The hedge fund industry from 2004 to the middle of 2008 went through a huge boom period and as the funds became larger and larger; during this boom time the smarter funds began to realize that with size came complexity, and with complexity came risk. However, in often secretive and private world of hedge funds there was little regulation, and less general belief that investors would demand transparency.

In 2008, about half way through the year, all hell broke loose with the financial crisis. It seemed like in an instant, the hedge funds secret world had been destroyed as CDS’s and the hedge funds became the evil empire that had brought the world’s economy to the brink of collapse. It was unclear at that time, or even just a few months ago, how long the financial crisis would last? In addition, coming out of the crisis, it was unclear, how long the hedge funds would want to stay under the radar, and how soon it would be before they returned to profitability (able to reach their high water marks).

Fortunately, for most of the medium and large players it appears that time is at hand. Many of the smaller funds have either closed their doors or been folded into larger funds. With pending regulations, the price of entry for new funds will be much higher than in the past, creating a barrier to entry for smaller players.

It appears we are starting to come out of the financial crisis, and rightly so, the general public no longer believes hedge funds were the sole creators of the financial crisis (they only believe that the people that work in the funds make too much money). The savvy investors have come back to hedge funds, knowing that these are still where the smartest people on Wall Street are, and where their best chance for healthy returns on their investments continues to be. However, the power has shifted from the funds, who used to pick and choose investors, to the investors who can now make more demands of the funds.

After experiences like Bear Sterns, Lehman Brothers, Madoff, Galleon, fund managers have come to an Age of “Hedge Fund” Enlightenment, realizing that their need for systems and stronger governance and better policies and procedures that support their business in real time are critical to their continued success. The future requirements from the Fed, SEC, and Investorswill require that funds are able to quickly provide their positions as well as linking their financials to their Assets Under Management.

There is no doubt, that as this Age of Enlightenment comes to the hedge funds there will be many approaches to building out infrastructures. Some funds will attempt to build everything, other will try to find that magic piece of software that promises the “hedge fund in a box”, while others will choose a mixture of all approaches. No matter what approach you pick the first thing a fund needs to do is understand itself. Any of these approaches could work (with the exception of the hedge fund in the box, that software is sitting right next to the Easter Bunny and Santa Claus) but none of them will work if they do not match your organization.

What I mean by that is, know yourself first, and don’t try to be what you are not, or what you don’t wish to be. If you do not have an IT department, or you do not wish to have one, don’t have some development firm custom build you a set of systems. All you would be doing, is making that development firm rich, and creating a money pit for yourself.

Don’t just pick pieces of software because your friend at Fund X or Y uses it and loves it. Hedge funds are like strands of DNA and no two are the same. It is a guarantee that what works great for your buddy at Fund Y will not work the same for you.

There is a lot more to this story, and I will continue to write more about this in the coming months. Treat this post as a cautionary tale. I have been in the consulting industry for close to 20 years now, and one thing I can say for sure is there is always someone who is willing to take your money. Be careful on how you pick a consulting partner / integrator. Treat this choice like the second most important relationship in your life (I will refrain from any Tiger references).

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