By Thomas J. Conheeney and John C. Suglia, Co-Presidents of Investment Management Services Inc., New York, a leading firm in outsourcing solutions for hedge fund managers. This article appeared in the August 1997 issue of Hedge Fund News?.
Timely access to information is critical to a hedge fund's strategic plan. It is critical in different ways to the trader, the risk manager, the CFO, and of course the investor. Volatile global markets, exotic instruments and complex trading strategies have led hedge fund managers to demand trade date information. As the world's time zones have melded into a 24 hour global trading day, hedge fund managers, particularly those operating across multiple markets and time zones, can no longer afford to wait for information to be processed overnight so that it can be accessed the next day.
In the same way that a delay in market sensitive news could cause the loss of an opportunity in the marketplace, the untimely delivery of portfolio information can affect a hedge fund manager's positions and ability to manage risk. Value at Risk (VAR), credit risk and sensitivity analysis all require position information. The delivery of real time data to these tools would greatly enhance the power of these types of risk analysis. Hedge fund managers can also gain a competitive advantage to better service clients through the delivery of real time information. The ability to access real time portfolio position and P&L information creates the ability to deliver real time Net Asset Values (NAV's) to investors through the investment manager's Web site.
Advances in technology have streamlined the steps between trade capture and reporting for the end user. Improvements in PC desktop infrastructure, coupled with state of the art communications standards and overall software integration, allow the capture of orders at a single point on the trader's desk. These orders may then be filled automatically as they flow smoothly across the operations, accounting and compliance desks. Additionally, these transactions can now proceed electronically to prime brokers, clearers and custodians, again avoiding the need for further keystrokes. The entire lifecycle of the transaction lives within a single integrated world that may now be opened to a wide variety of end user reporting and analysis tools.
The evolution of desktop infrastructure is moving at a rapid pace. More powerful PCs can now perform most of the same functions on a trading desk that were previously reserved for UNIX workstations. The increasing processing power, combined with the advanced functionality of the Windows NT operating system, has allowed desktop PCs to provide true application multitasking to the user: a process that was only available under UNIX. This increase in performance, combined with lower purchase and service costs, has made PCs an attractive and reliable option for the trading desktop.
While Internet technologies continue to make information more available on trade date, trading and analysis will continue to require significant processing power on the desktop. Although network computers (NCs) appear to be an attractive option (low cost and low maintenance), the dependence on the network server to perform most of the work is probably not the optimal solution for the trading desk. As with other business related issues, the optimal solution is a balance of processing power and responsibilities between the network server and the desktop PCs.
Communications and data delivery
Gone are the days of hard copy reports, faxes and obsolete software designed to transmit and receive files of information from vendors and service providers. Information traditionally available on trade date + 1 through these transmission methods is now available on trade date through digital circuits, faster lines and access to increased band-width.
The Internet has changed the way data is delivered and processed. The Internet, the World Wide Web, and more specifically, Web based technology standards have made information more accessible and the access to that information more cost efficient. A wide range of technologies and tools such as Web browsers (including Netscape Navigator and Microsoft Explorer), display and programming languages (HTML and Java), communications platforms such as IRC (Internet Relay Chat or chat rooms), real-time audio feed capacities and electronic white boards are changing the way trading desks receive and process information.
Web browsers provide a user friendly way to download and display information over the Internet. The browser allows the data provider to maintain the data and software locally at their site while the user simply makes requests to retrieve and download data via their browser. This method replaces the proprietary software packages previously offered by vendors, thereby eliminating the problems with maintaining software remotely.
Many brokerage firms and most market data providers and research vendors have created Web sites providing Internet-based trading and information services. These firms have been attracted to the Internet because it is a low cost way of providing their service and it eliminates the need for additional hardware and dedicated data lines. However, there is concern about the capacity of the Internet to handle the increased volume as well as security and reliability issues to be addressed. The information highway occasionally has a car thief or a traffic jam causing delays. For this reason, Web sites require significant work to secure confidential information and may not be an appropriate method of delivering some proprietary or time sensitive information.
Due to the security and reliability concerns of the Internet, many organizations prefer to utilize direct lines as the communication venue of choice. The need for dedicated lines, however, does not preclude the use of Web technologies. Anything that can work on the Internet can work quite effectively on an intranet or extranet for delivering data to the trading desk in a real time environment. An intranet is a private network using web technology for internal data access. An extranet is an extension of this private networking using sophisticated security technology to allow customers access to the vendor's or service provider's data.
The integration of software systems is yet another development that has enabled hedge fund managers to move to trade date processing. With the advancement of sophisticated database management systems, hedge fund managers are able to maintain key information in a single, flexible format. While database management is not a new development, recent advances in open architecture standards, replication and accessibility allow for more applications to share the same data. Trading, management, accounting, and compliance personnel can access the same portfolio data without concern for the integrity of that data. One single database of portfolio information eliminates the time and expense required for creating and maintaining multiple databases.
HTML and Java, the display and programming languages for interactive content on the Web, combine to provide significant integration strengths: ease of software installation, portability across any platform and rapid prototyping capabilities. These lead to a significantly shorter development cycle from business requirements to finished product coupled with the ability to easily distribute the same applications across different platforms. Web applications share access to the same databases and are capable of optimizing their processing load across a network for improved performance.
The integration process makes single point of entry systems possible. Today's technology allows the hedge fund manager to enter order information from a single entry screen with order fills entered into the system through order routing feeds direct from the exchange floors or keyed in by the manager. Gone is the need to hand write tickets that are passed from one application data entry clerk to another. The trade data is borrowed from storage in the database for either secondary calculations or for distribution to applications on the operations, accounting and compliance desks. Applications transmit the trade data to other applications electronically. Many prime brokers have electronic interfaces, thereby allowing automated transmission and reconciliation of trade data.
Single point of entry systems capture and store information in relational databases. All primary and secondary trade data is stored at the end user's fingertips. The data is available for reporting from the moment it enters the system. It is accessible to a wide variety of flexible, simple to use, and powerful reporting tools. Users throughout the organization can extract the data they want and manipulate it with analytical processing tools. Today's users, through the use of sophisticated report writers, can develop and customize their own reports without understanding complex data structures or sophisticated computer languages.
Sourcing technology: build or buy
To remain "cutting edge" while staying cost effective, hedge fund managers must find ways to leverage technology to maintain a real time environment. There are significant costs in choosing, developing and maintaining systems and software. Platforms and infrastructure, user interface, database functionality, integration capabilities, reporting, security, audit controls, reconciliation tools and redundancy must all be considered.
Outsourcing is an effective way, in both cost and time, for trading organizations to access the real time environment. From market data access and network management to trade execution, operations and accounting, outsourcing allows trading companies of all sizes to replicate the real time infrastructures of some large hedge funds, investment banks and broker/dealers at a fraction of the cost. This powerful and flexible infrastructure will better accommodate increased capacity, expansion of the investment program across products and markets, and better leverage relationships with prime brokers and FCMs, market data and telecommunications vendors, and audit and accounting firms.
Real-time operating and management solutions software begins with an order management tool that covers all products and markets, providing an on-line trade blotter to track trade status and provide real-time positions and P&L. Another on-line client reporting tool displays market and currency exposures, risk calculations, cash management requirements and trade confirmation status. The trade date cycle is completed as the information flows through the system to banks, prime brokers and investors. Tools like these allow the trading desk to focus more energy on trading and less on administrative functions.
Outsourcing allows for true "one stop shopping." Technology, trade support, operations and accounting supplied by a single vendor provide consistency and ease of use. The hedge fund manager manages only one support relationship, freeing up time and effort to concentrate on discovering profitable investment opportunities. u