Innovation in Hedge Fund Technology

HFM TECHNOLOGY | Issue 17 | May 2015

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Jayesh Punater, Founder & CEO of a hedge fund solutions partner, Gravitas, discusses the evolution of technology, offering insights to innovation in the space.

There are three resources that hedge funds use to grow their businesses — people, process and information (via technology).  Technology has evolved into an increasingly advanced state as the amount of data has grown exponentially, information has become more accessible and technological systems and solutions have matured and commoditized.

Despite these changes, hedge funds continue to focus on antiquated, less cost-effective methods of implementing and maintaining multiple systems rather than leveraging data, scale and security to their advantage.  As a result, there is a real need to bring technological innovation, revolving around a single technology platform, data management and user experience, into the hedge fund industry.

Technology today is at a pivotal stage of evolution and influence.  In our everyday lives, we see technology taking over human activities.  We use applications like Uber to hail rides, MyFitnessPal to track calories consumed, and FreshDirect to order groceries to our doorsteps.  The amount of data is growing exponentially, doubling in size every two years.  

In 2013, there were 4.4 zettabytes of data and by 2020, this number is expected to reach 44 zettabytes (Source: IDC, 2014).  Computing power, storage costs and bandwidth costs -- both network and wireless -- have significantly dropped and are closer to zero than the days of buying minicomputers and workstations.  Software development has also evolved where the open source movement is commonly used by the largest of firms not only because it is free, but because it is based on a shared principle where multiple users can contribute to a single product further enhancing it.

In the face of this progress, why do hedge funds continue to rely on outdated, costly technology models to run their businesses?  Many funds spend hundreds of thousands and sometimes even millions on patching together multiple technology systems and data streams that are very complex to implement and maintain.

The asset management industry and, in particular, the alternative industry has experienced tremendous growth, at a very rapid pace.  Institutional investors, pension funds and even corporate investors are allocating more and more funds to the space.  Consequently, funds experience added pressure to create scale as the investors’ appetite for transparency, reporting and risk controls continues to increase.  The industry lacks role models of a new paradigm that could solve these new issues around data, scale and security in a robust manner.

At the heart of solving for these issues, it is essential to understand the three fundamental pillars that leverage technology to gain advantage.  Gravitas analysts and quants have studied the best models both inside and outside the industry and have concluded that the new way hedge funds should innovate in technology can be broken down into three basic components:

1.    Data: It is critical to have data discipline.  Hedge funds should focus on managing their data and leveraging their technology in support of all their data and analytics, especially as technology becomes more and more of a commodity.  Funds should think of their data strategically and gain insights from it from the front to middle office.

2.    Platform: One single technology platform and one consolidated data source create transparency, redundancy and agility while reducing costs.  Having one integrated view of a whole firm enables hedge fund managers to make faster, smarter decisions.    

3.    User Experience:  Well-designed UX is paramount to the adoption of technology applications and absorption of real-time data.  The end-user should be enabled to manipulate information by changing views to their liking.

At Gravitas, we believe that this is the new way for hedge funds to grow their businesses.  With a cost-effective and reliable technology platform, an agile technology interface and a discipline around data management, hedge funds will be empowered to not only deal with the new challenges they face, but also to grow alpha.   As funds examine the three resources they have to scale their business — people, process and technology, they must focus on the key leveraging factor — technology.