Institutional Investor's Alpha Magazine - March 2008 - (Page 59) Yet there are circumstances in which hedge funds are rushing to market too quickly to consider building any proprietary information technology first. Such is the case with Clive Capital, a ten-employee fund that had to move fast to get into the commodities arena. Like many hedge funds, Clive Capital, which is still in its first year and declines to say how much in assets it has under management, foresees more opportunity in commodities than in the beleaguered equity and credit markets. The firm could have cobbled together its own trade-capture and risk management system based on spreadsheet technologies, hoping for a competitive leg up by doing so, but that system might not have worked well in some sectors, says Richard Boland, chief operating officer at the London-based start-up. “Investors are not terribly keen on having you run all your risk management, books and records on spreadsheets,” he says, noting that spreadsheets are not versatile enough to serve as enterprisewide risk management platforms. After reviewing several providers, Clive Capital signed with SunGard’s Kiodex Risk Workbench, a Web-hosted risk management application for commodities trading. The software handles deal capture, valuation models, risk measurement, financial reporting and market data. The firm decided also to use London-based Options Technology to outsource round-the-clock support for its hardware, software, networking and security technology. Boland says one of the main concerns was getting to market quickly. The firm implemented Kiodex at the end of October, and by December four employees were able to go live with it while others involved in trade capture, risk reporting, auditing and trade checking used the application intermittently. Kiodex doesn’t offer everything he wants, Boland concedes, but he argues that it was the best available choice. His main problem with it is that although the application is fine for commodities trading, it cannot be used for equities, foreign exchange or fixed-income instruments. “As we grow we might have to look for another system,” Boland says. Ben Jackson, chief operating officer of SunGard’s Kiodex business unit, says his company may soon offer an application that addresses needs like Clive Capital’s. “Many have tried and failed to create the nirvana of a cross-asset risk management system that includes commodities,” he says. Boland says he is happy with his outsourcers for the time being because they simplify his work. “You can sit in a Starbucks and run all your reports,” says Boland, who is known for frequently doing just that. Alan Rae, Clive Capital’s head of technology, says it is vital to hold outsourcers to high standards. If Rae calls an outsourcer with a problem and is told it will be fi xed in two hours, “they had better mean a couple of hours,” he says. Hedge funds with reservations about outsourcing need to run due diligence “or have some third party audit these people,” Rae adds. Dougal Brech, London-based head of the European client services division (and prime brokerage group) for Credit Suisse, says the level of technology outsourcing among hedge funds tends to be inversely related to size. Small firms usually outsource as much as possible, he says, while large ones move toward in-house systems as they grow. Developing their own systems to the extent that they can is a selling point for high-end fi rms. Even so, large fi rms often return to the trade-execution platforms to pursue what’s become commonly known as algorithmic trading, which relies on elaborate computer models instead of humans poring over data. But the brief shelf life of algorithms can make this a short-lived arrangement as well. For this reason, AM Investment’s Lee says, his firm may soon consider taking its algorithmic execution in-house to allow its traders to stay on top of it to a greater degree. “I think the algo industry is a lot like the outsourcing industry five years ago,” Lee says. “Right now algos are very generic and it’s hard to differentiate one from another.” And if the firm moves to full-f ledged computer-based trading, it’s highly unlikely that it will be outsourced. “You’re basically outsourcing a strategy, a fund,” he says. Yet as they have done before, hedge funds may be able to apply the outsourcing option in a new way for algorithmic trading. Some f irms are already working with vendors to co-locate servers at exchanges to speed up market data feeds used for algorithmic trading. But server co-location and even BEN JACKSON, CHIEF algorithmic trading remain a OPERATING OFFICER, SUNGARD long way off for many hedge KIODEX BUSINESS UNIT funds, especially the majority of smaller ones. The more immediate concern is getting a better grip on information technology to better cope with market volatility. One of the upsides of down markets is that they can force long-needed change. “The days of having a Microsoft Excel and Access environment are further and further gone,” Credaris’s Lavelle says. “People who are still existing in that world are going to need to make some fairly serious decisions.” Having taken some of his own counsel, Lavelle, of course, hopes to reap the rewards of customized outsourcing, starting with his software developers in China at iSoftStone. “We want them to think around the issue and add value,” he says. “They also have to be able to say, ‘We’ve come across this technology, this great new language, this great new concept. Have you thought about incorporating that?’” Such innovation just might make the difference in a difficult market. “Many have tried and failed to create the nirvana of a cross-asset risk management system that includes commodities.” MARCH 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 59
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