Alternative Investment Firms Seeking out Sell-side Technology to Support Fund Growth

24 June 2008

A new category of software vendor is moving into the alternative investments space, addressing various aspects of the trade lifecycle of both established and growing hedge funds, according to Gravitas Technology, a leading technology service provider to the alternative investment management industry. This group of enterprise platforms, which have traditionally targeted the sell-side, includes Murex, Calypso, SunGard Front Arena, Sophis and Misys Summit.

As hedge funds move toward multi-strategy trading and globalization, they are facing the need for more intraday front and middle-office functionality around P&L, positions, cash, pre-trade analytics, compliance, risk and reporting. The trading style at many funds has become similar to that of a global asset manager. As such, these sell-side software vendors are rising to meet the needs currently unmet by traditional hedge fund technology, which in many cases, is equity-focused in a now multi-asset class environment.

Firms that lack the capability to handle derivatives, commodities and other products in a straight-through-processing manner are finding themselves exposed to operational risks resulting from inadequate automation and controls. “Sell-side systems present a compelling option for hedge funds that are dealing more and more with instruments that are not addressed fully by their existing systems,” says Jayesh Punater, CEO of Gravitas Technology. “We are now starting to see these traditional sell-side platforms offer solutions that work synergistically with a hedge fund’s current infrastructure.”

Bringing sell-side technology to the buy side is not new: Algorithmic trading, direct market access and execution management systems all originated in sell-side firms, and were adapted to meet the needs of hedge funds. Gravitas Technology, which provides vendor evaluations and recommendations in line with its consulting, software, infrastructure and integration businesses, is seeing two major trends emerging with sell-side technology moving into the hedge fund space, both for large established funds and smaller, growing funds.

In larger funds, these enterprise systems are being used in the front and middle office to provide risk management, position, real-time P&L and valuation. In smaller, growing funds, this technology is being offered on a hosted basis with wide access to new functionality.

• Established Funds: Risk Management and Valuation

As hedge funds grow, they find that their risk management needs grow exponentially with the complexity and volume of their investments. The risk tools available in order management systems (OMS) may be appropriate for long-short equities, but are often inadequate for credit, OTC derivatives, bank debt and commodities due to the fact that they do not have robust risk and compliance attribution functionality for more these products.

In one case study of a multi-billion-dollar hedge fund, the firm opted to use Murex as a middle office valuation engine, to work synergistically with the firm’s enterprise-wide OMS across asset classes. Used in this capacity, Murex allows portfolio managers to conduct valuation, what-if analyses and risk reporting across asset classes. In this case, the firm’s existing OMS is still used to enter trades, as the OMS offers sophisticated blotters and other tools that are unmatched by other systems.

• Growing Funds: ASP Offers Enterprise Functionality

In many small and growing firms, spreadsheets and manual tasks are still very much the norm. Using new technologies to automate key aspects of the trade lifecycle provides growing hedge funds with more time to focus on planning and executing creative, alpha-producing strategies.

In the course of its consulting and integration work, Gravitas is encountering hosted offerings from sell-side vendors such as Calypso with Sky Road custom hosting and SunGard Front Arena. These application service provider (ASP) solutions offer hedge funds enterprise system functionality on a hosted basis, making the systems affordable for smaller funds. For hedge funds that are finding their enterprise OMS too expensive or difficult to maintain, a secure ASP version of one of these systems is now an option to be considered.
One example of such a system is Calypso. Through a strategic partner vendor called Sky Road, the Calypso system is now available via an ASP solution to meet the needs of firms with sophisticated cross-asset trading strategies. The Calypso Sky Road ASP solution includes front-to-back-office functionality, portfolio and risk management, custom analytics, market data integration, automated prime broker and fund administrator connectivity and workflows and disaster recovery.
“As the hedge fund industry becomes more institutionalized, firms are broadening their approach to technology and operations. Traditional hedge fund vendors are not necessarily meeting the needs of multi-strategy, multi-asset hedge funds, creating opportunities for other providers to introduce options that will help firms manage risk, increase trading volume and grow their assets exponentially,” adds Punater.

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