The CEO of Agio Technology tells us how to invest our tech dollars if we started our own $100 million hedge fund. By Phil Albinus
What are the technology needs for hedge funds in 2011?
Bart McDonough, CEO of Agio Technology: There are three areas. First, there are cost reductions across all areas. Second, they have greater coverage needs, such as expansion into other markets and offices. This puts a strain on IT even though they are adding one or two traders in these regions or locations they have to increase their coverage hours by 100 hours if they trade in Europe or Asia. This increases complexity and offers a greater skill set. You need a new network, data and server people. Third is the overall complexity going on with compliance needs. Hedge funds have to maintain and manage more data over multiple platforms such as mobile devices, IM, and text messaging and social media and they have to be responsible for it.
The Sell Side usually provided data and technology to the Buy Side but now we see more third-party firms offering tech solutions. Are the days of the Sell Side acting like a Sugar Daddy over?
McDonough: Some of the smaller funds are getting technology from the Sell Side but I think those days are over. Being multi-prime, hedge funds can’t be tied to a single sell-side firm.
But they’re not building their own tech like the Sell Side, correct?
McDonough: No, they are usually using best of breed vendors. We help hedge funds integrate technologies from different vendors.
We’re seeing a lot of hedge funds starting up these days. Do these traders from larger, more established firms expect to have the same tech they had at their former firms?
McDonough: Yes, to a point. For e-mail, they want that to be the same. The same goes for how they work from home and on the road — they want that to be the same. In terms of their back-end systems, they understand that their needs are very different so with that they have a very open mind and they don’t have a lot of preconceived notions. They don’t know necessarily how the books and records were kept at Goldman Sachs, for example — they just did the trading. When you talk to them about those solutions, they are lot more open minded. Even with the OMS, which is a bit more personal to them, they are very open minded to that.
Big sell-side firms have to store their data for seven years, according to the law. Did the buy-side firms have to do this as well?
McDonough: No, but with the forthcoming hedge fund registration, they will have to. The amount of data you have to keep is different. You have to keep data pertaining to all books and records but not necessarily all communications. But that is kind of a gray area and people might err on the side of storing too much instead of too little data.
When it comes to compliance, is data the biggest pain point for hedge funds?
McDonough: In order to report on the data you have, you have to know exactly what data you have and how long you have to keep it. We create an ESI Data Map for clients and that stands for electronically stored information. It allows a hedge funds’ technology, compliance and legal departments to speak the same language. It says this is what we have, what we keep and what we report on. After you have the data, then you work on transparency as in how can we report on this data now that we have to.
We find the biggest stumbling block is helping the customers identify what they have and how they can improve it. That entire work flow is new for hedge funds.
If you and I started a hedge fund and we have $100 million, how much should we set aside for technology?
McDonough: A $100 million fund that is long/short equities focused in the USA, we would probably set aside one percent of our budget. If you start to talk about a fund with offices all over and multi-market support — even if your offices are in the US — then you start talking about 5, 10, and 15 percent of your budget.
If you want to be multi-prime and you layer on your internal or external complexity then based on those factors I would tell you where your budget heads up.
What sized hedge funds do you cater to?
McDonough: We have $50 million funds with five people and larger. It’s not size that we focus on but complexity. We focus on firms that have a high degree of complexity; we think the firms that don’t have this high degree of complexity don’t need sophisticated IT. The reality is you can get a lot of functioning IT that doesn’t need great scale if you are not growing rapidly and you are not trading different asset and security types and if you’re not exposed to a lot of different markets. We focus on the complex firms, the ones that are rapidly growing.