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Spotlight-blackInnovations in Trading and Technology (more stories)

09 May 2011

Top 10 IT Mistakes Hedge Funds Make

With their focus - as it should be - on investing, hedge fund managers can easily fall victim to technology failures. Carter offers a list of 10 potentially costly mistakes to avoid.

When it comes to technology, hedge funds don’t always have the time or the in-house expertise to understand all the pitfalls. However, poor understanding of technology or handing it over to the wrong people can cause a nightmare. Avoiding the following mistakes can help you escape disaster.

1. Working with generalists. Work with IT vendors who understand your industry. Make sure they appreciate the urgency of your business and have relationships with the right market data, order management and compliance providers. Deep hedge fund knowledge and expertise means your IT team will understand the dynamics of your environment and provide the right services and partners for your fund.

2. Underestimating lead times. If you are just starting your fund or a new technology initiative, remember to engage your technology team as early as possible. Often hedge funds underestimate the amount of time it takes to implement new systems. The more time you give your technology team, the more time they have to properly plan, test, and deploy your system. Lead times on equipment and services can ruin the timing of projects and cost you in the long run.

3. Not communicating with your IT team. Meet with your IT team at least twice a year even if you don’t have any major IT initiatives going on. Though things might look like they are running smoothly, have your technology team review your current systems, security, and processes regularly. Have them point out mission critical systems, aging equipment, unsupported software, and security risks that could affect your fund in the future.

4. Choosing your vendors on cost vs. substance. When outsourcing IT projects or services, don’t base your choice solely on costs. Get references and talk to funds that have implemented similar systems/services successfully. Cutting costs can result in back-end fees, reduced functionality, less support than expected, etc… Key things to ask include: did the IT provider deliver on time, what issues did they encounter, and how did they respond when things didn’t go according to plan?

5. Being unaware of the technology that makes your business run. Often hedge funds can’t identify their mission critical systems and applications. They may know they need e-mail and access to their order management system but rarely know that their trader is using a locally saved spreadsheet that is critical for their day-to-day tasks. Make sure you know your employees and understand the technology they are using. If it is important to their work process, ensure it gets backed up and others know how to use it.

6. Not understanding the difference between backup, business continuity and disaster recovery.  A lot of people get these terms confused, which is costly when data is lost or unavailable. Backup is the process of copying your data and having the ability to restore it in case data is lost or becomes corrupt. Business Continuity refers to the plans, policies and procedures your fund has in place in case a disaster happens. Disaster recovery is a group of technologies and solutions that ensure your critical systems remain available during a significant outage. A well-prepared fund should have all three.

7. Lack of procedure and systems documentation. Very few funds document their technology solutions. This can be a critical mistake if you lose a key employee who understood the ins-and-outs of a particular system, or if a relationship with a key vendor sours. Make sure every IT project is well documented and that you retain a copy of the documentation for your records.

8. Making the wrong call on outsource vs. in-house. While there is no clear answer to the question what to outsource and when, rule of thumb says: Keep your core competencies and what differentiates you from your competition in-house. Outsource the rest. For example, systems like e-mail and compliance solutions have been commoditized. There are very few scenarios where it makes sense to keep them in-house. Your proprietary research database, models, etc., should be kept close and not fully outsourced.

9. Under training your staff. You can spend a lot of money on quality technology solutions. If your people don’t know how to fully utilize or support those systems, then they will wither on the vine. When implementing a new solution, get the most functionality you can from the system by training your staff. This is key for user acceptance and the project’s success.

10. Keeping old desktop, workstations and laptops. Best practice says to replace a third of your systems every year. This way you can always have a planned budget for these systems and never get stuck having to replace everything in one year. Support costs increase and productivity will likely decrease as your equipment ages – its performance will drag and require more attention.

Spotlight-white-trans For more stories in the Innovations in Trading and Technology Spotlight Series click here.

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1 Comment to "Top 10 IT Mistakes Hedge Funds Make":
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    Bart Bartolozzi

    11 May 2011

    As the number of Hedge Funds has grown over the last few years so have the various companies that have looked at the space from a potential vendor perspective. There are a variety of unique technology challenges specific to each hedge fund, but one thing that is consistent is the mission-criticality of their IT systems and communication platforms. Hedge funds, first and foremost need to work with technology vendors that are truly focused on their business and are prepared to support their solutions with both the necessary resources and the timeliness necessary to eliminate potential downtime of their systems. Additionally, when selecting a solution platform, hedge funds need to ensure that the systems that they select provide them with the right features to allow them to both grow their business and provide them the proper tools to provide some basic self-support. It is critical that these solutions have a simplified management system, which should provide for lower TCO and allow for the platforms to be effectively managed by the internal resources available to the hedge fund. Systems that allow the hedge fund to manage basic administration, adds, and changes provides the hedge fund with the ability to make platform changes as needed to keep up with any changes to the business and limits vendor support to only larger platform changes and system issues. Another important consideration as to any platform decision should be based on how well the platform can support application integration or ease of application development. The various hedge fund systems and solutions are no longer stand alone and are constantly being pushed for tighter integration and greater layering of applications across platforms or on top of platforms. Solutions that allow for easy development on top of them, based on available APIs and SDKs are now in greater demand, and the business has greater necessity than ever before to integrate to them, as the business evolves or to meet additional business/regulatory requirements. Lastly, there is an increasing focus from the hedge fund on business continuity and disaster recovery (BCP). No longer can the hedge fund take a wait and see approach to business continuity. Platform decisions now are increasingly made based on the solution’s ability to support BCP and just as importantly, cost-effective BCP. Hedge funds have realized that BCP considerations up front, lowers the overall implementation costs, but most importantly, protects their business from potentially devastating revenue loss, going forward. Hedge funds can no longer roll the dice with regards to their vendor decisions, platform decisions or strategic need for BCP.

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