June 2014

AUTHOR
Will Geyer
Managing Director,
Head of Platforms
will.geyer@itg.com

CONTACT
Asia Pacific
+852.2846.3500
Canada
+1.416.874.0900
EMEA
+44.20.7670.4000
United States
+1.212.588.4000
info@itg.com
www.itg.com

Going Multi-Strategy,
Not Multi-System
Hedge funds have traditionally started as single-strategy investment vehicles,
focused on generating returns from just one investment strategy. Single-strategy
funds have the advantage of simplicity they only have to focus on just one set of
risk calculations, and have been able to keep risk and compliance departments
relatively small. For an increasing number of hedge funds, however, internal and
external market pressures have created an environment where funds need to adopt a
multi-strategy model in order to remain competitive, put more capital to work, and
seek out additional alpha.
This is a critical juncture in the lifecycle of a fund. Adding a fixed income strategy to a
long-short vehicle or investing in commodities for the first time is a chance to attract
new talent and assets. It provides an opportunity to establish best practices and an
efficient infrastructure, but it can also introduce inefficiencies that can hinder the
growth of the fund for years to come.
I. THE NEED FOR MULTI-STRATEGY
Over the past half-decade, many of the differences between hedge funds and other
investment vehicles have broken down. Regulatory reform, including the Jumpstart
Our Businesses Startups (JOBS) Act in the United States, has allowed greater range
of permissible marketing and allowed investment strategies. One difference that
remains, however, is that hedge funds continue to retain the ability to charge high
management and performance fees. A Citi study from 2013 found that hedge fund
fees remain around 1.6 percent of assets under management, far higher than the
typical fees of the asset management industry as a whole.
In an era of increasing choice, investors are demanding that hedge funds deliver true
alpha, even as they grow in size. For many hedge funds, this means moving beyond a
niche strategy (which is frequently limited in the assets that can be deployed)
towards new classes and investments. Rising funds need more options as they hunt
for truly additive returns.
While continuing to place a strong emphasis on total returns versus costs, investors
are placing more requirements around the infrastructure of the funds they invest
with. Due diligence teams have more robust investigations into fund operation and
management, and are paying particular attention to the risk and operation systems
of the fund. It is no longer sufficient for funds to simply have a risk and reporting
system in place. Funds need to have business continuity, compliance infrastructure
and TCA analytics that meet strict requirements in these areas.

June 2014

The trend towards increased government regulation is going to increase especially

around many of the investment vehicles like derivatives that hedge funds often
deploy. The Securities and Exchange Commissions (SEC) Form PF and the
requirements of the EUs alternative investment fund managers directive(AIFMD) are
forcing more and more funds to provide a thorough account of how they manage
trades and report their risk and trade data. Industry bodies, such as AIMA and the
MFA, along with multiple industry analysts, are encouraging firms to adopt these
strategies when available.
II. INFRASTRUCTURE PROBLEMS
For a hedge fund, maintaining multiple systems for multiple strategies creates the
potential for a number of infrastructure problems. Here are three of the most
common that portfolio managers and chief technology officers may encounter:
Data maintenance & reconciliation There is no universal way of storing and
categorizing financial data. Each individual system can have a unique way of storing
data, as it may speak its own language. When data is moved from one system to
another, there are opportunities for errors in translation with inconsistent
symbologies and numbers, creating an unacceptable risk of error in the compilation
and reporting of trade data. Furthermore, reconciliation of data across multiple
disparate systems with unique symbologies or formats becomes an extremely
cumbersome, time-consuming task that can lead to portfolio or trade optimization
delays, due to the inability to arrive at a timely, accurate view of the portfolios.
Waste In the process of ordering and executing a trade, a fund needs to call on
research, quotes and pricing data from outside sources. In many cases, there is a
cost associated with accessing this data. Multiple systems have the potential to take
the same data over and over again, causing unnecessary duplication and additional
costs. With a single system, once the data is inside, it can be shared across asset
classes and strategies free of charge something that is oftentimes not possible in
segregated systems.
Execution management system At the core of a trading system are the order
management and the execution management systems. As these technologies have
evolved in the past decade, many in the industry have started referring to them under
the combined OEMS title. But there remains a sizeable gap in the ability of
execution management systems to handle multiple asset classes. While many order
management systems can aggregate today across multiple asset classes, execution
management systems are comparatively less developed. Many firms that have
sophisticated order management systems are using multiple, potentially wasteful,
execution management systems, something that is only now rectifiable.

June 2014

Building a Home That Lasts

SINGLE SYSTEM
Reconciliation

MULTI- SYSTEM
Reconciliation

No wasted
data

More
complicated
post-trade
processing

Back Office
Processing
Compliance

Execution
Management
System

Equity Execution
Management System

Fixed Income
Execution
Management
System

Redundant
data

Order
Management
System

Pre-Trade
Compliance

Everything built
to the same
specifications:
consistent
symbology

Equity Order
Management
System

Fixed Income
Order Management
System

Pre-Trade
System 1

Analytics

Pre-Trade
System 2

Pre-Trade
Analytics

Different
systems
cant
communicate

Research
Research

Given the choice, where would you prefer to livein a cobbled-together old walk-up with an unreliable superintendent or a modern, wellconstructed apartment building
maintained by a solid management company? The answer is obvious. The same logic holds true when making
ITG Hedge Fund Solutions
decisions about hedge fund infrastructure and platforms. Multi-asset hedge funds can choose to operate with a patchwork of legacy systems
and providers strung together to support different asset classes or work with a sleek, integrated solution with centralized support.

Buildingmodels,
a Home
Thatsolution
Lasts
As more firms transition to multi-asset
a seamless
can help reduce data duplication, minimize regulatory and compliance risk,
improve investment flexibility, and support efficient growth.
Given the choice, where would you prefer to livein a cobbled-together old walk-up with an unreliable
superintendent or a modern, well-constructed apartment building maintained by a solid management
company? The answer is obvious. The same logic holds true when making decisions about hedge fund
infrastructure and platforms. Multi-asset hedge funds can choose to operate with a patchwork of legacy
systems and providers strung together to support different asset classes or work with a sleek,
integrated solution with centralized support.
As more firms transition to multi-asset models, a seamless solution can help reduce data duplication,
minimize regulatory and compliance risk, improve investment flexibility, and support efficient growth.

June 2014

III. ADVANTAGES
Once implemented, a multi-asset system can provide several distinct benefits to
asset management firms. Three of the most important benefits include:
Portable alpha Funds today need to be opportunistic to generate excess returns.
Managers wont have to wait three or six months to test and implement a new
platform to access a tactical idea, which may no longer be actionable by the time it is
implemented. Whether it is a convertible arbitrage play in Europe or an attempt to
sell pork belly futures, managers wont be hamstrung by current infrastructure, only
their imagination.
Creation of a single blotter Front-, middle- and back-office professionals can save
time by accessing all trade information through a single, integrated portal. No longer
will college-educated professionals serve as glorified macros, copying, pasting and
converting needed data for basic investment processes. When you drive your
workflows off a single blotter you also get one point of service and support. This can
not only improve employees quality of life, but also increases accuracy.
Built to expand As a company grows, so do the benefits of a single system.
Consolidating and processing data from two strategies is an inconvenience, but
doing the same for eight strategies is a logistical nightmare. Growth in assets can
also create execution impact that taxes your returns. A single blotter platform will
help you aggregate multiple funds into blocks and also enable you to trade multiple
securities in coordination minimizing your implementation shortfall. Making the
correct system decision early in your business case will make your firm stand out in
the eyes of investors and current and future employees.
IV. FINDING THE RIGHT PARTNER
Hopefully, we have made a strong argument about the benefits of an integrated
system. As you get ready to make the transition, it is important to carefully vet your
proposed vendor. Not every technology firm does everything in depth. Certain vendors
in the space have promised to deliver a complete platform but have only built out one
or two asset classes, potentially expanding implementation time. There is a chance
that investment managers may wind up with an integrated system that is just as
inflexible as the one they have replaced.
To avoid this, ask your vendor the right questions up front. Start with these:
What asset classes do you support?
How many times have you completed an install in the past?
Do you have any third-party consultants or advisers who can testify to the
effectiveness?
Do you have a statement of best practices that you follow in the installation?
What happens if something goes wrong?
How are each of the products supported and serviced?
With the right preparation, going multi-strategy can be one of the smartest and
most productive junctures in the life of a fund.

June 2014

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