Transforming the Trading Experience

Technological elasticity: achieving an infrastructure that scales both up and down

February 13, 2024

Hedge fund COOs face the most challenging of tasks – striking a balance between operating on sufficient resources to achieve a fund’s goals and being agile enough to adapt to ongoing market volatility. For some, especially those at emerging managers, this balance is particularly fragile – getting it wrong can mean the business failing to move forward. As a result, today’s operational infrastructures must allow for scaling up and, if necessary, scaling down.

Hedgeweek discussed this notion of ‘technological elasticity’ and how hedge fund managers can achieve it with Annalices Villapa-Mallik, who works within EMEA business development at Neovest, the multi-broker trading software provider which is fully owned by JPMorgan.

Hedgeweek (HW): What are the key questions the COO of an emerging hedge fund firm should ask themselves when preparing an operational infrastructure that can scale or grow with their business?

Annalices Villapa-Mallik (AVM): With hedge funds under increasing pressure on performance and management fees, operating costs should not necessarily determine survival, however those costs are often still a great consideration. We’ve found COOs framing their approach in terms of fundamental versus secondary requirements and, with deadlines always looming, the speed to achieving those targets.

Some COOs who’ve worked at larger institutions seek the same enterprise software solutions for their new fund. However, after reviewing not only the financial but also set-up costs involved – both easily absorbed by their previous houses – they may find themselves re-evaluating this approach. An approach taken here may be a leaner, downsized version allowing for prioritization of core requirements for go-live and a plan to scale.

In other cases, where a fund has been live for a year or more, the COO may be looking to replace their current setup, redoing parts of their infrastructure or adding new solutions. Some choose to limit the financial and labor cost of displacing and replacing systems by selecting modular open platforms that allow them to scale up or down as necessary.

HW: Why might a hedge fund firm need to scale down? What might this look like in practical terms?

AVM: While hedge funds appear to have bounced back in 2023, we understand that the losses in 2022 are still fresh in their memories and a sense of caution remains. And with the biggest managers continuing to attract the vast majority of allocations, it is not unwise for COOs at emerging managers to have a scale-down strategy in hand. Scaling up is fun, but forward-thinking businesses are also mindful of having the ability to scale-down.

An initial review of fundamental and secondary requirements will provide a guide on what a scale-down setup could look like and the extent to which a firm can reduce its costs without greatly impacting its operational workflow and investment strategy.

Hedge funds who wish to revert to their leaner setup may wish to temporarily disable supplementary modules while retaining use of the core execution capabilities. Providing the option to turn a service off and on at short notice is another way to adapt to clients’ needs in challenging market conditions.

While market volatility was calmer in 2023 – the VIX dropped to a four-year low in December as rate cuts were signaled in the US – the significant national elections on the calendar and ongoing conflicts in the Middle East and Ukraine mean that many analysts are predicting that equity volatility will increase in 2024. In Hedgeweek’s recent Global Outlook report, authors were bullish on funds’ abilities to navigate this volatility and capture alpha over the next 12 months, while acknowledging that the potential for greater rewards was rooted in an environment with significant risks.    

HW: You mention challenging market conditions. Can you provide examples of recent innovations helping managers navigate the market volatility common in contemporary investing?

AVM: Yes, there are several. We continue to see systematic strategies grow as clients either expand on their existing strategies or add a systematic underlay. Conversations with our clients help us identify their systematic goals and determine how we can better align our product to their growth. For example, these involve enhancing our API capabilities. For discretionary traders, it’s providing them with the ability to access the more complex algorithms their banks and brokers provide, especially for multi-leg strategies.

We’ve also seen a rise in funds having their own proprietary technology. Innovative platforms can help support growth by complementing existing/in-house solutions. For example, a global hedge fund firm with more than $40bn in AUM wanted its tech leaders to focus on the aspects of its proprietary technology that adds to their IP, so they looked for a vendor that could provide just a UI/screen to which it could attach its technology. They chose Neovest – our modular structure made this straightforward and cost-effective for them.

HW: Beyond working to complement a client’s proprietary technology, how are vendors helping firms achieve technological elasticity?

AVM: Hybrid solutions — where a hedge fund selects partners who are experts in a field they value but also who have an open mindset for integration — are a good example. As hedge funds recognize the strengths of each provider, they no longer seek a single provider to solve all their problems, instead preferring to create an ecosystem of strong services complementing each other.

Flexibility remains important at both ends of the AUM spectrum. One of Neovest’s long-term clients, a multi-strategy hedge fund with more than $10bn in AUM, has seen strong growth in recent years and wanted to implement a global, centralized buy-side trading desk, while retaining the flexibility to allow their PMs to trade directly with their brokers. This growth meant they wanted a central place for all their risk and compliance functions (e.g. short locates, position limits), as well as gaining efficiencies through consolidating multiple asset classes onto one technology platform.

The trend of more firms expanding into new asset classes through business diversification was explored in Hedgeweek’s 2023 report Supporting Innovation: The Forces Driving A New Wave Of Outsourcing. One of the report’s key interviewees, the COO of a $10bn+ systematic hedge fund business, said that larger firms were under increasing pressure to innovate and remain relevant by diversifying into new strategies. This pressure has, in turn, driven investment firms of all sizes to seek greater flexibility through outsourced solutions and new technologies.   

HW: Several of the examples you’ve given showcase managers diversifying their business. What does a more diversified set of trading instruments and/or asset classes mean for a firm’s operational needs?

AVM: We’ve seen demand to trade bitcoin, energy, and base metals. As a result, Neovest has recently released its base metals ticket with price streaming capabilities, enhancing our clients’ order execution from voice to click-trading.  The new feature allows them to also further integrate base metals to their electronic operations workflow; removing hours of manual work for those who want to trade on broken date liquidity.

There has also been a rise in our macro strategy clients, from new macro strategies within multi-pod hedge funds to new fund launches. Our macro clients’ traders and PMs require the ability to not only handle derivative orders via click-trading or on the depth trader, but to also be able to create synthetic multi-leg futures strategies and exchange-listed user-defined options strategies.

Another trend we’ve observed is the rise in multi-manager and multi-strategy funds. One of our clients – a platform fund with over $10bn in AUM – launches new pods of PMs and traders at speed. Often, they give one to two weeks’ notice. They needed software that wouldn’t curtail their growth ambitions and could be launched easily. Neovest has worked with them for over ten years, helping them use technology to meet their ambitions rather than constrain their growth.

HW: Finally, how can the right technological infrastructure help a fund manager reassure investors about its ability to scale up and scale down?

AVM: Neovest has supported its clients in building technological infrastructure with the ability to scale up and down through an open ecosystem, with modules complementing and integrating well with each other. A scale-up and/or scale-down strategy can be supported by providers whose agility in volatile conditions and adaptability to funds’ needs can help them achieve those plans.

Fund managers also look at robustness – not only in the solutions but the providers themselves. They assess if their service providers can withstand the same market conditions they would face. Brand recognition and stable ownership structure therefore becomes invaluable when inspiring confidence from investors.

Annalices Villapa-Mallik, EMEA Business Development, Neovest – Annalices has been with Neovest for over 8 years and is responsible for new business growth in EMEA within the hedge fund industry. Annalices has over 15 years of front office experience in the financial service industry’s leading institutions, working in technology companies to brokers and investment banks. Previously, Annalices was a Senior Consultant at Eze Software (now SS&C Eze, a business unit of SS&C). Prior to Eze, Annalices was a Trade Support Analyst at ITG and a Finance Reporting Analyst at IBM UK

If you would like to see the original article, please visit : https://www.hedgeweek.com/technological-elasticity-achieving-an-infrastructure-that-scales-both-up-and-down/