03/26/2014

More Funds Embracing Web-Based Products

Front-office technology vendors peddling cloud-based portfolio systems are rapidly gaining on rivals still focused on software products requiring on-site installation and maintenance.

Broadridge Financial, Enfusion, Imagine Software and Liquid Holdings are among the firms riding a wave of demand from new and emerging hedge fund managers for web-based systems that can perform most, if not all, of the functions traditionally handled by in-house computer networks. In the face of rising technology costs, there are signs that even some larger, more established fund operators are considering outsourcing certain tasks to cloud-based vendors, despite lingering security concerns.

“I think that clients have really come to accept the Internet as a viable delivery mechanism that can give them an acceptable level of performance and resiliency,” said Bennett Egeth, president of Broadridge’s investment-management unit.

Consider that Broadridge has roughly doubled its client roster in the past two years to about 250 — largely via sales of a cloud-based portfolio-management system that also supports order-execution and risk-analysis functions. Or that Liquid Holdings, whose product is only available via the web, went from 23 to 77 clients in the second half of 2013, following an initial public offering in July. Industrywide, adoption of cloud-based order-management systems is now running at about 42% — up from just 5% in 2009, according to a recent study by Aite Group.

To be sure, the growth is being driven by smaller hedge fund firms that lack the resources to install trading systems in-house — let alone design their own systems, as the largest fund operators typically do. Two-thirds of Broadridge’s clients, for example, run less than $250 million. The New York firm, which had marketed its portfolio system under the Paladyne label until recently rebranding the product, offers a front-to-back-office “hedge fund in a box” starting at about $75,000 a year. Managers can access Liquid’s product for as little as $40,000.

For now, most larger firms are resisting migration to cloud-based systems, in part because of concerns about data security. Said a veteran hedge fund operations professional: “They [blue-chip managers] have more money than God, and here’s what they would have to worry about — putting their software, their crown jewels, on someone else’s server. And what happens if the CIA or the FBI goes to the cloud provider and gives them a request to divulge all the information on their servers? If it’s on your servers, you have the ability to defend it. That’s where the industry starts to get scared.”

What’s more, established hedge fund firms already are running technology systems they built themselves or purchased at great cost — and switching vendors can be a long and difficult process. “This is like ripping out your spine,” said Aite analyst Denise Valentine.

As a rule, bigger, more established fund shops dedicate significantly larger portions of their operations budgets to technology than newer, smaller firms. That said, an increasing number of old-guard managers are toying with the idea of performing certain tasks remotely — such as storage of less-critical data — in an effort to trim costs. Broadridge’s Egeth said concerns about data security are “so ’90s.”

Aite, a Boston firm that tracks the investment-technology sector, highlighted the increasing popularity of cloud-based portfolio- and order-management systems in two recent reports. Most of the leading vendors have businesses that are still largely based on software installed on clients’ computer systems. London-based software giant Misys, for example, services only 2% of its clients via a cloud-based offering.

“Client take-up of cloud among [many] vendors is relatively low,” Aite said. It singled out Broadridge and Imagine Software as the firms that “rule the roost” in the cloud arena, but also spotlighted Enfusion, Liquid Holdings and SunGard’s Hedge 360 product.

Paladyne, Broadridge’s predecessor, acquired its portfolio-management technology from multi-strategy hedge fund shop Alexandra Investment in 2005. But it’s only been in the past couple of years that the cloud-based version has caught on as a cost-effective alternative to installed systems. “I’m blown away by Paladyne’s growth,” Valentine said in an interview last month. Broadridge subsequently dropped the Paladyne name.

Valentine, who authored the Aite reports, noted that cloud-based systems carry significantly lower implementation costs, eliminate the need for in-house information-technology staffs and can deliver upgrades more quickly. Advancements in cybersecurity, meanwhile, promise to ease concerns about data leakage.

“Automation has improved in intrusion-detection and data-leakage technology, with active alerts and systemwide reporting on incidents helping companies to manage issues,” she wrote.

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