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Traditionally IT vendors have had limited scope to service the lucrative world of the hedge funds, but increasing exposure and regulation are forcing this industry’s participants globally to look to technology to ease some of their pain points. This is according to a new report by independent market analyst Datamonitor (DTM.L) “Securities Processing in Hedge Funds”. It predicts global hedge funds’ investment in IT will reach $3.3 billion by 2009. The report which investigates the technologies being demanded by this industry to cope with new market developments also reveals opportunities for technology vendors are not restricted to the global hedge funds industry alone but also to service providers such as prime brokers and fund administrators.
“The evolution of the hedge fund sector is somewhat inevitable. Hedge funds globally will look to use technology to improve execution capability in the front office as they seek competitive advantage”, says Nii Barnor, financials services technology analyst with Datamonitor and author of the study. “In addition, service providers need to raise the bar too by offering enhanced reporting functionality and superior connectivity to clients.”
Hedge fund industry set to provide new opportunities for IT vendors to target
Despite having a relatively poor year in 2004, the global hedge fund industry has rebounded strongly. Datamonitor expects the global market to reach approximately $1.9 trillion in assets under management by 2009.
Hedge funds are beginning to resemble traditional asset managers by placing cost control and efficiency higher in their priorities, as despite the market growing in size - large number of start-ups entering the field, there have also been numerous instances of funds collapsing due to the competitive pressures in the industry.
In tandem with this, the industry is facing increased levels of regulation. Whereas in the past, high net worth individuals dominated the investor base, pension funds and insurance companies have begun to invest in hedge funds. In addition, new investment vehicles such as the emergence of fund of hedge funds provide a greater level of access to the hedge fund sector. Even though the US courts recently threw out the SEC’s mandatory rule for hedge funds to register, regulation of the industry to protect investors is still expected to grow and to be determined on a country level.
“The shift of the hedge fund industry into the retail space has prompted an increased focus on execution capability”, says Barnor. “The availability of real-time data to enhance the investment decision making process, direct market access (DMA) and algorithms are all key areas hedge funds are beginning to focus on as they search for new trading opportunities.”
Fund administrators and Prime Brokers key targets too
Firms servicing the industry such as prime brokers and fund administrators are also beginning to suffer from competitive pressures. Whilst traditionally offering custody, clearing and reporting functionality, prime brokers in particular are finding hedge funds demanding more in terms of supporting complex strategies from both a connectivity and operational aspect.
IT spend by prime brokers will be focused on the European and Asian regions in the next few years (Datamonitor estimates it will reach $414m and $194m respectively by 2009), as they attempt to enhance their margin and stock lending systems as well as upgrading settlement systems to process higher volume, more complex instruments being traded by hedge funds. Technology solutions will continue to be driven by the need to retain and capture client order flow.
Fund administrators too will have to update their offerings and will be looking to technology to do this. Barnor says “the technology in demand is a step on from solutions for the mutual fund industry by focusing more on how to provide a consolidated view to cater for the demands of each kind of investor”. As the market develops, fund administrators will be pushed to offer customizable real-time reporting with web based user interfaces.
Barnor concludes:
“The global hedge funds industry now provides a viable selling point. The substantial growth of this sector is set to continue as Asia and Europe begin to catch up with the US in market size. As these institutions grow and become more mainstream, technology solutions will continuously be demanded. As it progresses, vendors have the opportunity to tailor their solutions to the intricate nature of the hedge fund industry.”
