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"What I Know as a Former Hedge Fund CTO”: Fusing Technology Optimisation With Business Flexibility in the Alternative Investment Space

The alternative investment sector has recently evolved, with new regulations, rising institutional cybersecurity expectations, and the shift towards commoditised and cloud-based tech imposing long-term changes on the chief technology officer (CTO) roles and responsibilities. Yet it remains a highly fluid industry – firms can disappear almost as quickly as they appear, depending on market conditions. Fast reactions and consistently high performance are key to survival. 

In this high-pressure, high-stakes environment, CTOs and their internal IT teams must evolve their technical and non-technical skills, balancing the technology side with the broader systems and operations that make up the entire ecosystem. This has never been easy to do – especially with high staff turnover. But now, additional factors are at play: investors and regulators expect even the smallest businesses to demonstrate high levels of cybersecurity and operational due diligence (ODD) maturity from the outset.

More is needed to ensure the quick delivery of IT products and services to the business. Teams need a different approach, balancing the delivery of tech with the needs of the business and with additional governance responsibilities. Generic outsourced IT service providers may have some of these robust structures and processes in place – but most lack the in-depth expertise and knowledge of the nuances of the alternative investment space needed to deliver true value to firms.

As the sector continues to tackle these competing needs, how can businesses get the best of both worlds?

Engaging the experts

The dynamic evolution and growth of IT means that firms no longer need to settle for the generic technologist. Neither do they have to manage their unique technology challenges alone. Instead, businesses can leverage in-depth industry expertise by forming the right strategic partnerships, using them as a natural extension of the CTO. The best relationships develop when all parties are living and breathing the entire lifecycle of an alternative investment firm.

Tom Cole
Tom Cole

Amidst a rapidly shifting industry landscape, the CTO of a hedge fund needs to experience much more than the technology side of things. There is the entire ecosystem of the business to consider – from ODD and risk management to investor and regulatory concerns and portfolio management processes. If firms are looking to outsource any of their business operations, they need to ensure that the third-party emulates this close integration and becomes part of the fabric of the organisation. Everyone should be privy to the key themes that define a hedge fund in 2023 – not just at a high level, but to the nuts and bolts of what makes a good hedge fund, how to resolve various teething issues, and what investors are currently focusing on.

Firms should have high expectations of external industry experts. To communicate and collaborate effectively, they need to be willing to get to the heart of the organisation. From inside the hedge fund, they should be expected to get involved in bilateral conversations and meetings, picking up on intelligence far beyond the piecemeal communication that inhibits many strategic relationships. Only with these regular, up-close insights can a truly holistic picture of a firm’s people, processes, and technology start to form.

For example, everybody involved with an alternative investment firm’s IT development needs a deep appreciation and understanding of the increasing need for ODD maturity. The technology side of due diligence is closely interlaced with the broader systems and operations of the business, so there are nuances and important contextual details that could be missed with a more generic approach. At the same time, a busy hedge fund CTO may struggle to dedicate the time to gathering, analysing, and verifying information relating to ODD maturity. Firms must find ways to bridge the gap, combining cutting-edge technology with an in-depth knowledge of the complexities of the alternative investment industry to deliver a scalable and purpose-built solution.

The art of balancing technology, business, and governance

In-house IT departments can find themselves ingrained in delivering quick wins for the business, occasionally losing sight of long-range reporting requirements or broader strategic goals. But today’s hedge funds must balance providing the technology with delivering what the business needs – and then layer on strong governance.

If funds are to keep performing consistently in a competitive, unpredictable market, they must ensure they have technology flexibility in place to match business flexibility. The wider industry shift towards more subscription-based OPEX investment models is helping firms to be more agile – but companies still need to demonstrate this flexibility both at a commercial and technology level. Drawing from a deep well of technology and industry expertise will enable firms to map the latest tech innovations to the evolving needs of the business.

Firms must also have robust reporting processes in place, specifically designed to meet the demands of regulators and investors. Utilising tailored, industry-specific technology solutions to improve corporate governance will enable them to track and report their key performance indicators (KPIs) more efficiently, operating within an automated and data-rich environment to meet current and future compliance needs.  

Cybersecurity is another area where industry expertise is critical. Regardless of size or scale, all hedge funds are now expected to show high levels of cyber maturity from the outset, and investor and regulatory pressures continue to force change. By working with certified cybersecurity professionals, alongside a suite of automated compliance tools, hedge funds can achieve this operational maturity seamlessly, with the peace of mind of knowing all business processes are secure and compliant.

People, processes, technology: a more strategic approach

So, how can a CTO in today’s alternative investment space achieve this blend of technology optimisation, business flexibility, and mature governance? To ignite positive change, CTOs should take a step back from the day-to-day operations at the coalface of the firm. While they play a vital role in growing the organisation and ensuring technology aligns with business needs, the CTO should also be prepared to fall into the background when required, thinking strategically rather than tactically.

CTOs should form strategic partnerships that are rooted in deep industry expertise. This could mean bringing external experts into the fold. But even if they choose not to outsource their IT to a services provider, firms can optimise their in-house model by building in the commercial benefits of an outsourced function.

For example, setting clear costs mapped to specific people, processes, and technology requirements monthly will establish clearer commercial boundaries, enabling internal teams to meet rising investor and regulatory expectations. It also helps firms to scale and standardise their operations more smoothly.

By balancing the deployment of technology with the commercial and governance needs of the business – and leveraging in-depth industry expertise along the way – the CTO can provide alternative investment firms with the best of all worlds.

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Tom Cole is Managing Director – UK & Europe at Abacus Group

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group

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