4
I
Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
Methodology
• On average, hedge funds will allocate ~9 basis points of
their underlying AUM toward covering their IT spend in 2011.
This includes hardware, software, data and IT personnel.
• This equates to industry-wide IT spend of ~$2.09 billion
USD in 2011. Franchise-sized frms with AUM in excess of
$5.0 billion are expected to spend, on average, $7.9 million
on technology in 2011—more than 13x the spend forecast for
small funds with AUM less than $500 million.
• Small hedge funds charge nearly this entire amount of IT
expense to their management company. As a manager’s
AUM grows, more of these expenses begin to be charged
back at the fund level. The largest hedge funds are able to
charge 20% to 30% of these costs back to the fund.
• The allocation of more costs to the fund rather than the
management company can be considered an additional
expense investors may have to pay to access capacity at
these managers and refects the ability for the largest
funds to absorb these expenses without signifcantly
impacting performance.
Key Findings
Hedge fund IT spend in 2011 is forecast at $2.09 billion USD, equivalent to ~9 basis points of the industry’s total
AUM; while the bulk of these costs are charged back to the hedge funds’ management company, the largest
managers in the industry allocate up to 30% of this expense at the fund level.
The threshold at which hedge funds will choose to “Buy” versus “Build” their desired software has shifted
extensively in recent years as better solutions come to market; at present, hedge funds are focusing custom
development work on risk management applications and on data management platforms that help with
compliance and investment decision-making tools.
• Software innovation in the hedge fund industry has been
driven by a set of large hedge fund managers who pioneer
their own platforms when commercially available options
fail to meet their complex requirements.
• Over time, these platforms, built for cutting-edge funds,
become commercialized and ultimately commoditized,
resulting in distinct “customization” waves in the hedge
fund industry. The unfolding of this cycle informs when
new capabilities become commercially available and thus
infuence a fund’s buy-versus-build decisions.
• Foundational functions such as portfolio management and
trading, part of the frst wave of hedge fund technology
investment, are now crowded with a multitude of vendors
and outsourced service providers, as once-differentiated
capabilities are now commoditized.
• With the industry’s secondwave now cresting, the availability
of risk, fnance and collateral management solutions that
drive capital effciency and optimization are increasing,
offering a greater number of hedge fund managers more
options on how to realize these capabilities.
• A new, third wave of hedge fund technology investment is
beginning to form. Managers are contracting with specialty
consultants to build unifed data management platforms
that consolidate the fund’s reporting capabilities across
formerly disparate functions.
• These emerging platforms provide hedge funds the fexibility
they require to address evolving investor transparency
and regulatory compliance demands. They also provide
opportunities to create robust investment decision support
tools that help managers focus on their alpha creation.
• Interest in such platforms is likely to continue to grow as
specialty consultants spread best practices across the industry.