Alternative Funds Surprisingly Slow On The Technology Uptake

by Carla Johnson, Investors Offshore.com

02 May 2006

Many UK-based alternative investment funds are not maximising competitive advantage by using cutting edge technology, according to the findings of a recently published survey.

Transaction Network Services (TNS), a leading financial community connectivity provider, has conducted research that seemingly dispels the myth that alternative investment funds are seen as the technology trailblazers among UK buy-side institutions.

TNS, which surveyed IT managers, head traders and CIOs at 34 UK hedge fund institutions, says that more than a quarter of hedge fund firms still do not trade electronically and continue to use traditional paper, phone and fax. Half use leased lines to connect with sell-side institutions, with a further 30 per cent having internet connections and only a fifth using a trading extranet.

The research also revealed that almost three-quarters of firms have not yet adopted FIX (Financial Information eXchange)-based trading, a key enabler for straight-through-processing.

“It’s a real eye-opener that so many organisations who trade electronically continue to use multiple leased lines or the internet, rather than being part of a secure shared network. This is especially surprising, as 20 per cent of the organisations we spoke to said they connected with at least 11 sell-side partners," commented Alex Walker, vice-president, financial markets, TNS.

“One-to-one leased line connections don’t scale effectively, are slow to implement and offer no proactive management. Internet connections may appear cost effective, but the added expense of security management in installing the necessary firewalls and relevant people often outweighs the perceived low cost," he added.

With electronic trading projected to almost treble between 2004 and 2007, Mr Walker argued that maintaining multiple leased line connections would become even more onerous for trading organisations in this new environment.

However, while Mr Walker admits that slow adoption of FIX-based trading among alternative investment managers is surprising, he expressed confidence that its take up will increase.

“Nobody is pretending the hedge fund sector is backward in its attitude to technology. Indeed, the opposite is often the case, with many firms embracing it, to capitalise on opportunities presented by algorithmic trading, direct market access and programme trading," he noted.

“But our survey’s key findings reinforce our view that a surprisingly high proportion of the UK’s hedge fund businesses are currently failing to secure the maximum benefits modern technology offers," Mr Walker observed.

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