Hedge Fund Data Management - Focusing on Alpha Generation

from Xand : Peter Curley - 31st December 1969

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Hedge Fund Data Management - Background

Originally hedge funds were small nimble firms that were highly focused on the task of alpha generation. The industry's out-sized returns soon attracted attention resulting in huge inflows of capital. For many managers this success also came with much greater operational complexity. Key industry developments like the change in hedge fund investor profile from high-net-worth individuals to institutional investors, the move from the single prime model to the multi-prime model, and the increase in regulation due to the 2008 crisis, have all inevitably distracted managers from their core mission of alpha generation.

The subject of hedge fund data management is particularly important because all of the above key industry developments have necessitated onerous and time-consuming reporting requirements. Hedge fund data management is also vital because market data underlies all hedge fund investment strategies. A number of trends in hedge fund data management have greatly increased the associated challenges of dealing with market data including:

  1. Soaring quote and execution message rates
  2. Continuing fragmentation of execution venues
  3. Increasing demand for multi-asset class and global data.

Proliferation of Applications

It is important to note, that not only has there been a significant change in the quantity and type of market data demanded by hedge funds, but also the types of applications that consume this data have changed dramatically. Today, the average hedge fund environment has any number of critical applications. The traditional standard configuration of an order management system plus some type of portfolio management system and/or accounting platform, has been augmented by newer more specialized applications such as execution management systems, research management systems, risk systems etc. These applications make the job of hedge fund data management ever more complex because they all demand market data in different formats, latencies, and degrees of granularity.

Traditional Hedge Fund Data Management

To attempt to manage this increasing complexity, firms have built large hedge fund data management infrastructures. These invariably include some type of connectivity such as a leased line, software that parses and cleans, and hardware that is used to receive and store the market data. All of this infrastructure has become a considerable distraction to hedge fund managers. Seemingly simple tasks like adding an asset-class or creating a new report can become involved IT projects that suck up valuable resources and cause delays. Looking to the future hedge fund managers see no relief in sight with all of the above mentioned trends pointing to more complexity not less.

A Return to Focus with Cloud-based Hedge Fund Data Management

It is obvious that for many firms in-house hedge fund data management is not a sustainable path. Over time hedge fund data management is likely to consume more and more resources. Fortunately cloud-based market data offers a solution that is far more cost effective and flexible. With this approach there is no need to build out traditional hedge fund data management infrastructure. Hedge funds can simply access their market data via standardized web APIs. Market data can be consumed and paid for on an on-demand basis. The adoption of a market data cloud will allow firms to remove a major distraction so that they can once again be more focused on their core mission of alpha generation.

This is the second post in our "Top 5 Hedge Fund Technology Challenges All Blown Away by the Cloud" multi-part blog series. Be on the look out for the next post "Expanding the Universe of Alpha Generation Possibilities".

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