With hedge fund managers facing regulatory mandates that are driving business costs up even as management fees are being squeezed, a push is on to boost operational sophistication without sacrificing the strategies that they offer their investors in the pursuit of alpha.
Over the last few years, the industry has undergone a significant regulatory overhaul. In the U.S., there are new requirements stemming from the Dodd-Frank Wall Street Reform Act of 2010, including hedge fund registration with the Securities and Exchange Commission, the Volcker Rule and the SEC market access rule 15c3-5.
Regulations are increasing business costs and the industry is looking to minimize those costs through innovation.
“In the wake of regulatory reforms, not the least of which is the Volcker Rule, firms are starting to exit proprietary businesses and spinning them off,” said Ken Barnes, senior vice-president of corporate development at Options, which provides a centrally-managed infrastructure-as-a-service, or IaaS, for trading firms.
“When you spin off a business, you need to create a complete technology platform, consisting of basic services such as telephony and print, as well as specialized services like market data, routing, clearing and settlement,” said Barnes. “We are well placed to provide that suite of services. Our IaaS operates in our data centers as a cloud-based service, so we can get those firms up with minimal efforts.”
PrimeOne Solutions, a division of financial data provider CoreOne Technologies, provides hosted prime brokerage services via its SwapCloud platform. These services include physical prime brokerage, synthetic prime brokerage—e.g., equity swaps—and securities lending.
The platform “allows hedge funds to consolidate equity swap booking activities with multiple prime brokers”, said EJ Liotta, global head of PrimeOne Solutions. “Previously, there had been no solution for the hedge fund community to keep track of the economics of swaps other than through custom-built software. Our system consolidates all swaps on to one platform, so that a hedge fund can manage books across multiple prime brokers, and then reconcile their activity with prime brokers to make sure they’re getting proper financing, resets and payments.”
The private cloud platform is better positioned to provide security and scalability to the end user at a lower cost than if they were to build it out themselves. “In our view, the aggregation of resources at the platform level is one of the primary trends driving efficiencies among capital markets firms today,” said Barnes.
With trading volumes down, firms have an over-abundance of technology that had been built up to handle capacity that’s no longer viable. “With the continuing maturation of the technology stack, elements that were once considered core can be operated more efficiently through an IaaS service such as ours.” said Barnes at Options. “By being more efficient with the technology stack, firms are free to allow firms to focus on competitive advantage.”
Firms will also be required to adopt more strict policies for data capture and storage in the wake of new regulations, particularly newly registered hedge funds. Traditionally, this has led to increased overhead costs for firms.
“However, firms are now finding it easier to leverage a cost-effective, fully-compliant private cloud-based data storage and archival solution that offers the required level of data security and the level of storage sophistication that enables them to respond quickly to documentation requests during regulatory audits,” said Barnes.
