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“Hedge funds should ensure                                                                CASE STUDY
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2               Hedge Fund Technology                                 NEWS & RESEARCH




    Management Quality (MQ)
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N E W S U P D AT E       Hedge Fund Technology                       3



FUND LAUNCH | SUPPLIER SPILLS THE BEANS ON AXA’S...
4         Hedge Fund Technology                     N E W S U P D AT E




   Researchsummary.com has            RISK MANA...
I M P L E M E N TAT I O N       Hedge Fund Technology                  5




Single system to cope
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6       Hedge Fund Technology                  TO O L S O F T H E T R A D E




    “Whether your
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TO O L S O F T H E T R A D E                 Hedge Fund Technology                    7



  Inmarsat has just launched a ...
8     Hedge Fund Technology                R I S K M A N A G E M E N T & I N V E S T O R R E P O RT I N G




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E L E C T RO N I C T R A D I N G              Hedge Fund Technology                  9




Unravelling brokerage
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10     Hedge Fund Technology             LIQUIDITY RISK




                         Collateral management
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SYSTEMS SELECTION                       Hedge Fund Technology           11




The best solution at the
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EDGE
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EDGE

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  1. 1. “Hedge funds should ensure CASE STUDY their broker is offering true HFT exclusively direct market access.” details the IT Torvald Bohlin assesses ways deployment at to save on brokerage p9 Discovery p5 HEDGE FUND www.hedgefundsreview.com Jan/Feb 2003 Volume 1 Issue 8 INFORMATION TECHNOLOGY FOR THE ALTERNATIVE INVESTMENT MARKET TECHNOLOGY Contents ADMINISTRATOR TAKES ON ITS COMPETITORS WITH EAGLE SOFTWARE IN TOW Hemisphere planning 2 News update Oaktree implements interaction software 3 News update AXA IM to launch convert arb fund using Sophis software 4 News update Stop/loss strategies reveal limitations of automated systems 5 Implementation outsourcing solution Hedge fund administrator Hemisphere is adding a strategies,” he said. Discovery Capital Management range of software applications to its technology “On the reporting side, at the moment it is NAV deploys Trema’s Finance KIT platform, h-EDGE, allowing clients to effectively calculations and no daily reporting. But we are 6 Tools of the Trade outsource their entire front to back-office IT capa- finding that more and more funds are looking for Ben Fitzgerald O-Connor reviews bility. The company, which was acquired by Bisys their data to be aggregated and presented in a the feasibility of satellite communications in March 2002, has hired Eagle Investment Systems much better format.” 8 Risk management & reporting to provide its products; Pace, Star and PT-Plus, While potential clients of Hemisphere’s service Reech Capital’s Mark Weller explains the growing demands of institutional which will be implemented during the third quarter can expect a complete technology package of and private investors of 2003. trading, risk management, accounting and 9 Electronic Trading Stephen B. Hixon, managing reporting, Hixon said those who are happy with Are hedge funds moving away from director of Hemisphere Financial their existing front-end will not be forced to adopt ‘bundled’ brokerage services? Services, said: “we have just new technology. “Our take on the market was, did 10 Liquidity Risk reached agreement with Eagle clients want us to force solutions on them? We Credient/Infinity’s Alan Bright Investment Systems to use their wanted them to be able to use whatever front-end suggests and IT solution to deal with three software applications, and trading and risk management software they like, be collateral agreements these will form a large part of our it Beauchamp, Charles River or whatever. They can 11 Systems Selection new hedge fund technology plat- use a variety of solutions and our platform will EGAR’s Ravi Jain presents tips for the form. In addition to this, we have Hemisphere’s integrate with them. smaller hedge fund also developed a number of appli- Stephen Hixon “We decided Eagle had the best products for a 12 Foreign Exchange cations in-house which will give platform like this. They are browser-based and Thinking of taking the plunge into existing and new clients a range of value added ser- highly scalable so they can handle high volumes in online forex trading? Ditch the phone vices.” trading and large numbers of users.” Hixon explained the enhanced platform will offer h-EDGE comes on the heels of a similar develop- Editor Ralph Savage advanced capabilities that support straight through ment from one of Hemisphere’s main competitors, ralphs@incisive.co.uk securities processing, reconciliation, pricing, daily Citco Fund Services, which launched an out- P&L reporting and flexible web-based reporting. sourcing service in October, called Aexeo. Citco’s Managing Kira Nickerson “Hemisphere’s securities processing capabilities said its premium package “aims to virtually elimi- Editor kiran@incisivemedia.com were lacking, but we are greatly enhancing this so nate a hedge fund’s need to maintain expensive in- we can provide services to a much broader array of house service and technology infrastructures”. Contributor John Butcher john.butcher@incisive FUND LAUNCH Publisher media.com Susanne Petrie First islamic fund built on in-house IT susannep@incisivemedia.com A custom piece of back-office technology is at the the underlying hedge fund managers, applying core of the world’s first Islamic hedge fund, due for multiple financial and industry tests to ensure Marketing Rainy Dhillon launch in the first quarter of this year. stocks do not break Islamic law. Manager rainy.dhillon@incisiveme- The software will allow Shariah Fund Inc’s fund It will also be capable of analysing tens of thou- dia.co.uk of hedge funds to ensure companies invested in are sands of stocks a month if necessary, according to compliant with Shariah law, which until now has Dauvin Peterson, vice-president of Shariah Funds Subscriptions Vicky Priest made shorting impossible in Islamic products. It Inc and head of software development. “This is a Executive vpriest@incisive.co.uk will be used to analyse all securities invested in by huge departure from (continued on page two)
  2. 2. 2 Hedge Fund Technology NEWS & RESEARCH Management Quality (MQ) MARKETING TOOLS|MULTI-NATIONAL MANAGER RAMPS UP CRM CAPABILITY Oaktree implements ratings of hedge fund administrators could become a fixture in the industry over the next two years, after the first report of its kind on such a firm sparked a wave of interest. Custom House Administration & Corporate Services received a Baa1 MQ rating from Moody’s Investor Service in December interaction software Oaktree Capital Management, has selected the sup- “When our marketing representatives call on and, according to Vania Schlees, a plier Interface Software to support the firm’s clients, it is critical that they have the ability to spokesperson for Moody’s strategic CRM (Customer Relationship Manage- view their clients’ existing investments, as well as hedge fund administrators are ment) initiative. new opportunities that they might be interested starting to take them seriously. It will deploy Interface’s InterAction 5 solution to in.” he said. “It was difficult pulling this informa- “The reason for creating a provide sales support to its marketing and client tion together without a user-friendly system. procedure like this is people relations efforts. Oaktree chose the solution mainly because it is were often asking us for a Oaktree is a US-based alternative investment browser-based. Ghebrial said this enables execu- qualitative rating of an asset manager, with $25bn of AUM, in fund strategies as tive-level staff among the firm’s 255 employees to manager, custodian bank or an diverse as equities, high yield bonds, convertibles, gain easy access to a repository of relationship administrator. Once we had distressed debt, opportunistic real estate and mez- information, “such as who knows whom and spe- carried out the first for Custom zanine debt. it has offices in LA, New York, Tokyo, cific deals that clients have been involved with in House, we had many more London and Singapore. the past,” he said. enquiries, including one from a The solution will be integrated into Oaktree’s in- Secondly, the software has extensive integration hedge fund administrator in house developed accounting and portfolio manage- with Microsoft Outlook, alongside which, InterAc- Ireland.” ment systems, to deliver a 360-degree view of tion 5 automatically synchronises outlook contacts Schlees added the product is client activities within the firm. Ossama Ghebrial, with a centralised knowledge base. not specialised to hedge fund senior vice president of information systems at A final point was the software’s data change administrators, but it looks at Oaktree, said having a single point of access to its management tools and data quality, which allows the organisation of a company, relationship “intelligence” is critical to support dedicated staff to manage the process for keeping its IT infrastructure, how marketing and client relations. it clean and up to date. departments work and what communication to management is like.The goal is to iron out any CONTINUED FROM PAGE ONE... problems and ultimately improve the way the company operates. First islamic fund built on in-house IT previous Shariah compliance systems which have plans to launch – the first of which will be a ven- seen Islamic scholars looking over spread sheets on ture capital fund. a quarterly basis,” he said. In the future Shariah Funds Inc plans to offer the “In most cases Shariah compliance will be deter- product to similar houses looking for customisable, mined by the fully automated system, but where automated back-office systems for a Shariah fund. there is room for debate over a stock Shariah scholars will be asked to review the company and UPGRADE decide if it is compliant. This could occur for example if a hotel chain meets all the financial tests Trema updates Finance KIT but fails industry tests because it serves pork on the menu.” system with new version 6.0 The software has been developed by Carnegie Finnish software supplier Trema Group has Mellon PhD candidate Yuriy Nevmyvaka. He has launched an updated version of its Finance KIT worked on systems for financial markets with solution. Version 6.0 incorporates a unique API CSFB as well as in the field of artificial intelligence. and “plug and use” interfaces, enabling users to It will be used exclusively by Shariah Fund Inc’s connect with external production and distribution fund of hedge funds initially and may be used on systems providing more scalability while min- up to four more Islamic products the company imising maintenance and costs. EDITOR’S NOTE “A slow period over the festive season has been replaced by a Publishing office rush of activity in the sector.The use of technology is becoming 7 Air Street, London,W1B 5AD Telephone 020 7439 3050, Facsimile 020 7439 3070 E-mail info@incisive.co.uk a key component among many new fund launches, which goes ISSN:1478-0607 Materials may not be reproduced in any form without the written permission of the publisher. © Copyright 2003 Hedge Fund Technology to show managers are viewing IT as a serious advantage.” © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  3. 3. N E W S U P D AT E Hedge Fund Technology 3 FUND LAUNCH | SUPPLIER SPILLS THE BEANS ON AXA’S CONVERT ARB PLANS IFX Group is to launch a new back-office system aimed at AXA IM hires Sophis small to medium-sized hedge fund managers.The technology has been described as a true ‘click and deal’ system enabling AXA Investment Managers’ Structured Asset to integrate proprietary financial models, thanks to trades of forwards and options. Management division (SAM) has opened a convert- the financial toolkit. This is the most advanced The supplier is tight-lipped with ible arbitrage fund in Dublin, using technology product we have found both for alternative and tra- regards to the launch, but said from Paris-based Sophis. ditional investment activities and we plan to extend an official announcement will be The supplier announced the launch of AXA it’s use to all SAM’s activities by Q1, 2003.” made in early March. It is Vega in a release last December, however, Hedge Hervé Vinciguerra, chairman of Sophis, added. thought the launch will put IFX Fund Technology, has discovered AXA IM planned “The relationship we have developed with them Group in direct competition against any publicity in anticipation of unveiling has enabled us to gain in-depth knowledge of the with prime brokers. the product early this year. specific needs of investment management and to A spokesperson at AXA IM played down the propose a very innovative and high-quality system, Lehman Brothers’ Global release, adding that AXA Vega has already begun which has received very good feedback from the Prime Brokerage is trading, albeit with seed capital only. market.” incorporating RiskMetrics’ risk Sophis’ VALUE front and middle office software reporting tools into its will cater for all of AXA Vega’s front and middle Upgrade to convertibles database technology platform.The office activities. Olivier De Lamotte, head of con- Meanwhile, Sophis has released a new version of software, RiskManager, will vertibles at AXA IM added plans are underway to its pricing library for convertible bonds, Convert- generate strategy-based end-of- extend the technology to all of SAM’s businesses ibles On-Line. The supplier said the upgraded ver- day risk, exposure, stress test by Q1 2003, including index funds, structured sion includes enhanced analytics, “as well as the and liquidity reports that will be funds and credit arbitrage. latest novelties in convertibles pricing; Partial Dif- made available through “We needed sophisticated tools in order to ferential Equations (PDE)”. The database now LehmanLive, the bank’s web comply with increasing demands from investors covers over 2,000 international convertible bonds, portal.Also on offer will be and regulators,” he said. “When we started from all European countries, USA, Japan and access to the software’s working with Sophis, we were looking for a reliable South-East Asia. interactive intra-day and secure system that would enable us to cen- Sophis said the use of PDEs is a step forward in functionalities on an tralise all our data in an application providing a the convertibles market “as they provide higher independent web platform, to single database. VALUE offers real-time valuation flexibility to take into account all the events in the support hedge fund, fund of of all risk indicators and Net Asset Value calcula- life of a derivatives underlying, and ensure more funds and investors’ risk tion, comprehensive risk reporting and flexibility accurate pricing and Greek indicators.” aggregation activities. EXOTIC INSTRUMENTS Charles River Development and TradeWeb have joined Suppliers release new futures tools forces to develop a front-to- back-office fixed income trading solution.The two firms are FutureFirst Software has upgraded its back-office and onExchange who have launched a combined combining their software to hedge fund software to include support for single order management product called LINQX. produce a solution which will stock futures. The suppliers said their offering is an intelligent eliminate re-keying of data at The supplier’s suite of products; Trader’s order routing platform supporting best execution various points in the order and Accountant, Daily Tracker, Pool Accountant and for single stock futures. They are trying to meet the execution cycle. An initial user Propogator have all received an upgrade to support execution challenges of prime brokers among of the solution will be Putnam the instruments, which only began trading on others, who will need to trade these instruments Investments, whose’ managing November 8, 2002. across multiple exchanges at the same time. Antici- director,William Sullivan said: “Single stock futures are an unusual product that pated benefits are liquidity enhancement, price “by linking their systems combine the characteristics of both stocks and improvement and offsetting for customers. TradeWeb and Charles River futures,” said Terry Brennan, president of Future- “We will use LINQX immediately to get best exe- are providing benefits in terms First Software. cution for proprietary trades and to consolidate liq- of time savings, error reduction “A purchaser of one contract of a single stock uidity”, said Jon Peabody, president of Rock Island and increased operational future has purchased the right to receive 100 shares Index Trading. “it will enhance co-ordination of efficiency. Now, investment of that stock on a settlement date at the agreed our arbitrage and in-house market-making activi- managers will be able to contract price. They combine the efficiency of the ties on public markets.” originate a fixed-income trade in futures market with the range of products avail- The system facilitates price improvement and an OMS, seamlessly route it able in equity markets. A single stock future liquidity enhancement by dealers for the benefit of electronically for execution, behaves like a stock option when the stock splits; a their customers on a fully documented basis. In receive and electronic single stock future becomes worth a different addition to providing routing and execution capa- confirmation back in the OMS number of shares. All other kinds of futures con- bilities, the system is designed to capture regula- and conduct paperless trade tracts have a fixed multiplier, so this is completely tory reporting data. allocations and settlement new for futures.” Marketing has begun, with the suppliers tar- without re-keying data.” geting prime brokers and firms seeking to expand Combined development their single stock futures volumes, especially those On the heels of FutureFirst are Future Dynamics handling block trades and undirected order flow. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  4. 4. 4 Hedge Fund Technology N E W S U P D AT E Researchsummary.com has RISK MANAGEMENT|AUTOMATED STOP/LOSS HITS SNAG IN VOLATILE MARKETS gone live with an enhanced Manual intervention version of its PDF-based broker research web service. RSPro has added sources from new brokers, with the service now covering over 15,000 companies from 11 investment banks. Researchsummary is offering subscriptions to the research portal for typically $1,000 per needed to curb losses year for single use, with Discretionary stop/loss procedures are increasingly time for managers in the long/short area. discounts for multi-users. John being favoured over automated risk controls, as One such manager is Charles Tritton, head of Thorne, chief executive officer volatile markets have caused these strategies to get alternative investment at New Star. However, he of researchsummary.com, said, stopped out at a loss. says he prefers to use manager discretion, rather “with the implementation of According to a number of fund managers, prices than technology to manage automated stop/loss new regulations like NASD opening significantly lower than their previous day procedures. “We might use this at key chart levels, 2711, we will see the during October and November 2002 are highlighted when a stock is about to break out. Of course, auto- acceleration across the as the main cause for managers to look for added matic stop/loss can be highly detrimental to a fund investment industry of RIXML- flexibility. in a volatile market, but we use a subjective based data production over Single strategy funds and funds of hedge funds method.” 2003.” are now being urged to view their risk on a port- VaR is becoming more widespread in the hedge folio basis and place their trust in measurements fund market, with users of the measurement gener- Shore Capital, the London- such as Value at Risk (VaR) during volatile periods. ally assumed at around 70-80% of funds. based investment banking Ted Wright, vice president of research and a But Mark Weller, head of international hedge boutique, has gone live with its senior analyst at LJH Global Investments, blames fund sales at Reech Capital (see viewpoint on page connection to DrKW’s extreme intra-day volatility in markets which is eight), said it does have limitations which managers Bestconnect order execution continuing to some extent at present. should be aware of. “Our software builds up a system. Bestconnect has been “Some managers have said in these types of matrix of how instruments and markets correlate designed to offer brokers, asset market environment, you need to be a little more with one another. Nine times out of ten it works managers and institutions access patient and either waive your stop/loss limit or be fine, but you can overlay that with a stress test so to electronic execution as an patient in investing in stocks you have a truly high you can see how your portfolio will perform if that alternative to telephone dealing. conviction of. This is probably an extremely tricky historical correlation breaks down.” Shore Capital’s introduction to the service will allow those SUPPLIER FOCUS groups to access its market- making capabilities in the small- cap sector. Shore Capital Supplier targets East Coast managers currently makes markets in approximately 450 smaller US-based software provider, Random Walk Com- market already, including, “one of the largest hedge companies quoted on AIM and puting, is attempting to tap into the US hedge fund funds in the US.” Scotkin added, “we have com- the Official List. market with an expansion into new Boston offices. pleted projects for a number of others, ranging The firm has previously developed software for from data warehousing to risk arbitrage systems.” Fund managers could be able institutional traders and banks and says it now to measure US-based wants to help alternative investment houses catch ONLINE FOREX up on their IT. companies’ default probability more accurately after Kamakura Joel Scotkin, CEO and co-founder of Random Currenex gets new CEO as Corporation produced a report on their predictive capabilities of Walk Computing, said, “Most hedge funds start with a core group of very smart financial analysts competitors’ sales rise up models.The supplier’s own and traders who set out to develop and execute Online foreign exchange platform Currenex has probability model KDP-jc has a advanced investment strategies. Their initial focus replaced outgoing CEO, Lori Mirek, with a new strong predictability, after the is almost exclusively on ROI and building their cus- chief executive, Clifford Lewis. report found evidence garnered tomer base. Mirek’s departure follows a wave of resignations from 1.4 million monthly “If they’re successful, they often find that their in the past twelve months, including Roddy observations on 17,460 US growth rates in trading volume and accounts go Boulton, Currenex’s former European general man- companies over the period of way beyond their initial expectations and IT plan- ager and Karen Steele, who used to head up the 1963-1998. Kamakura is a ning with all sorts of implications for systems firm’s global marketing efforts. provider of multiple default capacity in risk management, trade flow, and client Lewis joined Currenex in January and will be probability models which are reporting. Random Walk comes to the table with placed immediately in charge of the firm’s aggres- derived on a common platform the experience and the tools to help these organisa- sive growth targets in the increasingly competitive and distributed in a fully tions bring their systems up to the level where they online FX marketplace. compatible and comparable way. can perform and grow to support the business Rivals FXall and State Street’s FX Connect ser- instead of slowing it down.” vices have both announced large increases in Scotkin said that while clients mainly consist of trading volumes. UK research firm Client Knowl- mid-tier asset managers and prime brokers, the edge has recently revised its estimate of FXall’s firm has customers in the alternative investment daily average from $3bn to $4bn. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  5. 5. I M P L E M E N TAT I O N Hedge Fund Technology 5 Single system to cope with fund launch aim After breaking the news in August by the same information flow. While scanning dozens of software providers 2002 that Discovery Capital and evaluating each potential vendor on how closely their solution’s functionality mirrored its Management was overhauling its requirements, Discovery finally opted for Trema. IT systems, HFT exclusively reveals According to Krensky, the choice was made in the most part for the extensive instrument cov- details of the year-long project. erage that it had. “It was particularly strong at pro- cessing exotic instruments such as exotic options, “We needed to In late July 2002, $900m hedge fund, Discovery interest rate swaps, and structured products,” he Capital Management, decided to implement a new says. streamline our hedge fund risk and portfolio management system, “Secondly, the feature functionality of Finance to aid expansion of its emerging markets invest- KIT was more extensive than competing products operations, simplify ment business. and Trema is dedicated to accumulating knowl- After an exhaustive search, lasting almost six months and taking in nearly 70 separate software edge and redistributing it to customers through its technology.” our systems suppliers, Discovery finally selected Trema Group, and went fully live with the system, Finance KIT, STP expectations environment and just before Christmas. Harry Krensky, Founding Partner at Discovery The entire implementation process was completed in less than four months. Trema’s pre-configured enhance comments, “Discovery is a multi-asset class, multi- database allowed rapid implementation by auto- strategy fund, with investments in equity debt and matically rolling out the standard configuration functionality. It also currency markets in over 20 countries world-wide, work for workflows, settlement instructions and so we needed a system with a flexible architecture related functionality. had to be a single to expand in line with our business. Discovery expects enhancements to straight- “Our proprietary system didn’t give us the flexi- through processing, reduced need for manual inter- solution, bility to develop products with diverse strategies, vention, simplified and risk-return characteristics.” systems integration encompassing and access to real-time Preparation for expansion information. The new front, middle and Discovery’s proprietary system had been devel- system will provide full oped in-house and lacked the depth of function- front, middle and back- back office.” ality and scalability the fund required as the office functionality in business grew. The new solution had to be scalable one solution, facili- Harry Krensky, Founding enough to support the launch of new funds. tating STP and elimi- Discovery was also looking for something that nating complicated Partner, Discovery Capital could extend a standardised, more disciplined interfacing. Similarly, approach to risk management. users have only one Management “By partnering a vendor with a good track point of information Trema Group’s record in the industry, as well as extensive domain entry, so manual input Päivi Karesjoki expertise and experience, we were looking for both is minimal. Finance KIT has real-time pricing and knowledge and technology,” adds Krensky. “We risk management capability, which sets it apart needed to streamline our operations, simplify our from many solutions on the market. systems environment and enhance functionality. It “Risk management is a core focus for our busi- also had to be a single solution, encompassing ness and this new solution is perfect as it will allow front, middle and back office.” us to integrate the entire investment process with Extensive instrument coverage coupled with a our risk management strategy,” adds Krensky. scalable platform was the next requirement, Expanding its hedge fund customer base is also enabling Discovery to launch new funds without a core focus for Trema Group. Päivi Karesjoki, continuously needing to re-engineer the infrastruc- Head of the Asset Management Segment for the ture. Real-time profit and loss and risk manage- supplier, says, “this is a market where we see sig- ment capabilities were of particular importance as nificant opportunity for growth over the next few Discovery’s portfolio relies heavily on calculating years. its performance in a real-time environment. Simi- “We believe our solution, because of its focus on larly, limit and risk management monitoring were real-time information and seamless functionality, also critical considerations and had to be powered will capture a large portion of this market.” © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  6. 6. 6 Hedge Fund Technology TO O L S O F T H E T R A D E “Whether your fund managers decide to go to If you can’t leave the exotic island holiday locations, office, take it with you satellites in controlled re-entry, which would cause Given the importance placed on them to burn up in the upper atmosphere over the or just try and get mobile telecoms in modern earth’s oceans. This all made a very newsworthy story, but less a decent signal business life, it’s conceivable a cell so was the step in by the US government, a heavy phone failure could cost you user of the network, to rescue the company and to wherever they are, money. Here are the failsafe options sell it on debt free. In turn, this gave Iridium what some might see as an unfair advantage, and satellite phones allowed it to profitably reduce pricing by signifi- While the red braces and fast living characterising cant amounts, much to the irritation of their solve problems and the eighties trader may have been replaced by the equally debt laden competition, who have reluc- more analytical and strategic execution of modern tantly been drawn into a price war. But the con- bridge hedge fund management, it is true to say the hours sumer is the winner, and satellite calls can now be and energy put in by the managers and supporting made for less than the cost of a hotel phone call. communication cast of successful funds is enormous. Consistent out performance does not happen by accident. Compact solutions gaps” Access to information and the ability to keep abreast of the markets is paramount to being able The capabilities of the latest generation of satellite phones are impressive, and both voice and data ser- to seize opportunities that might have small win- vices are available. Handsets are manufactured by dows of opportunity. Communications technology companies such as Motorola, and while they are is a key facilitator, and few funds will now be slightly larger than the average mobile handset, without essentials like broadband connections at would still fit comfortably in a jacket pocket. home offices, allowing connection into the corpo- Units designed primarily for data use usually are rate VPN. of a similar size and proportion to a laptop com- Besides broadband, there has been a quiet revo- puter, as the lid forms an integrated antenna, lution going on lately in the field of satellite com- which allows for improved and uninterrupted com- munications, which you may not know about. Like munication. wealth, the gap in global telecoms between ‘haves’ As with regular mobile networks, there is a and ‘have nots’ is becoming increasingly wide. choice of data carriers. These choices include: While we enjoy ATM MANs powering megabit DSL connections to our homes, and resilient fibre ISDN services which offering a clear 64 kbps fed leased lines, other parts of the world struggle data stream. to deliver basic PSTN infrastructures. Mobile Packet Data Services, in which you only For example, most Nigerian business people pay for the volume of data transferred, which are each have three mobile phones, as their disparate similar to the G3 GPRS networks. Bandwidth of networks have what can at best be described as 128 / 256 kpbs is similar to ADSL speeds patchy coverage, and are completely incompatible Analogue data service (modem) connections. with one another. Whether your fund managers decide to go to The main commercial networks are run by exotic island holiday locations, yachting beyond Inmarsat, Thuraya, and Iridium. Each has its own the comfort of the coastal waters, or just try and coverage, pricing and feature set, so the choice is get a decent signal wherever they are, satellite dependant on your needs. phones solve problems and bridge communication Inmarsat is one of the longest established satel- gaps. If your only experience of sat phones is in lite networks, having been formed as a government the films, where they deploy a briefcase sized unit funded European consortium, which has now been with a folding dish, only for the good guys to get privatised. Inmarsat’s biggest user constituent is in cut off before they can say where the bomb is, then shipping. Aboard a ship, a single satellite base can read on... you will be pleasantly surprised. provide Internet connectivity for all the PCs Ben Fitzgerald-O’Connor is a aboard, as well as voice services. It can even be consultant with Onega, a Price war is good news used to practically support video conferencing. provider of IT support You may recall last year’s news, one item of which Inmarsat supports voice (4.8kbps), ISDN (64 kbps), services & consulting to the was the impending demise of the Iridium satellite and MPDS (always on – up to 50 kbps, typically 17- network. It will come as no surprise that it costs a 20 kbps). Small ISDN data units are available, City’s financial community. lot of money to launch and maintain a constellation which provide corporate class communications on For more information, call of communications satellites and the company a global scale. +44 20 7540 6820, or e-mail operating Iridium imploded given the weight of Betraying the military origins of the network, ben.fitzgerald@onega.net debt they were faced with. many terminals support encryption of the voice The news was of dramatised plans to engage the and data channels. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  7. 7. TO O L S O F T H E T R A D E Hedge Fund Technology 7 Inmarsat has just launched a new data service – handsets used by Iridium are small and very sim- SUPPLIER Regional BGAN (Broadband Global Access Net- ilar looking to normal mobiles, though they work DIRECTORY work), which provides data throughput similar to exclusively with the Iridium network. ISDN speeds, but through an always on connection, Data is supported on Iridium, either using a reg- BISYS and charging just for bandwidth used. Currently ular modem connection to an ISP or corporate net- bisys.com the system only operates in Europe & Northern work RAS Servers, at 2.4kbps, or via Iridium’s EAGLE INVESTMENT Africa, but global coverage should be achieved in Direct Data Connection, which runs at 10 kbps on SYSTEMS approximately two years time. the Internet and is therefore the preferable choice eagleinvsys.com The terminals are very compact, costing around for data communications for Iridium users. The EGAR TECHNOLOGY £1000, and weighing in at 1.5 kgs. Data is not functionality of the phones and network is on a par egartech.com cheap (though it may be in comparison to a fund with that of any mainstream GSM network, so you CHARLES RIVER manager’s time), typically costing £10/Mbyte, get voicemail, call forwarding etc. which is anticipated to drop over time. If you are deploying remote, (or in some cases, crd.com very remote) data access solutions, then min- CURRENEX All-in-one imising bandwidth is an important priority. A currenex.com Thuraya handsets offer the unique benefit of being number of technologies exist to reduce the band- FUTURE DYNAMICS both satellite phones, and GSM Triband sets. This width requirement for common applications: way, when you are in civilisation, you can use the fdlweb.com terrestrial mobile network – O2 (formerly BT Windows Terminal Services & Citrix FUTUREFIRST SOFTWARE Cellnet) in the UK, (Vodafone & T-Mobile are Remote Control Applications futurefirst.com undergoing implementation). The switching from Web browser based software HEMISPHERE GSM to Satellite happens transparently, so if you hemisphereglobal.com move out of local cell range during a call, you will Remote control applications vary widely in the switch to the satellite automatically. bandwidth they require, and the native Windows IFX MARKETS The handsets cost around £650, and you just RDP (Remote Desktop Protocol) used by both Ter- ifxmarkets.com insert your existing Sim card into the phone, and minal Services, and Windows Remote Desktop INTERFACE SOFTWARE you are up and running. Pricing for Voice calls sharing are quite efficient due to Microsoft’s unsur- interfacesoftware.com starts at around $1 a minute. prising in depth knowledge of their own operating Data is somewhat slower on the Thuraya net- system. KAMAKURA work, being limited to 9.6kbs, which is usable, but Proprietary remote control systems such as Net- kamakuraco.com you would want to think carefully about your Support, or NetOps are designed to get the best NEONET strategy for minimising bandwidth use, in order to possible use from your available bandwidth, and neonetsecurities.com provide a rewarding user experience. Thuraya’s allow files to be transferred in a compressed form satellites are in geostationary orbit at 45° East and between local and remote machines as well as facil- RISKMETRICS currently cover over 100 countries. To conserve itating the support of remote users. riskmetrics.com power, and provide good reception, the satellites The exact choice of network will depend upon TRADEWEB dynamically focus spot beam radio beams as your requirements, and priority for voice and data. tradeweb.com required, instead of providing a uniform single Each network has unique capabilities and pros as signal level across the satellite footprint. This inno- well as cons, but common to all are the benefits of REECH CAPITAL reech.com vative technique allows the same performance to having a single phone number around the world, be achieved as a significantly larger and more and if you are using data, only one set of parame- TREMA GROUP expensive system of the previous generation. ters for IT to set up globally. Most importantly, you trema.com Thuraya handsets also offer GPS support, which will never need to worry about stocking local can pinpoint your location on the planet to within phone system socket adapters in the wall for each 10 metres’ accuracy, and this can be reported via country any more! SMS text messaging. Contacts: Abduction threat Iriduim - www.iriduim.com It is a fact that, in many of the world’s emerging Thuraya - www.thuraya.com economies, incidents of kidnap and ransom are at Inmarsat - www.inmarsat.com real and worrying levels. It gives great assurance, Offshore Telecom - www.offshoretele.com that in the event of a situation such as this arising, the Thuraya handset could be the difference between months of lost time and anguish; and your insurers being able to commission and coordinate COMMENTS & an efficient extraction. People pay a small fortune for ‘tracker’ systems OPINION... for their cars, Thuraya allows you to protect your If you any comments on the issues raised in this human assets in a similar way. edition of HFT or the fortnightly bulletin, please Iridium’s constellation is one of the low earth contact, Ralph Savage on +44 (0) 20 7432 6948 or e- orbiting satellites, which has coverage from pole to mail ralphs@incisive.co.uk. pole, and is very reasonably priced. With a simple to understand model – calls from an Iridium phone In next month’s edition, we feature the exclusive to any landline, or GSM mobile in the world are Hedge Fund Software Systems Selection Survey. charged at $1.50 per minute, on top of the $15 per Dozens of IT solutions will be independently month standing charge, and the initial purchase of reviewed, giving you the most accurate break down of a handset at around £1250. Like Thuraya, the relevant software currently available. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  8. 8. 8 Hedge Fund Technology R I S K M A N A G E M E N T & I N V E S T O R R E P O RT I N G Assuming a greater understanding of risk As hedge funds grow in popularity, managers should be mindful of the sophisticated demands of both private individuals and institutions. By Mark Weller When considering the weighty demands of institu- fund and the investor’s individual requirements. tional investors, and Hedge Funds’ eccentric atti- It is certainly right to recognise investors need tude towards transparency, a question now has to somewhat different and perhaps less specific infor- “It is not the case be answered; What sort of risk analysis do mation on the funds themselves. However, it is not investors want and realistically how much of this the case that investors aren’t sophisticated enough that investors can they obtain in the current hedge fund environ- to have a thorough analysis of their portfolio. Most ment? of them are happy and comfortable enough to aren’t Investors want a thorough assessment of the risks taken which in many cases can be used with receive Value at Risk and often other measures, including Greeks. sophisticated performance data to provide risk adjusted returns. To this end, Value at Risk (VaR) can be a very effec- Position level data tive way of aggregating risks from different instru- Requirements certainly vary from one investor to enough to have a ments into one single number. another and the fund manager must be prepared to VaR looks at how instruments correlate to each present data in a format that is acceptable to each thorough analysis other and can therefore be very useful at deter- investor. For instance some investors are aware mining how a portfolio of instruments will react, that the strategy they have invested in can be dam- of their portfolio. given a particular event. aged by too much transparency being provided It is crucial that the investor carries out a suit- and may ask instead for a summary of the highest Most of them are able approach for the strategies to which they are risks within the portfolio on, say, a sector basis exposed. rather than asking the manager to reveal all of the happy and For instance, there were many examples in the underlying positions. late 90s of fixed income arbitrage traders suffering Many investors find stress testing can be a very comfortable extremely poor market liquidity with some of their powerful analytical tool but the user must not positions. In many cases, follow it blindly. Stress testing looks at the enough to receive they were buying an volatility experienced during a particular historical illiquid bond and event and applies this to the current portfolio to Value at Risk and shorting the liquid bond measure the impact on the portfolio of a similar set to pick up the basis of events unfolding once more. often other points in the middle. Many would argue However, one of the limitations if you use an his- torical event such like LTCM, is that the dynamics measures, that the basis points picked up are simply a of each individual event can be very, very different. During the Russian debt and LTCM crises there including Greeks.” reflection of the lack of liquidity of the one rela- was extreme volatility, equity markets fell dramati- cally and bond spreads widened. Then the Fed cut tive to the other. From a interest rates and the markets stabilised, recov- risk perspective, you ering much of their initial losses. Mark Weller is head of need to look very specifi- If you looked at the markets currently and you international hedge fund cally at what is going on predicted further interest rate cuts, you would not sales for Reech Capital in the portfolio, such as if be able to assume that the markets would recover. a fund was running short Rates have been falling in the US for the last two of a five-year liquid treasury and long of an years and yet this has not prevented the equity illiquid one. From purely a durational perspective, markets falling further. you would show them as running almost a flat We expect significantly more money to flow into position. alternatives over the next few years as the recent Increasingly, investors are placing particular trend continues. reporting requirements upon funds prior to Although some believe the last five or so years making an investment or subscription. This can go manifests all the characteristics of a bubble, one further than a weekly or monthly presentation of must put this expansion into context. Hedge funds risk and in some cases a daily report is required still only account for a tiny portion of the global that shows not only the positions that the fund is investment pool (some estimate as little as one per running but also how these compare to pre-defined cent). With this interest will come increasing risk limits. These limits will be either VaR-based or demands for a higher quality of reporting from using Greeks such as Delta, Theta or Vega mea- fund managers and for the investor this can only be surements, depending upon the strategy of the a positive. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  9. 9. E L E C T RO N I C T R A D I N G Hedge Fund Technology 9 Unravelling brokerage for a low priced service ECNs, direct access brokers, panies addressing the demand for objective analysis that is not influenced by the executing whatever you want to call them; broker. This autumn, eleven US research firms with the cost reductions possible joined forces under a common theme with the mis- sion to “promote investor trust through the use of through electronic trading, hedge investment research that is financially aligned with investor interests”. funds are starting to take notice. To stay competitive in tough markets, hedge funds are taking a less myopic view of trading and “To capture the Some of the most powerful forces driving markets are evaluating the whole execution process – from in both Europe and the U.S. are globalisation and technological development. With stocks of multi- the front to the back-office. Some immediate areas of attention are total transaction costs, execution full potential national corporations trading on several exchanges across two or more continents, cross- quality and the direct market access technologies offered by their brokers. This also brings into focus benefits of border trade execution possibilities are at the fin- gertips of the hedge fund community. speed of execution, commission rates, clearing and settlement, opportunity costs and market impact. electronic trading, The growth of the hedge fund industry coupled with the downturn in the equity markets over the The price of failure such as reduced past few years have combined to draw attention to While reducing commissions can be an obvious new uses of technology in the brokerage and asset first step in the direction of lowering total transac- commission, lower management industries. With a focus on improving tion costs, traders are becoming more aware of the trading performance and enabling more advanced significant hidden transaction costs suffered by opportunity costs trading strategies, this has created a number of missed and/or delayed trades. new players offering an execution-only service at a The use of direct market access technology and reduced highly competitive price. helps to significantly reduce the possibility of Hedge funds, generally having significantly delays and missed trades and used in conjunction market impact, higher turnover than traditional funds, have cre- with the benefit of anonymity can also signifi- ated a need for fast, efficient, and low-cost elec- cantly reduce the negative effects of market hedge funds should tronic trading capabilities with a global reach. impact. Viewed as innovators in the asset management To capture the full potential of electronic ensure that their industry, hedge funds have been quick to embrace trading, such as reduced commission, lower oppor- new uses of technology and direct market access tunity costs and reduced market impact, hedge broker is offering as a way to lower total transaction costs and funds should ensure that their broker is offering improve executions. true direct market access, rather than simply direct access to the broker’s trading desk. true direct market Focus on cost An enduring 3-year bear market has intensified the With the latter approach, the order ends up with a trader who either sends it forward for execution access.” focus on transaction costs and the quality of on the exchange or executes it in the traditional broker-provided analysis. This combined with the fashion, limiting the real-time benefits of electronic growing trend of reliance on in-house analysis by trading in a similar way as voice-based trading. hedge funds, has decreased the rationale for a high- Fragmentation of liquidity amongst exchanges priced bundled execution and research service. and ECNs creates the need for single access points A recently released report from the U.S. con- to multiple destinations. As hedge funds adopt sulting agency, Freeman & Co., supports this trend. increasingly complex and global trading strategies, According to Freeman & Co., hedge funds are the need to reach global liquidity directly and in increasingly looking for providers that are focused real-time becomes more prevalent, but with a fast and specialised in one part of the previously bun- and reliable execution vehicle, hedge funds gain dled service. full control of orders and the ability to react imme- On the execution side, the demand is for agency diately to market movements. brokers who provide efficient electronic execution Capturing the full value of a trading strategy solutions with low commission schedules. On the will always be challenging. However, with trading analysis side, the demand has not gone unnoticed solutions that address market globalisation, the and one recent example is the announcement by possibilities of technology and fragmentation of Citigroup that it will break out its analysis to be marketplaces, hedge fund managers and institu- independent of corporate and investment banking tional investors are finding new ways to access all Torvald Bohlin is CEO of and underwriting. of the major points of liquidity and turn market Another sign of this development is the growing volatility into a powerful new tactic in their trading international agency number of independent investment research com- strategies. brokerage, NeoNet © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  10. 10. 10 Hedge Fund Technology LIQUIDITY RISK Collateral management keeps the wolves at bay If a counterparty is downgraded you are going to want more collateral. But what if it's you who gets downgraded and everyone is knocking at your door? By Alan Bright Banks hold instruments against credit events but it ratings, most have none. is important that they can be sold quickly with Banks therefore demand and little market impact. However, during a time of receive collateral agree- market turbulence, when investors sell feverishly, ments with unilateral thresh- “What would an only the first one gets a good price; the rest lose by olds favouring the bank. having to pay a liquidity premium if they want a These thresholds are usually ideal system look sale. Welcome to the world of liquidity risk. The question now is, should models include bid/offer raised after credit deteriora- tion or other triggers such as like? To go back to behaviour to compensate? One circumstance where liquidity risk appears is declines in NAV per share, high redemption volumes or the original when a major derivative counterparty goes bank- rupt – as was the case with Enron. All its counter- Alan Bright is departure of key staff. Of course, banks are being mar/comms manager of parties must scramble simultaneously to replace prudent in demanding credit comment, how their now liquidated positions. A bank might have Credient/Infinity sensitive unilateral collateral to take a hit due to some market impact, but the thresholds with hedge funds, but these could cause easy is it to include effect is contained within a single relationship. the very event they are trying to avoid. As a hedge But there is a nastier strain of liquidity risk, fund gets hit with larger collateral calls, the prices future bid-offer related to a bank’s ability to fund itself when it is it can get for liquidating assets drops, causing downgraded. It is not the financial meltdown of more collateral calls and so on. behaviour and over bankruptcy, but a treasury or asset liability man- Liquidity risk is therefore very important to ager might suddenly have to raise cash to top up hedge funds and they often have in-house systems what time period collateral with hundreds of counterparties. in place to manage it, calling on skills from their The trading operation of a typical investment own quantitative analysts. In addition, prime bro- and under what bank might have 6,000 counterparties and no risk kerage is one way hedge funds can avoid multiple manager would relish having to liquidate assets to collateral calls. scenarios?” meet the requirements of each of these. Any Funding liquidity risk arising from credit down- model encompassing liquidity risk should have to grades is already an issue for hedge funds and will quantify the cost of putting up more collateral. become more important for banks. What would an Banks don’t seem worried by this sort of liq- ideal system look like? To go back to the original uidity risk: “Going from AA to A wouldn’t be that comment, how easy is it to include future bid-offer key” one head of credit risk measurement said. behaviour and over what time period and under A market risk manager at another major bank what scenarios? emphasised that all its main collateral agreements Any solution should have an analytics system were bi-lateral, meaning that if there were a credit that simulates future market movements. The downgrade due to problems in the banking system would also analyse each contract, giving industry as a whole there would be no net effect. the risk manager an aggregate position, showing Trading thresholds might drop and no additional which dates carry the greatest liquidity risk. This collateral would be required. might, for example, show when it is most exposed. This assumes, of course, that collateral can be There are systems that tackle this, but none do rehypothecated so that additional collateral so on a specific date basis. They look at predeter- received can be used to cover additional collateral mined future dates, rather than specific maturity required. It also assumes a roughly balanced net and payment dates from underlying contracts. mark-to-market position across all counterparties Funding liquidity risk due to credit downgrades with two-way collateral arrangements. Finally, it has rarely been a problem for major banks. But doesn’t address a single bank being downgraded. with more collateral agreements and increasing On top of that, the number of collateral agree- volatility in financial markets, there is a growing ments is increasing. One bank said that three years need to track and quantify the potential funding ago only five per cent of its trades were covered by impact of credit downgrades. Doing so requires collateral agreements while the current figure is technology reflecting the maturity and payment nearly 70%. Newer agreements are more likely to structure of actual trades in collateralised portfo- contain explicit reference to credit downgrades. lios as well as the structure of the collateral agree- The more immediate danger of funding liquidity ments, including definition of thresholds as a risk is faced by hedge funds. A few have low credit function of credit standing. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk
  11. 11. SYSTEMS SELECTION Hedge Fund Technology 11 The best solution at the right price?Not always Leading up to our feature on difficult to acquire from vendors. But spreadsheets can only go so far due to maintenance and develop- sourcing technology for hedge ment drawbacks. funds, Ravi Jain says support and There are other ways to achieve sophisticated analytical tools without building them from maintenance are the key to a scratch. Typically, larger vendors are inflexible and fruitful relationship. will not customise their solutions. Pure consultants often reinvent the wheel at enormous cost. “small firms rarely Smaller technology vendors are increasingly Most discussions on hedge fund technology tend to willing to use their own software as platforms for have the clout to revolve around portfolio management, reporting building customised analytical applications. and accounting systems. However, underpinning For risk management, analysis and reporting demand the most the vast majority of discussion is the fact that needs, there is an option beyond build or buy, many hedge fund managers today face problems analysing, selecting, and ultimately buying such which is to use existing service providers. But this is a difficult area as hedge funds with multi- dimen- attentive support. technology. Obviously, most know they want the best pos- sional risk are under pressure to provide some stan- dardised risk measurements and reporting to Therefore, make sible system for the lowest price, but during their investors. They cannot justify expensive risk man- quest, many users forget to consider other crucial agement systems nor do they have the IT and staff sure your elements, including sophistication of the tech- to run them. Several outsourced services for this nology, its potential scalability, ease of implemen- have cropped up over the years, usually only pro- expectations are tation, and how good the support will be. viding limited solutions at best and failing to earn When most large institutions are presented with the confidence from the alternative investment spelt out clearly in the dilemma of “buy vs build”, for hedge funds the community. more relevant and crucial question is “buy vs. out- More recently, prime brokers, administrators and the first contract.” source”. outsourced operations companies who already pro- Standardised require- vide accounting and P&L for funds have begun to ments like position provide services. While they do not necessarily spe- keeping, back-office oper- cialise in this area, hedge funds should continue to ations, accounting and push them towards developing their services. investor reporting can all Administrators and prime brokers are indepen- be outsourced to service dent and unbiased and already have the complete providers or pre-pack- position of the fund, and thus are the natural place aged systems can be pur- to get standardised risk analysis and reporting. chased to do them In both pre-trade analytics and risk manage- in-house. An outsourcing ment, many vendors do not have enough resources company will typically to provide customisation and enhancements to sys- have the same standard tems. If your needs are not totally covered by the Ravi Jain is CEO of EGAR features as a purchased features of the system and enhancements are Technology vendor system, with a required, make sure the vendor has the resources to different cost. deliver on its promises and has consulting staff For larger funds, bringing systems in-house will that properly understand your needs. probably be more cost effective in the long run, but Get clear pricing on enhancements upfront, as hedge funds must make sure they include costs like many vendors charge high rates for them. IT staff and hardware when comparing the two Smart entrepreneurs will ensure that $10,000 alternatives. does not turn into $100,000 and will insist vendors function within agreed parameters. But small firms Pre-trade analytical systems rarely have the clout to demand the most attentive Technology decisions for the areas of analytics and support. Therefore, make sure your expectations risk are not so clear. Given the assumption hedge are spelt out clearly in the first contract. Once the funds are becoming more analytical and quantita- deal is signed, you’ll lose a lot of bargaining power, tive in their approach, these systems are key to so leverage it while you can. survival, but most of the time require significant Funds of all sizes should now be able to acquire proprietary information or models. systems which are appropriate if they make good Many managers end up using internally built choices and explore all of their options. Investi- versions based on Excel spreadsheets, because gating those options will result in finding tech- they are looking for specific analytics which are nology to better meet their needs then ever before. © Hedge Fund Technology. January/February 2003 Reproduction strictly prohibited. Subscriptions: vpriest@incisive.co.uk

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