Within the lavish offices of hedge funds in Mayfair and Connecticut, managers are not all about contemplating investment strategies, getting ahead of the competition or, in the case of Bridgewater Associates, adhering to in-house principles and attacking the wildebeest.
Despite being the supposed sexy side of finance, hedge funds have increasingly mundane concerns. Firstly, there’s the onerous costs of compliance – they’re spending up to 10% of their operating costs on compliance staff, technology and strategy, and this only looks set to increase, according to a new survey by KPMG and the AlMA. This follows an earlier Deutsche Bank study, which said that legal and regulatory costs had risen by 50% for most hedge funds over the past two years.
This isn’t sitting well. Not only are smaller funds struggling to meet these costs – primarily because they have to absorb them internally, rather than use investor funds – but some hedge fund managers seem put out by the need to busy themselves with such petty concerns.
“The entire nature of the alternative investment industry – particularly the hedge fund industry – is one of innovation and finding new ways to achieve alpha,” bemoaned one hedge fund manager responding to KPMG’s survey. “There’s no doubt that regulation is constricting this and making it harder for new players to enter the market.”
Another thing that is drawing hedge funds away from their primary business is the need to invest more in IT. A study by Citi released at the end of last year, which suggested it now requires at least $250m to launch a hedge fund, pointed to a 14% rise in technology spending to $2.3bn across the industry, a figure which is only set to rise.
Part of this is building compliance technology, and hedge funds have also started to hire for the more exciting areas of IT – Big Data is starting to take off, with many firms looking to draft in data scientists, for example, while others have invested in satellite technology used by military intelligence to monitor risk exposures to mines, farmland and ports.
“Hedge funds are working hard to get their data under control and use it for competitive advantage,” said Nick Finlay, head of investment management at Hays Finance Technology. “They’re looking at market, customer relationship, trading and index data. The result is a huge spike in demand for SQL database developers. All of this is coupled with tech investment as they launch new products.”
Again, though, hedge funds’ IT departments are also being inundated with requests for something decidedly more boring – bring you own device (BYOD). At a roundtable of hedge fund CTOs hosted by Waters Technology, senior technologists pointed to BYOD as a big theme for 2014.
Adam Stauffer, CTO of HBK Investments, said: “What we've seen is everybody handed back their BlackBerry and said, ‘Please support my iPhone.' Everyone handed in their loaner laptop and said, ‘Please support my MacBook Air.' There are already people asking to get rid of their workstation entirely and use their MacBook in the office.”
Investment banks have also slowly been embracing BYOD, either through allowing employees to use their own smart phone or by installing company systems on personal devices. Credit Suisse, for instance, has more than halved the number of Blackberry phones used by employees to 8,500 over the past two years. This has placed increasing strain on banks’ IT departments, from both an infrastructure and security perspective.
“The increased use of BYOD has created increased demand for security IT specialists within the hedge fund sector this year,” said Finlay.
Hylton Socher, CTO at Fortress Investment Group, told Waters Technology: “The trend we're going to have to deal with is people saying, ‘Why can't I have at work what I have at home? I want to see my data from anywhere, I want to iChat with my business colleagues.’ It introduces a plethora of security challenges."