Why New Launch Hedge Funds Need to Choose Technology Wisely

According to Hedge Fund Research data, the total capital invested in hedge funds grew to over $4trnn last year, a 10% rise on the previous year and that growth is projected to continue, with multi-asset, multi-strategy funds in particular gearing up for another strong year. Despite the changing economic backdrop in 2022, with the S&P 500 losing 20 percent in the first half of the year, hedge funds performed markedly better, as the HFRI Asset Weighted Composite Index, a measure of hedge fund performance, gained 1.6 percent over the same period.

As new funds continue to launch, one of the most critical decisions they face is around the technology and infrastructure they put in place to support their business activities. Getting things right at the start can set them up well for success over the long term, whereas making the wrong technology decisions in these early stages can lead not only to unforeseen costs, but also to a number of problems further down the line as their business evolves.

So how can new funds ensure they have the right solutions in place that will enable them to launch quickly and cost-effectively, while laying a solid foundation for their future growth?

Multiple systems are not the answer

Most new fund launches are dealing with a limited amount of resources and therefore have to wear many hats, including sourcing new investments, managing portfolios, trading on the markets, running operations, taking care of accounting and finance, and managing technology, all while running the business on a daily basis and complying with the necessary regulations.

At launch, from a technology perspective, such firms are faced with a range of options regarding which solutions to implement across the front, middle and back office. Some opt for what they consider to be a ‘best of breed’ approach, by adopting different products from different vendors. However, this can be both costly and cumbersome, as it means multiple implementations, integrations and file transfers, whilst having to set up workflows across numerous application sets that may or may not work well together.

There are other disadvantages to this approach. When working with diverse systems, everything depends on how well those systems are integrated. If a change is made in one, it may cause the integration to break, which could lead to the whole house of cards to come tumbling down and the business can be severely disrupt as a result of one small change in one system.

Why an all in one approach makes sense

For new hedge funds, adopting an ‘all-in-one’ system is generally a much better approach, for a number of reasons. First of all, it significantly cuts down the procurement and review process. The economics are also much more compelling, as an all in one solution will generally be more cost-effective than multiple vendor contracts, each with its own minimum pricing level.

Another benefit of a strong all in one solution is that everything is fully integrated right out of the box, which removes the need to integrate diverse components. If a change is required or customisation is needed, having a single point of contact supporting the entire business lifecycle is vastly more efficient than trying to get four or five vendors to work with a new data set or a new workflow, for example.

Of course, in order to be effective, the all in one solution should provide a high level of functionality to cater for each business process, including the portfolio management (PMS), order management (OMS) and execution management (EMS) components.

From an accounting standpoint for example, the PMS should offer a true double entry general ledger system. Furthermore, on the OMS/EMS side, multi market and multi asset functionality is essential, because even if a hedge fund operates a simple strategy at launch, things won’t necessarily stay that way. The fund may decide to expand its business by developing new strategies in new markets, so it is important that the chosen platform is able to cater for that and scale with the fund.

Regulators are also placing a greater focus on hedge funds, it is essential that firms have a system that is fully auditable for compliance and regulatory review, so the compliance engine should offer a range of standard regulatory reports as well as custom reporting, to provide transparency not just for regulators but for the investors too.

Building for scale and growth

A key requirement for any platform adopted by a new fund is the ability to scale. At launch, a hedge fund needs to know that it can start small and that the system will be able to grow as it grows, scaling not only across new strategies, markets and asset classes, but also in terms of volumes if, for example, the fund decides to launch a systematic strategy that pumps a high volume of orders into the market algorithmically.

Hedge funds have long relied upon complex systems usually built up over many years with often substantial investment. In today’s world, it is critical that new funds implement a system which allows them the flexibility to adapt, remain competitive, and plan for future growth. Central to this is finding a comprehensive PMS, OMS & EMS solution which offers the functionality, scale, speed to market, and multi-strategy, multi-market, multi-asset coverage so that they can become operational quickly, cost-effectively, and fulfil their full potential.

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Chris Jenkins is Managing Director at TORA, an LSEG Business

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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