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Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
Other signs of commoditization are also emerging as we enter
the second half of Wave 2.
Several new services focused on fnancing and collateral
management have launched in recent years that standardize
the benefts market pioneers realized through Wave 2
custom-builds and make these advantages available more
widely to the hedge fund community.
Quadriserv’s AQS platform offers a central counter party-based
securities lending platform that facilitates automated stock
loan trading in equities, ETFs and ADR product. This electronic,
direct-access platform is providing centralized price discovery
and transparency in an anonymous, automated environment.
Fund administrators are extending their middle-offce
outsourcing capabilities to offer collateral management services
for OTC derivatives. These offerings aggregate a hedge fund’s
view of their positions across their set of prime brokers and
perform collateral tracking, processing and optimization on
the hedge fund’s behalf. These services are offered to hedge
funds at a signifcantly lower cost than it would take to build
out a fund’s own capabilities. Moreover, these services enable
hedge funds to more fexibly address a rapidly changing OTC
derivatives regulatory environment without having to set aside
signifcant investment capital.
Finally, some established software vendors are also expanding
the scope of their offerings by acquiring and adapting collateral
optimization solutions that had initially been developed for the
sell-side. A recent example of this is Syncova’s Optima system,
recently acquired by Advent Software. Syncova was initially built
by the sell-side as a margin and fnance system, and then the
technology was commercialized by spinning out as a software
company, targeting both sell- and buy-side customers.
While other systems existed for OTC collateral management,
Syncova differentiated itself by also addressing prime brokerage
margining structures. Its recent adoption by a few of the largest
hedge funds underscores the initial commoditization of this
function. The acquisition by Advent should lead to further
commoditization of collateral management over time given this
vendor’s entrenched position in the hedge fund space. Another
new vendor in this space is Hazel Tree, whose offering provides
a consolidated dashboard based on margin data fles from prime
brokers. Their platform doesn’t replicate margin structures, but
rather organizes the data in such a way that funds can gain
insight into their cross-broker margin picture. This approach is
more straightforward—and less robust—than “shadowing” prime
brokerage margin calculations, but it is potentially easier to
implement for a smaller fund.
Other software packages are becoming available that will
streamline collateral movements by putting automation around
the wire transfer process via SWIFT protocol—recently made
cheaper for the buy-side community—and other electronic
methods. One such product, offered by IntegriDATA, was built
by way of a consulting project for a large hedge fund. A similar
product from ECS Financial was built by transaction-processing
automation experts.
In the fnancing space, customizations designed for the hedge
fund space are also becoming add-ons to existing vendor
packages. A common example of this can be found in Eze Castle
Software’s adaptation of their order management system to
accommodate short locates, which allowed funds to more easily
shop for the best borrow rates across various prime brokers.
These examples of how funds can better manage the collateral
and fnancing of their businesses were made possible because
of the foundation laid by Wave 1 investments and the broad
availability of multi-asset trade and portfolio management
platforms. As Wave 2 continues to unfold, we expect to
see continued commoditization of fnance and collateral
management and a reduced need for hedge funds to invest in
customization of these functions.
Wave 3 Customizations Emerge to Support Insight
into the Investment Process
Whereas Wave 1 and Wave 2 enhancements related to creating
foundational abilities to effectively realize the manager’s
investment strategy, emerging Wave 3 customizations are about
how to harness information and create insight. Emerging Wave
3 customizations offer managers a differentiated ability to
generate and share information about their investment process
to satisfy investor and regulatory demands and to support an
intensifed focus on alpha generation.
As outlined in our June 2010 survey,
The Liquidity Crisis and
its Impact on the Hedge Fund Industry
, there were several
concerns that came to light in the course of the 2008 crisis.
First, it became clear that the positions held in many hedge fund
managers’ portfolios were far less liquid than their investors
had anticipated and, in many cases, were seen as outside the
manager’s stated investment mandate. Second, performance in
the period underscored that many managers were simply using
leverage in a strategy that was highly correlated to beta rather
than having a differentiated approach to produce alpha returns.
Third, there had been inadequate oversight of the investment
“Consultants built our fnance application. It was built for
someone else, and we leveraged that intel.”
– CTO of a U.S.-based Hedge Fund Managing between
$3 Billion and $5 Billion USD