Small hedge funds have been appearing all over the place, and these buy-side firms have robust technological needs.
Various factors are helping drive the proliferation of these boutique firms, including regulation, entrepreneurs eager to take advantage of the opportunities present in the hedge fund industry and executives at larger institutions looking to strike out on their own.
Global regulations fuel proliferation
Global regulators have been making efforts to push proprietary trading out of banks, and this has contributed to the growing number of small hedge funds, according to Waters Magazine. A perfect example of this regulation is the Volcker rule, created in the U.S. pursuant to the Dodd-Frank Act.
This piece of legislation bans proprietary trading at banks, and many trading desk staff are leaving banks in anticipation of this rule’s implementation. While the Volcker rule does permit exemptions in certain circumstances – for example trading done to hedge positions held by these financial institutions – many have credited it with creating a mass exodus of trading professionals.
Many of the more senior individuals in this position have been leaving for hedge funds, which are taking advantage of this surplus of talent.
Hedge funds must hold higher standards
While hedge funds might benefit from the current surplus of trading talent, many have far greater concerns, as they are frequently being forced to meet higher standards, according to Waters Technology.
These buy-side firms are often encountering greater scrutiny as a result of accepting money from institutional investors, which could demand a wide range of more sophisticated resources, the media outlet reported. In addition, hedge funds need to concern themselves with how they will get past the due diligence teams of potential investors.
The traditional pressures placed on the technological resources of these buy-side firms have certainly not dissipated either, according to the news source. These institutions will still need to concern themselves with meeting the demands of their traders, portfolio managers and also regulators. Their need for robust technological resources stems from their need to fulfill multiple objectives simultaneously.
Many buy-side firms are also being forced to navigate myriad pressures stemming from their use of benchmark data. Clients are often demanding that these organizations use more of these benchmarks, which are used to evaluate performance, and also harness custom ones.
At the same time, the expense associated with benchmark data has been on the rise, which has been creating cost pressures for all affected financial institutions. As benchmark data costs rise, they could reduce the amount of space available in a buy-side firm’s budget, therefore making it more difficult for a small hedge fund to buy the technology it needs.