Spreadsheets and tools provided by prime brokers will take you only so far. We felt an investment in advanced risk technology was necessary to pave the way for continuing success,” stated Jay Iyengar, VP of Trading at Seasons Capital in New York.
With the increased market volatility, Seasons Capital also cited the need for a real-time risk management tool as well as likelihood of more regulation and oversight as other factors motivating its technology decision. “The ability to generate intra-day risk and P&L projections, customize stress tests and track every trade since inception are all critical capabilities that put us in control of our portfolios,” stated Iyengar in the release. But the main reasons for its move to Derivatives.com, an ASP-based service, that is available through the Internet, was a business decision to prepare for the future, according to today’s release.
Hedge funds are getting off spreadsheets, said Lance Smith, cofounder and CEO of Imagine Software, in an interview with Advanced Trading. According to Smith, there are limitations to spreadsheets from a functionality standpoint and they can pose a security risk as well.
"As hedge funds have grown, so too has their need for sophisticated functionality. Despite being a highly useful, general-purpose calculation tool, spreadsheets do not have any built-in capabilities oriented to the very specific and demanding requirements of portfolio and risk management,” said Smith.
“Granted with enough time, users can build P&L and risk analytic functions inside a spreadsheet, said Smith, but he added, "These solutions are not scalable and are quite limited in scope compared to dedicated software solutions, which can ‘slice-and-dice' data and analysis results in very flexible ways. From an operational perspective, spreadsheets represent a security and maintenance problem,” Smith added, noting their lack of reporting capabilities run counter to today’s increasing demands for transparency. “In short, spreadsheets should be viewed as a stopgap measure, at best,” said Smith.
According to Steven Harrison, Imagine’s president and COO, hedge funds need a database to store all their data for audit control purposes. “A spreadsheet is not a database. It combines the data and the code and the logic all into one. It’s a bad architecture for a system,” said Harrison.
In some ways, hedge funds are preparing for increased regulation. “When the SEC comes in and evaluates your models and your systems, you say you have this policy and this control. The regulator will say, show me the paper trail for each of them. You need a database behind them. For example, if a fund is trading OTC options and someone changes the strike price or the expiration, “Our system saves all the changes that were made. You can look at your portfolio as of three weeks ago and all the marks and assumptions are retrievable," said Smith. “All of these audit controls and permissions, spreadsheets don’t support that, “ said Smith.
Hedge funds also have to make sure the person who built the spreadsheet never leaves the firm, said Smith.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio