Institutional Investor's Alpha Magazine - June 2008 - (Page 22)

Technical Platforms for Multi-Prime Brokers “A few years ago, the banks worried about hedge funds blowing up; now hedge fund managers worry about the banks blowing up.” Dougal Brech, Credit Suisse detailed net asset value calculations. Fund managers are increasingly relying on prime brokers for trade execution, cash and collateral management; leveraged ﬁnancing; securities lending; and in some cases, capital introduction. In addition, more fund managers are expanding into emerging markets in search of investment opportunities, and their prime brokers must demonstrate an ability to support these markets. With a need for so many complex functions, the managers are seeking a range of prime brokers, each with its own specialties. When a fund uses more than one prime broker, it must also have software that can incorporate data from all of the brokers on one seamless platform. Technical platforms are growing in importance for the emerging hedge fund industry in Asia. Consolidation of data is important to Japanese funds that do their trading in Singapore, due to the expense of registering in Japan, as well as to the large global hedge funds that have Asian oﬃces and need real-time exchange of data with their main oﬃces in London, New York or elsewhere. “From a global perspective,” says Stuart Farr, chief executive of Beauchamp Hedge Fund Solutions at Linedata Services, a third-party integrator that provides technical platforms for hedge funds, “it is of paramount importance that the funds have capability that is regionspeciﬁc, such as tax lots and stock ﬁnancing methodology.” Technical platforms have to accommodate standard trading practices in every country where a fund invests. A recent study by the third-party integrator Paladyne Systems notes that as an alternative to building costly technology to exhibit operational control, hedge fund managers increasingly rely on prime brokers for bundled front- to back-oﬃce technology. Prime brokers have invested heavily in recent years in an eﬀort to oﬀer such systems to their customers. Third-Party Integrators According to Paladyne’s research, Goldman Sachs and Morgan Stanley have emerged as market leaders among prime brokers due in large part to oﬀering integrated, fullservice capabilities. Their services include a large pool of investment products, access to large balance sheets and strong credit ratings, capital introduction, trade ideas and research, and comprehensive technology platforms and support. A hedge fund manager must choose between spending hefty sums on infrastructure and technology or reliance Going multi-prime 35 percent of funds in excess of $1 billion in assets have four or more prime brokers 2 • Alpha Sponsored Report • June 2008 on third-party service providers, such as fund administrators, for middle- and back-oﬃce support and prime brokers for technology and infrastructure. While more large prime brokers are oﬀering platforms that can incorporate data and services from other brokers, the independence of a third-party provider is preferable to some funds. Not surprisingly, there is a growing ﬁeld of third-party integrators – including Paladyne Systems, Linedata, Investment Technology Group (ITG) and Portware – oﬀering diversiﬁed platform functions to hedge funds. To a certain extent, third-party integrators are competing with major prime brokers in oﬀering technology platforms that consolidate a fund’s trading data, risk management, accounting and administrative functions. A third-party integrator’s technology also makes it easier for smaller funds to use multi-prime brokers without having to spend time and money on developing their own technical platforms. “With our technology, a prime broker will not hold a hedge fund captive,” says Paladyne CEO Sameer Shalaby. ITG also provides an alternative to a prime broker’s bundled services, oﬀering independent third-party research, trading execution, compliance guidance and client support. ITG’s services include a full suite of automated strategies that enable fund managers to tap into hidden liquidity while keeping their trading activity invisible to the market, thereby lowering market impact costs. At the same time, there is a growing trend to partnerships between thirdparty integrators and prime brokers. Two years ago, Paladyne announced a technology partnership with Credit Suisse to oﬀer their hedge fund clients an integrated and independentlyhosted, multi-prime technology platform, thus helping clients with the

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.