Every Asset Class, Every Function with Zero Infrastructure: The Asset Manager Nirvana

Date: September 16, 2014

Hedge funds have zero desire to own or operate technology. As they continue to shift technology usage to service-based models, can they really have it all?

For the past three years, there has been a simple and consistent theme to CEB TowerGroup’s annual survey of managers’ IT investment plans: above all, let’s reduce the amount of time and money we spend on managing our IT assets.

With overall IT investment flat, firms need to improve their ability to support traders, quants, and portfolio managers with better analytics and decision support tools, and also improve their ability to communicate with customers. Changing the way we consume IT services is one obvious way to create the budget and resource bandwidth to support those growth objectives. Because of these advantages, six out of ten surveyed financial institutions expect to increase investment in cloud-based technologies.

The shift to software-as-a-service and platform-as-a-service models is crucial for solutions providers; in addition, the roll out of new capabilities needs to be as fast and cost-effective as possible in order to survive and thrive. The typical software release and version support cycles of old are barriers to profitability today as well as future relevance. Delivering new features every day without any client-side integration may have become the standard for consumer and e-commerce technology, but our siloed industry still has a lot of catching up to do.

Read: New Insights for Asset Managers: How Technology Can Drive the Most Effective Middle Offices

However, with objectives aligned between buyers and sellers, surely the nirvana of zero infrastructure must be just around the corner? Not so fast: the legacy of decades of on-premises, asset-class specific and best-of-breed solutions is hard to shift.

In order to overcome these barriers, firms need to be smart about the battles they choose to fight: replacing a 20 year old back-office accounting system is going to hurt a lot, without an obvious impact to the core trading and investment competencies that managers are focusing on. The battle for next-generation enterprise software in our industry will be fought on the fields of data and analytics. These are assets to everyone in the firm, starting with the front office.

The benefits of moving to more agile and scalable delivery models are particularly relevant to analyst, traders, and portfolio managers, as their need for data and processing power is increasing every day. That need is driven by the seemingly unstoppable rise of passive investment products, the underperformance of active management, as well as a renewed focus on active risk management.

With their marginal management costs, passive funds — which track the performance of market indices — are powerful competitors to traditional managed funds for retail and institutional investors.

  • The assets managed by passive funds tripled to US$2.1 trillion in the period 2003–2011.
  • As their assets under management ballooned by over 500% over the past decade, the number of ETFs soared to more than 1,100.

So what are active managers doing to stem the tide? Increasing their ability to accurately measure alpha and demonstrate differential performance to institutional investors is a critical first step, which requires strong technology support.

Find out more about the changing hedge fund environment and how technology can provide competitive advantage by downloading our white paper.

Read more blog posts on our Hedge Fund Technology Resource Page.

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