Eze Castle Integration

The alternative investment industry is faced with the continued challenge to maintain and improve its operational and technology infrastructure in order to stay on top of impending regulations and growing investor demands. Eze Castle Integration tasked itself with surveying a subset of the alternative investment community as a means to achieve greater insight into the industry – including assessing the various software and hardware solutions, applications, and systems currently being employed by firms today.

The study was completed in the second half of 2010 and was targeted at a variety of alternative investment firms on the buy side, including hedge funds, funds of hedge funds, private equity firms, and venture capital firms. Eze Castle Integration interviewed and surveyed more than 200 firms and analysed the data, which is presented in the report. What follows is an excerpt from the Hedge Fund Operations & Technology Benchmark Study.

Respondent profile
There were 223 firms surveyed for this study, and more than half (56%) of those firms reported their assets under management to be less than $250 million. Of the remaining 44%, 17% indicated they had assets between $250 million and $750 million, while 27% reported they had AUM of greater than $750 million. These results are consistent with what we are hearing throughout the industry – while there clearly remain many large firms across the alternative investment landscape, there also continues to be an increase in the number of smaller firms coming onto the scene, particularly post-Madoff.

From a geographical perspective, the majority of survey respondents (76%) indicated their firms were solely based in the United States; only 24% of firms reported that they had an international office location. In accordance, 76% of firms also reported they only had one office location. Firms with two offices totaled 14%, followed by 7% with three offices and 3% with four or more office locations.

When asked for their primary investment strategy, firms provided a variety of responses. Long/short equity, however, was the most popular strategy, pulling in 38% of replies. Other single strategies reported were emerging markets (3%), fund of funds (2%), fixed income (2%), and distressed securities (2%). The remaining answers were “other” and “multi-strategy.”

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ezecastle2Front office findings
Order/execution management

Hedge funds and investment management firms operate in an industry where one second is considered a long length of time. Advanced technology solutions, therefore, have become essential, particularly when it comes to trade execution and management. With an order management system (OMS), funds have an integrated solution with the ability to review performance, exposure, and risk profiles in real time, monitor pre- and post-trade compliance results and enhance audit trails.

Our survey findings show that BNY ConvergEx’s Eze OMS was the most consistently used order management system amongst our respondents at 43%. Other popular responses included Bloomberg’s Trade Order Management System (21%) and Advent’s Moxy (15%). About one-fifth of responses were grouped into an “other” category, which included systems from Calypso, Charles River, Fidelity, Fiserve, Flextrader, Linedata, Merlin, Neovest, Portware, and RediPlus, as well as proprietary/in-house systems.

Market data & analytics

A hedge fund cannot survive without the lifeblood on which it runs – market data. Portfolio managers, analysts and traders leverage market data for real-time pricing information, trade-related data and other industry information used for trade execution and research. But as the amount of information continues to rapidly increase, firms require robust systems to manage and process that data in an efficient manner.

Bloomberg continues to be the dominant provider of market data to investment firms, garnering over 71% of responses. In many cases, however, firms are leveraging the expertise of more than one market data vendor to provide real-time information. This trend is supported by our survey findings, which show that despite the fact that Bloomberg was by far the most popular market data vendor used, 30% of total firms indicated they were using Bloomberg as well as another provider.

Bloomberg is, not surprisingly, also the leading market analytics tool provider, according to our survey results. About 43% of respondents said they used Bloomberg as at least one of their market analytics tools. Capital IQ (17%) and Thomson Reuters (11%) were other popular choices. While most firms are only using one tool, about 43% of firms said they use two or more tools in conjunction with each other. The most popular combinations are Bloomberg/Capital IQ and Bloomberg/Thomson Reuters.

Middle & back office findings
Portfolio accounting

One essential back-end system for buy-side firms is their portfolio accounting systems, which provide functionalities including multi-currency support, real-time profit and loss reporting, and general ledger and NAV calculation.

Our survey findings show that while Advent appears to be the market leader in the space (36%), there remains a lot of diversity, evidenced by the size of our “other” category, which accounted for nearly half of all responses (47%). In addition to Advent, firms are using systems provided by Calypso, Fiserve, Fortis, FundManager, Gravity Financial, Ledgex Systems, Northern Trust, SS&C, Tradar, and Wall Street Offices. Additionally, some firms continue to use in-house and proprietary solutions to meet their needs.

Risk management

In a industry hit hard by the Madoff fraud and the economic crisis, investors are demanding nothing less than complete transparency. Firms are expected to invest in risk controls and compliance tools to ensure the safety and security of investments on a day-to-day basis.

When asked about the risk management systems they had in place, our survey respondents provided a variety of answers, notably Advent (15%), RiskMetrics (15%), and Calypso (8%). A large percentage of answers (19%) indicated firms used Microsoft Excel or another in-house system. Other firms mentioned include BarraOne, Bloomberg, Factset, FundManager, GlobeOp, MATLAB, Merlin, Murex and SunGard. Some firms provided multiple answers.

Investor relationship management

Marketing and capital-raising are top priorities for firms, and a tool that can really benefit managers as they go through these processes is an investor relationship management tool (IRM or CRM). With an IRM system, firms can manage relationships and track correspondence with investors from day one.

Our survey results show that despite the increasing importance of IRM tools to manage investor communication, 37% of firms said they did not have a CRM or IRM system in place. It’s possible that the investment in an IRM system has taken a back seat to some of the more necessary applications, such as portfolio accounting or risk management. Historically, IRM tools have also required a considerable amount of system integration, which may have contributed to their slow adoption. We do anticipate, however, that firms will begin to adopt IRM packages as these systems shift to software-as-a-service models (SaaS), which lowers costs and eliminates the need for invasive system integration.

While the majorityof firms reported they were not currently using an IRM system, many firms are using tools provided by Backstop (12%), Netage Solutions (11%) and Salesforce (7%). Other firms mentioned include Code Red, FundManager, Fundrunner, Ledgex, Microsoft, Pertrac, Sage SalesLogix, Satuit, and The Next Round (TNR).

Email archiving

The Dodd-Frank Wall Street Reform and Consumer Protection Act has brought the need for email, instant messaging and information archiving into the spotlight for registered investment firms. According to Dodd-Frank, “an organization shall maintain records of all activities related to the business for a period of not less than five years in an acceptable format.” [1]

Our survey found that Global Relay is the current market share leader amongst buy-side firms, with 61% of respondents relying on them for electronic message archiving services. Other vendors being used include Symantec Enterprise Vault (7%) and Iron Mountain (5%). The “other” category, which accounted for 27% of responses, included providers such as Advisor Mail, FrontBridge, i365, Intradyn, Message One, Seccas and Smarsh.

A key component to ensuring the integrity of archived data is archiving in a Write Once Read Many (WORM) format that prevents alterations. Eze Castle Integration typically advises firms to look for a product that allows for prompt search and recovery of documentation and that runs seamlessly in the background to capture incoming and outgoing messages. We expect to see a greater emphasis placed on email archiving over the next several months as hedge funds and private equity firms are required to comply with the provisions of the Dodd-Frank Act.

Mobile technology solutions

The importance of mobile technology solutions in today’s world cannot be understated. For investment firms, mobile solutions provide a convenient and seamless opportunity for managers and traders to remain efficient in their business operations, even while away from their desks.

According to our survey results, BlackBerry remains the top choice for mobile solutions in the investment industry, with 95% of respondents claiming to be BlackBerry users. Apple, Windows Mobile and Android users were limited, however, increased usages of these devices is increasing at a steady rate and will continue to take market share from BlackBerry.

Conclusions
The Dodd-Frank Wall Street Reform Act is far-reaching, and it will have an impact on the operations and technology infrastructure being used by hedge funds and alternative investment firms. We expect firms will continue to look to technology providers for assistance in meeting regulatory requirements. The trick for many firms will be determining where to start and how to incorporate new systems into their business processes.

In addition to Dodd-Frank, investors – particularly institutional investors – continue to pressure firms to increase transparency, risk management processes and reporting capabilities. This is a trend we expect will continue for years to come as the economy continues to bounce back from the events of 2008.

Finally, as evidenced by our survey findings, hedge funds are using a variety of systems to manage their front, middle and back-office operations, and there is great vendor diversity in the marketplace. We expect, in many segments, three to five vendors will emerge as the top contenders in providing solutions and services.

Further information
To download the complete Hedge Fund Operations & Technology Benchmark Study please visit www.eci.com

[1] http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf