Huge growth in the credit derivatives market, the re-emergence of large, multi-strategy fund managers, and the post-Amaranth blow-up is contributing to a surging demand for vendor-provided trading and risk systems, according to a new study from buy side research firm Carbon360 that was released alongside its updated Risk Management Systems Matrix.
Broad industry concerns about the lack of transparency and lack of risk controls in hedge funds are also driving a surge in sales of risk systems, according to Carbon360. It is predicted by Carbon360 that total spending in Risk and Portfolio Management Systems will be an estimated $5.25 billion, a forecasted increase of 17.36% over fiscal year-end spend of $4.34 billion. Risk and Management Systems will account for early 16% of total buyside IT spending in 2007. By fiscal 2011, Carbon360 predicts spending by the buyside on Risk Management and Portfolio Management Systems will exceed $9.68 billion.
ASP solutions are emerging to meet the demand of smaller hedge funds unable to afford the large, multi-million dollar risk systems. âFunds under $4 billion rely on Excel or prime broker- delivered risk solutions,â said Brian Shapiro, President of Carbon360. âThe larger risk systems, which can cost up to $4 million to buy and install are completely unaffordable for the smaller funds. Fund administrators and software vendors are now forming partnerships to offer risk solutions and analytics through a hosted ASP and SaaS business models,â he said.
Carbon360 surveyed 96 managers in the U.S. and rest of world with average assets under management of $4 billion, as part of its larger report into the state of the risk systems market and found the following:
- Greater than 29% of Hedge Fund Risk Management is still based in MS Excel (XLS);
- Over 16% of managers use proprietary technology for Risk Management functionality;
- More than 20% of managers currently utilize proprietary technology for their order management functionality;
- More than half of managers utilize broker provided market access tools as a backup to existing Order Management Systems;
- It appears that the Portfolio Management Market is dominated by fund administrator provided solutions as well as more than 25% covered by Advent software packages.
âA majority of interviewed firms advised that their primary risk systems have all been built in house. This leaves open the opportunity for many of the vendors mentioned in the report to see strong sales in the years ahead, â said Shapiro.
In terms of future trends, Carbon360 finds that most firms, large and small, have some kind of ongoing initiatives in terms of improving the market and credit risk reporting. âWe do see a trend in the uptick in demand for risk systems driven by institutional investors seeking greater transparency and risk controls,â said Mr. Shapiro. This report was compiled between August and November 2006.