How to Keep Up with Hedge Funds Playing a New Game
Every organisation must become a technology organisation if they want to be successful in the future. In finance, many hedge funds are transitioning to a new world of ‘complex computers,’ big data analysis and artificial intelligence. Are they full of software engineers and mathematicians? Not necessarily.
Working Smarter in Order to Compete
FinTechs are already disrupting the hedge fund portfolio, eroding rates and minimising both factoring spread and securitisation returns. The likes of SoFi, OnDeck and Borrowell have raised the bar. Some of the market is quickly disappearing over the horizon.
In response, some of the leading hedge funds have recruited execs from tech companies to assist their transformation into computer-driven firms, many other firms have slashed IT budgets because they weren’t able to keep up with evolving communications technology.
These cutbacks mean smaller hedge funds might still be working with a legacy Time Division Multiplexing (TDM) turret infrastructure, which cannot provide the capabilities today’s traders expect and need. Leon Cooperman, founder of Omega Advisors believes that fund managers who want to compete will either have to cut fees or look to ‘complex computer models’ for help. “At age 73, I’m not going to learn a new game,” he told Bloomberg.
And if you are willing to learn a new game?
How to Join the Game
According to KPMG, 94 percent of hedge fund managers believe that technology will have an impact on competition over the next 5 years. More than a third — 38 percent — say that technology’s impact will be ‘Significant.’ 50% of large funds prefer to develop their own technology internally, smaller funds are more likely to outsource their digitisation.
Digitisation. It might sound like a buzzword. It simply means connecting people and things; and making sense of data in a meaningful and secure way. This can be achieved in three phases: 1. Discover where technology can enable the business. 2. Design and quantify the value to the organisation’s future. 3. Accelerate the transformational capability.
Where to Start
The transition to a digital hedge fund is built on Cisco DNA (Digital Network Architecture), a blueprint for a digital-ready business. Cisco Digital Network Architecture (DNA) and its three pillars: security, agility and innovation.
Security
Last November, hackers stole £2.5m from 9,000 customers of a well-known UK bank. The FCA called the raid ‘unprecedented.’ In an effort to avert danger, some companies use as many as 50 different security vendors. Such ‘stacking’ may seem prudent. It’s nice to think you have ‘the best of breed’ for every problem.
It’s actually counter productive. Cyber criminals thrive in complex networks in which everything is administered separately. These ‘Frankenstructures’ are more vulnerable. As an ecosystem of products that speak to each other: only Cisco DNA leverages the network as threat detector and enforcer before, during and after an attack. If you intend to ‘go digital,’ then why wouldn’t you secure your client information and IP across any user and device anywhere with the most effective security solutions on the planet?
Agility
As a forward-thinking hedge fund, you want the best technology capabilities but you don’t want to add more technology silos in house. When your priority is finding better ways to maximise returns, it’s an enabling IT strategy that matters.
Start with applications. You can say yes to building your own customer-facing application when you’re able to make it private and secure. When you have a network that keeps pace with vulnerabilities and a data centre that gives you complete visibility into data packets, third-party APIs, data libraries and data in transit and at rest.
And you can say yes to innovative applications for employee use when you have end-to-end protection across multiple locations, remote workers, data centres, hosting providers, private and public clouds, devices and things. The ability to pick and choose the best applications will assist fund managers and support staff alike.
Innovation
Once you begin digital transformation, the sky is the limit. Take Blockchain, for example. Adoption of Blockchain is becoming more commonplace in finance, but that doesn’t mean everyone’s about to start paying for everything in bitcoins. With its use cases including encryption of currencies, records, contracts and keys, it allows you to lock a central database, with full audit trail, increased security and lower overhead costs.
Or perhaps you could enter a brave new world of artificial intelligence, which a digital network architecture places within your grasp. Automated decision-making is appealing to hedge funds as it can save time and mitigate human emotional volatility. Read Learning to Drive the New CAR (Clients, Advisers, Robots).
How to Win the Game
As market competition increases, your firm’s ability to recognise and react to real-time conditions can result in competitive differentiation. Cisco’s High-Performance Trading Fabric offers unmatched performance and innovative capabilities that enable improved visibility and manageability of trading data.
Go beyond low latency into sustained performance with a fabric architecture that integrates speed, computing, big data management, business intelligence, and agility across the entire trading value chain.
For improved collaboration, Cisco Unified Trader Workspace with IP Trade can be integrated with your Cisco Unified Communications and Collaboration architecture to deliver a complete, streamlined trading turret communications experience.
Your Move
Hedge funds face a challenge to remain competitive. Failure to achieve digital transformation risks investors looking elsewhere. But hedge funds that get it right can ensure everybody wins.
