What has changed in the way that hedge funds operate?

Truss Edge, an IT platform for managing hedge funds’ STP requirements, celebrates 20 years of activity as an independent service for fund managers this month. Two decades ago the firm was spun out of a multi-strategy hedge fund to begin working with third party funds, helping them to meet their day to day middle and back office requirements.

“A great deal has changed in the hedge funds industry since we started out,” said Jay Duffy, CEO of Truss Edge. “Challenges presented by financial markets and by events within the hedge funds sector have altered the way fund managers are expected to carry on the business of portfolio management and reporting.”

Duffy added: “Working closely with our clients as this industry has been transformed, we have helped them to adapt their systems and processes and introduce the benefits of secure automation which technology has been able to offer hedge funds.”

Five key changes in the hedge funds STP environment: 1998-2018

  1. Operational risk: Fund managers are now required to meet much more stringent and detailed certification requirements than they were in 1998, mainly due to the enhanced scrutiny of their own investors. But this also now covers their partners and service providers, including their technology providers. Independent certification of technology – e.g. SSAE 18 or ISA 3402 – is now regarded as essential.
  2. Focus on cost: Pressure on fees and a focus on costs has been continuous through the period – hedge funds now have tighter budgets and less wiggle room. This means there is an emphasis on keeping things efficient and keeping operational head counts down. It has also meant that hedge funds are more inclined to consider outsourced solutions than they were in the 1990s.
  3. Multiple prime brokers: In 1998 it was still considered unusual for a hedge fund to have multiple prime brokers, but by 2005 Truss Edge was dealing with a dozen different prime brokers on behalf of our clients. Since then that number has only increased, with more specialist mini-primes entering the market. With hedge funds now routinely trading with multiple prime brokers, it is important that technology partners have the flexibility to support their numerous different data feeds.
  4. Automation: There has been a significant change in the way hedge funds are expected to report, with more emphasis on communicating via FIX connectivity. Even in 2010, many firms were still relying on CSV files being uploaded to an FTP site. That has now been transformed, with traders able to enter trade details directly via their OMS. This has also led to more emphasis on the quality of data that managers are used to dealing with.
  5. Transparency: Feeding out of the cost awareness of managing today’s hedge fund comes the issue of transparency. TERs (total expense ratios) were already being used as a measure of total cost for investment funds in 1998, but we now know a lot more about the costs and processes involved in running a hedge fund. Since 2008 enhanced transparency has led to a flight to quality by many funds.