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Hedge Funds Could Spend $800 Million a Year on Investment Technology

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NEW YORK (–A survey by PA Consulting Group found that North American hedge funds plan to spend approximately US$800 million a year on investment process information technology and expect this spending to grow.

These conclusions are based on responses from some 51 single- and multi-strategy funds and funds of funds, ranging in assets from less than US$150 million to more than US$1 billion. All the groups anticipate steady or accelerated growth in spending over the next three years.

Information requirements, investment strategy and size of assets under management emerged as the three drivers of technology spending. Asset size was more important for smaller funds while anticipated regulatory requirements were a critical issue for larger funds.

About 60% of survey participants were satisfied with their investment technology provider. Only a quarter of them saw as important their prime broker’s provision of integrated technology. Small funds were most likely to switch providers while the largest managers were least likely to do so.

Significant Share

“Prime brokers and fund administrators are an important distribution channel for investment and risk management technology vendors. They need to choose the vendor that will do the most to strengthen their relationship with their hedge fund clients,” Peter Stockman, a member of PA’s financial services practice and co-author of the report, commented in a statement.

Growth in hedge fund spending is projected at 4% to 5% a year between 2005 and 2007. According to Brian Dawson, another co-author, rapidly growing hedge funds need technology with a low entry cost and that can grow as the fund grows. “In particular, these funds need a solution that can handle multiple asset classes and investment strategies,” he said.

The US$800 million demand from hedge funds represents a significant share of the US$4.4 billion spent on information technology by North American asset managers. Total IT spending in North American financial markets is US$30 billion.

Technologies surveyed cover the three stages of trading, namely before the investment decision, order execution and after the trade. Data, news, broker and internal research, and messaging are pre-trade components of the technology. The post-trade phase includes accounting and reconciliation, reporting, analytics, deal capture, position keeping, risk management and portfolio management.

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