Hedge funds can be a fickle bunch when it comes to technology services. Companies and products lauded one year fall off the radar the next, as picky fund managers constantly seek software solutions that can help them perform their jobs faster and more effectively. Whether they come from independent vendors or brokerages, solutions need to be packed with functions yet simple to use and able to easily interface with other software. More than anything, however, solutions must be accompanied by first-class support. Even software nimble enough to respond to wild market gyrations won’t cut it in today’s financial world without strong service and support.
“If you build the best widget but can’t support it, you won’t be successful,” says Jeremie Bacon, president and CEO of Chicago-based Backstop Solutions Group. “To be successful long-term, support and service have to be No. 1.”
Backstop is the top-ranked firm among Investor Relations Management software providers in this year’s Alpha Awards™ for technology service providers. To compile our second annual rankings of the leading technology providers, Alpha once again turned to the hedge funds that rely on them to find out which firms and services fund managers and traders most value. Throughout the summer and early fall, we polled nearly 300 hedge fund management firms, representing more than $600 billion in assets under management. But this year, to provide more in-depth results, we have broken technology out from the Alpha Awards for top service providers that ran in the October issue of Alpha. We also broadened the questions we asked and separated Execution Management as a stand-alone category from last year’s Trade Order Management category.
Though many of the names from last year’s rankings reappear, the winning firms this year are dramatically different. Eze Castle Software tops Order Management; Goldman, Sachs & Co. leads the Portfolio Accounting pack; and Morgan Stanley is hedge fund managers’ No. 1 pick for Risk Management, while FutureTrade is the winner in Execution Management. And even though several companies offer products in more than one category, no service provider tops more than one category -- a further indication that brand loyalty does not mean much to hedge funds these days.
Based on this year’s winners, a fund manager looking to create the ultimate software system would have to use five different providers -- two of them brokerages, two independent vendors and one a subsidiary of a bulge-bracket bank. Although that might result in best-of-breed solutions in each category, the challenge of running so many different systems is daunting.
“If you go out and buy five or six systems, you might get solutions that do everything great, but trying to get them all to work together can be a nightmare,” says Todd Gottula, vice president and co-head of global accounts for San Franciscobased Advent Software (No. 3 in Order Management and No. 4 in Portfolio Accounting). Advent is one of several firms trying to push into neighboring realms by adding solutions to create a suite of offerings. Eze Castle Software is another, adding execution management capability to its order management solution.
The one-size-fits-all suite has thus far proved an elusive goal. Risk management is a far different animal from execution management. Even somewhat similar solutions like portfolio accounting and investor relations management contain enough distinct functions that each category fields a sizable number of independent vendors.
As part of our survey, hedge funds rated service providers in three areas: Software Functionality, Support & Client Service and Technology & Architecture. A firm can win an award in any of the overall categories with runaway ratings in one service area and merely good marks in the other two, but top-ranked firms tend to perform well in all three areas. This result suggests that hedge fund managers want technology that works and is adaptable to specific needs, and they want it from firms that provide expert, real-time service.
High-quality support and service may not be enough to win a new client, but poor quality can certainly drive away an existing one. Indeed, Support & Client Service drew the most comments from voters, who either vented about service problems or crowed about superior support.
EXECUTION MANAGEMENT
Hedge fund traders are constantly seeking an edge on their competitors, turning to everything from quantitative algorithms that help identify investment opportunities to execution algorithms that break big trades into multiple, virtually undetectible orders. And, of course, at the heart of all their activities is the need for speedy order completion. No wonder execution management systems, a family of software designed for fast and nimble electronic trading, have been rising in popularity in recent years. In fact, the closest thing to a split decision in this year’s Alpha Awards™ for technology service providers comes in the newly introduced Execution Management category -- populated by both brokerage-based and independent vendors. Top-ranked FutureTrade of Lake Forest, California, just squeaks past second-place finisher Banc of America Securities -- No. 3 in Trade Order Management last year -- whose InstaQuote system is also popular among hedge funds. Though FutureTrade ranks behind BofA in Support & Client Service and Technology & Architecture, the firm’s top standing in Software Functionality, where BofA ranks third, helps it clinch the lead.
“We get a lot of support for our capabilities,” says Murray Finebaum, FutureTrade’s president and CEO. He touts the system’s ability to trade a wide range of asset classes in venues around the world while smoothly integrating with order management systems and other software. “What we offer is a really well-integrated operation,” says Finebaum. Clients can “trade what they want to trade in a very user-friendly interface.”
Rounding out the top five overall winners in Execution Management are Neovest, Bloomberg and Goldman, Sachs & Co. Last year, Goldman topped our Trade Order Management category, which included both Execution Management and Order Management Systems, but the firm drops a few notches when its RediPlus software is compared on a more like basis with other Execution Management systems.
One of the undercurrents in the Execution Management field involves product ownership. Although brokerage-based systems such as InstaQuote or RediPlus play up their ties to the deep technology bench of major banks, companies such as FutureTrade try to parlay their independence from big prime brokerages into an advantage. FutureTrade is well aware that hedge funds closely guard their trading strategies, and the firm is not shy about playing up the potential for information leakage to other service providers or hedge funds when key trading software is owned by a bank with thousands of trading clients. That unease continues even though brokerage-based systems like InstaQuote allow trades to be executed through competing brokers.
“Hedge funds don’t want to be in a position where they are trading ideas and those ideas are available to competitors in a real-time basis,” says Finebaum, adding that it is a fear traders have frequently expressed.
Whether the perception has any basis in fact -- prime brokerages have erected extensive Chinese walls to isolate sensitive functions like execution management from other bank operations -- the possibility that trading secrets could leak has so far helped independent firms hold their own against brokerage-based systems.
InstaQuote began as the product of Direct Access Financial Corp., but in 2004 it was purchased by BofA -- which has effectively developed, marketed and supported the system since. Of the remaining top five firms, Neovest and Bloomberg are independents. Goldman Sachs acquired RediPlus when it bought broker Spear, Leeds & Kellogg in 2000.
INVESTOR RELATIONS MANAGEMENT
As institutional investment in hedge funds increases, managers face a growing challenge: They need to be able to respond to the increasingly complicated individual reporting and disclosure requirements of institutions without shortchanging the needs of their traditional investors.
Investor relationship management software is intended to do just that. The best IR management systems not only centralize and provide easy access to client data, they can also be used to build deeper relationships and, in some cases, assist in marketing to new clients. As hedge funds grow in size, their need to run like big companies is increasing the demand for client relationship management tools that can help even small hedge fund firms become more sophisticated.
The provider of choice for hedge fund managers is Backstop Solutions Group, which takes top honors for a second year. The Chicago-based firm does especially well in Support & Client Service. “Backstop has the best customer service of any product we have used,” says one hedge fund executive. Another praises the firm’s support team as extremely attentive, knowledgeable and accommodating.
Such feedback validates Backstop’s service-oriented strategy. With a staff of only 37, the firm has 20 people in software development, 14 committed to client services and only three in sales. And the firm’s online system for handling data allows managers and clients to retrieve, sort and display information quickly and simply.
“We have given people the ability to do large amounts of reporting, sorting and clearing,” says Jeremie Bacon, Backstop’s president and CEO. He says the firm has spent the past year adding tools that provide more-varied access to client databases and give fund managers the ability to create more-customized reports. Backstop has also added sales and marketing functionality to its software. For example, a fund manager visiting clients in London could use Backstop’s software to create a report on the fund’s biggest investors based on postal code, including how long each has been a client, its key people, the source of the relationship and possible opportunities for new investment.
Sage Software moves up two notches from its fourth-place showing last year. Act!, the company’s widely used IR management system, was acquired from Best Software in 2000 and has since been substantially upgraded -- particularly its reporting and tracking capabilities, which are available online. Sage touts Act!'s ability to interface with a wide range of systems and tools, allowing users to access client databases and create reports in a variety of ways. In August, Sage announced 60 new tools, providing additional options for everything from reporting to product management and sales. The company also recently enhanced its interface with the BlackBerry mobile device.
Rounding out the overall winners in Investor Relations Management are PerTrac Financial Solutions, Netage Solutions and SS&C Technologies. PerTrac, which touts a customer base of more than 225 hedge funds and alternative investment firms, holds tight to its No. 3 ranking. Netage, a provider for bigger hedge funds that boasts an easily personalized system, is in this year’s No. 4 spot. And SS&C Technologies, which was acquired by Carlyle Group and taken private in 2005, finishes fifth, down from No. 2.
ORDER MANAGEMENT
Order management systems are often the backbone of a large fund’s trading operation -- big, expensive and difficult to get just right. Not only do the systems ship and track orders and help monitor compliance, they communicate seamlessly and rapidly with other software, such as portfolio accounting and risk management systems. Ideally, they can access multiple asset classes and international destinations.
Because such systems are designed for universal use, they tend to be more complicated, and expensive, than small hedge funds need. Indeed, Jeromee Johnson, president of New Hope, Pennsylvaniabased trading software provider 3D Markets, believes most hedge funds can get by without an OMS until they have $1 billion under management.
Nonetheless, expansion of hedge funds, both in number and size, has proven an enticing growth market for OMS vendors. Many have begun experimenting with OMS “lite” products -- Web-hosted, stripped-down versions of full-function solutions aimed at smaller hedge funds that do not need the bells and whistles of a full OMS.
In the wake of the restructuring of last year’s Trade Order Management category -- which has since been broken into separate Execution Management and Order Management rankings -- only two of last year’s top-performing firms show up in this year’s Order Management ranking.
Eze Castle Software is the clear favorite in this year’s ranking, dominating both Support & Client Service and Technology & Architecture, helping the firm move up from its No. 2 ranking last year. The deft service and support Eze Castle provides for its Traders Console software shows up in client comments, with one hedge fund manager describing the firm as efficient, competent and extremely helpful. Rounding out this year’s overall winners in Order Management are newcomers Charles River Development and Advent Software, and Investment Technology Group, whose ITG Solutions Network was No. 5 last year.
“Hedge funds are very demanding, and they want the most-advanced tools,” says Thomas Gavin, Eze Castle’s CEO. He says hedge fund managers are looking for more options, yet more simplicity -- a product that can merge the advanced trading capabilities of an execution management system with the tracking and management functions of an OMS. To meet such demands, Eze Castle recently introduced an enhanced OMS with EMS functionality, which it touts as being easier to use than separate systems. But it remains to be seen how well the upgrade will fare.
Although Charles River trails Eze Castle in this year’s ranking, the firm’s OMS receives high marks for its Software Functionality and Technology & Architecture. That is not surprising, considering that Charles River has 165 people devoted to research and development. “We tend to have the highest investment in technology, and we have the largest international presence,” says Spiros Giannaros, Charles River’s vice president of sales for the Americas. But the firm was hurt by voters’ ratings of its Support & Client Service -- a fact that may be a reflection of the firm’s recent efforts that make the interface more complex as a result of increased customization ability. “We have tried to open up the technology so that in every instance where someone is looking for something -- configuration or customization -- clients can do it on their own,” says Giannaros.
PORTFOLIO ACCOUNTING
If order and execution management applications are the vehicles that get hedge funds to their destinations, then portfolio accounting systems are the road maps. The best ones are like a Global Positioning System, able to instantly show the exact position of a fund across accounts using real-time data. It is “you are here” software, revealing how strategies and investments are performing at any given moment.
On its face, Portfolio Accounting would seem a stable and established discipline, where brands that rise to the top should stay there year after year. But that is not the case in this year’s ranking, where there is considerable movement.
Goldman, Sachs & Co. did not rank last year in the overall list of portfolio accounting providers -- the category also included portfolio management -- but is this year’s leader in the pure accounting category. Meanwhile, Citco Fund Services, last year’s first-place winner, falls off this year’s ranking.
Goldman’s rise has been fueled by its ability to tailor portfolio reports to the individual needs of clients -- in effect, providing a more detailed and responsive road map. The firm has spent several years tweaking its portfolio accounting system to allow it to generate highly individualized reports for hedge fund managers, who are notoriously picky about how they want to display portfolio positions and results.
“Every fund feels like the way they look at their portfolio is part of their edge,” says Michael Nachmani, Goldman’s New Yorkbased head of product development for prime brokerage and fund administration. “Being able to slice and dice the information the way each fund wants to see it is very important.”
Over the past two years, Goldman has created more than 1,000 tailored reports for individual clients. And its customized services have been embraced by hedge funds. Voters rate Goldman No. 1 in all three areas: Software Functionality, Support & Client Service and Technology & Architecture.
Repeating in second place, Tradar maintains its strong following of small to midsize hedge funds -- the firm estimates that its average hedge fund client manages roughly $200 million in assets. Tradar also recognizes the importance of the reporting function. Over the past year the firm has beefed up its user interface to provide clients with more flexibility in the creation of custom reports. “We can interface with just about anyone,” says CEO Anthony Swei, who has sought to keep the firm’s portfolio accounting system architecture as open as possible.
SunGard Data Systems of Wayne, Pennsylvania, ranks No. 3 -- the same spot it held last year. Advent Software of San Francisco places fourth, and Linedata Services rounds out the top five. Linedata, a French investment software company, acquired U.K. portfolio management system company Beauchamp Financial Technology in December 2005.
RISK MANAGEMENT
Having a strong risk management system and knowing how to best interpret it can play a major role in a fund’s performance -- a fact that was highlighted during the summer’s market turbulence. When the markets plunged in August, risk exposure at many hedge funds soared. Some funds immediately sold off shares, only to have the market immediately rebound.
“When we look back on August, we now know that the smartest thing some funds could do was sit on holdings, even though it was a risky proposition for them,” says Michael Richard, who oversees the New Yorkbased risk management system Morgan Stanley offers its hedge fund clients. “That strategy played out for many who did hold but could easily have gone the other way had the market not recovered,” he says, noting that assessing risk is not a science.
Morgan Stanley’s risk offering is the product of choice for hedge funds trying to monitor and manage their risk exposure. The firm vaults to the lead position among Risk Management providers this year, from fourth place in 2006. Imagine Software holds tight to No. 2, and formerly top-ranked RiskMetrics Group falls to No. 3.
Richard credits Morgan Stanley’s high standing among hedge funds to the client services behind its RMS -- the consultation and advice from the firm’s experts that is included in the package. And hedge funds seem to agree. Morgan Stanley tops the voting for Support & Client Service and Technology & Architecture, although it comes in third for Software Functionality.
“We are prime brokers,"says Richard. “Our business is financing, not selling technology.” He adds that Morgan Stanley has no qualms about recommending another vendor to a prime brokerage client shopping for a risk solution. “I don’t look at us as competing against risk vendors,” he says. Even so, the firm manages to displace some of its competitors.
Second-place Imagine views hedge funds as its target market, counting more than 120 of them as clients. Since many of the managers it deals with have come out of large institutional investors, Imagine focuses on providing solutions across the board -- from the smallest start-up firms to multibillion-dollar funds. One third of Imagine’s 130-member workforce is devoted to product development -- an emphasis that helps the firm land the top ranking for Software Functionality in Risk Management.
RiskMetrics, which was spun off from JPMorgan Chase & Co. in 1998, has long been the standard in RMS and a favorite among hedge funds. The firm currently boasts more than 300 hedge fund clients, but fund managers say its basic architecture is in need of an update. Voters give RiskMetrics the lowest marks of the top three for Technology & Architecture, even as the firm ranks second for Software Functionality and Support & Client Service.
Visit www.alphamagazine.com to learn more about the Alpha Awards, as well as such other hedge-fund-related features and rankings as Alpha‘s 2007 Hedge Fund 100 list of the biggest single-manager hedge fund firms in the world.
