The quest for alpha has resulted in a major shift of assets to hedge funds.
The quest for alpha has resulted in a major shift of assets to hedge funds. And while hedge funds, big and small, pounce on the various opportunities to make healthy returns, many are unaware of the technology and operational infrastructure requirements that prevail in the new investment age.
According to a recent report, cutting-edge organisations including hedge funds are seeking out alternative investment opportunities wherever a healthy return is to be found. But the report by Tabb Group entitled "Alternative Investments 2007′ predicts that the shift in assets under management will also affect how technology infrastructure is implemented and operations are structured.
Investment strategies are evolving fast and hedge funds use various methods, including investing in over-the-counter derivatives, long/short strategies or arbitrage mechanisms, to outshine the competition. But this presents a challenge. ‘Hedge funds moving into more complex instruments such as derivatives on equities, bonds, swaps, CLOs, CDOs, etc. will find managing these instruments on spreadsheets increasingly challenging in terms of maintaining accuracy and efficiency. Moreover any potential investors would not look on this favourably,’ says Chris Cattermole, European Geneva Sales Manager, Advent Software EMEA.
The alternatives arena has brought with it a demand for more robust operational processes and technology solutions. Accordingly, hedge funds must re-evaluate their systems and capacity needs. Cattermole affirms that hedge funds looking to attract new monies, especially from institutional investors, are finding an increasing need to invest in their operational infrastructure. ‘This also applies to those funds wishing to retain their large investors,’ he adds.
Take for example some larger hedge funds who have invested in their technology infrastructure. Apart from being able to better cope with the market turbulence, they have also been able to cope with market dynamics. Improving business processes such as communication, documentation, data and workflow management can increase productivity and efficiency. It can also ensure minimal downtime and complete transparency to end-users and management, with no disruption to work environments.
And with continued pressure on hedge fund regulation from various jurisdictions, policy concerns – voluntarily or otherwise – also need to be met and refurbished. It is better to be safe than sorry in an environment where there is a rising voice for more regulation. ‘Regulatory pressures are making hedge fund firms reconsider their infrastructure options. The ability to demonstrate transparency into the operation with solid audit trails, robust compliance and reporting mechanisms is becoming a requirement for hedge funds and the need to have an appropriate platform is becoming paramount,’ explains Cattermole.
Many hedge funds are turning to solution providers that offer an integrated hosted infrastructure with all the components that hedge funds require. Cattermole sums up, ‘Corporate agility is increasing in importance for organisations and the flow of information is critical. Access to timely and accurate information across the organisation from a single source ensures much higher quality decision making in the front office. Being able to understand your firm’s positions and exposures in real time is a powerful tool in today’s unforgiving market.’
When a hedge fund has been supplied with all the technology it needs to run its business, it can concentrate on what it does best – how to seek alpha.
Chris Cattermole, European Geneva Sales Manager, Advent Software EMEA