Global hedge fund investment in IT will reach $3.3 billion by 2009, representing a potent emerging market for financial technology suppliers, according to research from Datamonitor.
The Datamonitor report, which investigates the technologies being demanded by hedge funds to cope with new market developments, also reveals opportunities for technology vendors to service providers such as prime brokers and fund administrators.
"Hedge funds globally will look to use technology to improve execution capability in the front office as they seek competitive advantage," says Nii Barnor, financials services technology analyst with Datamonitor and author of the study. "In addition, service providers need to raise the bar too by offering enhanced reporting functionality and superior connectivity to clients."
He says hedge funds are beginning to resemble traditional asset managers by placing cost control and efficiency higher in their priorities as regulatory scrutiny of their activities becomes more intense.
In addition, the shift of the hedge fund industry into the retail space has prompted an increased focus on execution capability, says Barnor. The availability of real-time data to enhance the investment decision making process, direct market access (DMA) and algorithms are all key areas hedge funds are beginning to focus on as they search for new trading opportunities.
Funds in turn are also beginning to demand improved service levels from their prime brokers. Datamonitor forecasts IT spend by prime brokers will hit $414 million in Europe and $194 million in Asia by 2009, as they attempt to enhance their margin and stock lending systems and upgrade settlement systems to process higher volume, more complex instruments being traded by hedge funds.
Fund administrators too will have to update their offerings and will be looking to technology to do this. Barnor says "the technology in demand is a step on from solutions for the mutual fund industry by focusing more on how to provide a consolidated view to cater for the demands of each kind of investor". As the market develops, fund administrators will be pushed to offer customisable real-time reporting with Web-based user interfaces.