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An Objective Look at IT Solutions for Hedge Fund Operations. John T. Vaughan, CEO, MarketDataInsite December 3, 2004. Industry Overview. “As the hedge fund market heats up, hedge funds are looking to technology to maintain their competitive edge”

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an objective look at it solutions for hedge fund operations

An Objective Look at IT Solutions for Hedge Fund Operations

John T. Vaughan, CEO, MarketDataInsite

December 3, 2004

industry overview
Industry Overview

“As the hedge fund market heats up, hedge funds are looking to technology to maintain their competitive edge”

“…hedge funds will by and large avoid building these solutions in-house, however. Most solutions built in-house simply do not offer the competitive advantages of those built by professional technology vendors.”

--”A Cottage Industry Goes Mainstream: Hedge Fund Technology in the Spotlight”, Celent Communications, April 21, 2004

©MarketDataInsite 2004 All Rights Reserved

hedge fund industry choices
Hedge Fund Industry Choices

The operating style of successful hedge funds is organize technology to serve the proprietary needs of the asset management function and to spend minimal time and money on technology for support functions.

The choice between installed and “on demand” computing seems to favor “on demand” services for support functions.

©MarketDataInsite 2004 All Rights Reserved

division of functions
Division of Functions

Proprietary and installed technology tend to support trading, settlement, analytics, customer reporting, compliance, risk management, financial reporting.

Functions like vendor expense management, commission and soft dollar tracking, payroll and employee benefits are candidates for “on demand services”

©MarketDataInsite 2004 All Rights Reserved

on demand expense management opportunities
On Demand Expense Management Opportunities

Each Vendor Creates a New Challenge to Your Time and Budget

  • Back-office Challenges of Managing Vendors
    • Non-uniform contract terms
    • Hard to reconcile invoices
    • Difficult to monitor requisition processes
    • Need to allocate costs
    • Blurs cost transparency for users, groups of users, firm
    • Makes it difficult to set budget
    • Difficult to identify successes/failures of different spend strategy

©MarketDataInsite 2004 All Rights Reserved

hedge fund technology case study 1
Hedge Fund Technology Case Study #1

Organizational Overview

  • Large hedge fund (over 150 traders and 4 locations)
  • Several billion in assets under management
  • Information Technology Department based out of central location
  • Large soft dollar user
  • Moving away from soft dollar dependency
  • Have been able to save significant costs through proper implementation of technology

©MarketDataInsite 2004 All Rights Reserved

hedge fund technology case study 11
Hedge Fund Technology Case Study #1

Had Specific Goals to achieve cost transparency

  • Challenge
    • Lots of paper work making invoice reconciliation and paying bills manual and time consuming
    • Accounting and Information used different software to manage technology administrating making it difficult to streamline vendor management
    • Vendor bills were fluctuating more than usual making it difficult to verify costs
    • Costs were loosely allocated across firm instead of correctly allocated blurring cost transparency
    • No knowledge of contract benchmark prices
    • Wanted to reduce expenses
    • Overwhelming for the one administrator responsible for IT function
  • Solution
    • Implement a customized database to provide a centralized location for all departments to manage and administrate vendors
  • Result
    • Established a central point of input for all vendor management and administration for both accounting and IT
    • Set rules & parameters for cost allocations to identify truer cost of a user, business unit and/or vendor
    • Were able to allocate bills directly to appropriate cost center or user
    • Received refunds from over billing
    • Automated tools to track changes in market data environment and their expected billing ramifications
    • Dramatically reduced administrator’s time and eliminated paperwork

©MarketDataInsite 2004 All Rights Reserved

case study example 1 former business process
Case Study Example 1: Former Business Process

Exhibit #2

Payment accepted

Bills are sent in-house or to soft dollar broker

Firm must manually allocate costs and reconcile invoices

Hedge Fund

Tasks Delegated

General Ledger/Accounts Payable

Soft dollar Broker A

Audit

Dow Jones

Soft dollar Broker A

Reconcile

Bloomberg

Soft dollar Broker D

Soft dollar Broker D

Allocate

Reuters

ACCOUNTING Dept.

Upload allocation to GL system and pay invoice

Vendors unable to supply invoices electronically

Hedge Fund

Hedge Fund

Upload and Notify

Time-intensive, prone to manual error, blurs cost transparency

©MarketDataInsite 2004 All Rights Reserved

case study example 1 new process
Case Study Example 1: New Process

Exhibit #2

Customized HedgeSpend database to match org structure and allocations

Hedge Fund

MarketDataInsite

HedgeSpend 3000

IT Dept.

Review Invoices paid using HedgeSpend 3000

application

Audit

Dow Jones

Reconcile

Bloomberg

Allocate

Reuters

ACCOUNTING Dept.

Upload allocation to GL system and pay invoice

Vendors unable to supply invoices electronically

Upload and Notify

©MarketDataInsite 2004 All Rights Reserved

hedge fund technology case study 2
Hedge Fund Technology Case Study #2

Organizational Overview

  • Start-up hedge fund with aggressive growth strategy (5 traders -70 traders in six months)
  • Projected 4 locations within one year
  • Unclear about Information Technology budget
  • Prime broker to pay for some services but not all
  • Information Technology budget all hard dollars
  • Needed a plan of attack to make sure that the information technology, while not a priority, costs would remain minimal and cost effective
  • Stay away from “tiered” contracts that could penalize the firm as they grow

©MarketDataInsite 2004 All Rights Reserved

it trends
IT Trends

“Continuing the age-old Wall Street tradition, many buy-side organizations are playing it pennywise and pound-foolish, spending less on technology and instead attempting to offset with people power. The primary problem here is not only do they spend more, these firms expose themselves to a human capital risk due to a critical shortage of qualified personnel”

--CarbonBased Consulting, 20004 Buyside IT Spending and Trends

©MarketDataInsite 2004 All Rights Reserved

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