29 November 2010
DataArt sponsors "Hedge Fund and Technology Trends - Impact on the Street and Investors” at Monday Club
DataArt sponsored a panel discussion "Hedge Fund and Technology Trends - Impact on the Street and Investors” at The Monday Club Annual Event held at the Roger Smith Hotel in New York City. The Panel, comprised of Alexei Miller, Executive Vice President at DataArt, Chris Kapsaroff, COO at JPM Prime Brokerage, and Nic Lenoir of ICAP addressed the latest technology trends in the capital markets sector.
Panelists agreed that hedge funds will continue to try and protect the “secret sauce” which they believe helps them outperform the standard market indices, yet they will be forced to show greater transparency by regulators and institutional investors. Miller suggested that there is some level of over statement around the notion of “the secret sauce” and that clinging to it prevents the sharing of good ideas and technologies. If there were more sharing we could expect that the industry could reduce costs and having to re-invent the wheel for solutions to common challenges. While such guardedness is good for consulting companies that build these solutions it is most likely an unnecessary duplication of effort.
Chris Kapsaroff of JPMC shared data from his research that for the better part of 2010, hedge fund returns on average were highly correlated to S&P500 (96% correlation), which made their high fees unjustified; however in the last quarter they started to act with “some more conviction” – and now the correlation is down to approx. 75%. JPMC Surveys suggest that almost 100% of IT managers will maintain or increase IT budgets in 2011.
The moderator, Orest Kyzyk, noted that historically, the big players developed technology suited to their specific client sets making it difficult to embrace new clients that did not fit that groups’ profile. As time passed, these big players recognized the need to be more open and helped develop technology standards such as SWIFT, FIX, etc. Cloud computing and SaaS will continue to drive firms to focus on core differentiation for their clients and outsource overhead and common services to these more efficient delivery modalities. Over the past decade the institutional investors have become the dominant clients of hedge funds rather than High Net Worth individuals. This trend has driven hedge funds to respond with technology initiatives for the more rigorous demands of Institutional investors and their need for enterprise level transparency, risk management and reporting. LeNoir discussed how in the high frequency trading environment technology and trading strategies have become integrated. Here speed has become very important. He also pointed out that the availability of tools and technology has made it possible for more players to become market makers on a global scale and providing liquidity to their clients.
Kapsaroff noted that startup activity and capital raising remains low. While we are seeing a modest increase in total AUM, virtually all of it is on the large side, going to the very large funds. Most of the few start-up funds also begin as fairly large concerns. Even with the Volcker rule having an almost immediate effect on proprietary traders and portfolio managers leaving large investment banks; many of them find new homes in large Asset Management firms instead of starting out new funds, which would have certainly been the case in 2007. All of this changes the dynamics in the industry – with the large firms getting larger, they inevitably attract more regulatory interest and have to act more conservatively.