Hedge Fund IT Spending: The Inevitable Contraction
AbstractNew York, NY, USA December 31, 2008
As the world’s largest financial institutions are whipsawed by an unparalleled series of shocks and traumas, the hedge fund industry has taken its own beating. Celent estimates that global information technology spending by hedge funds will reach US$1.35 billion by year-end 2009, representing a decrease of 20.5% year-over-year.
In the wake of an unprecedented series of events, most of which occurred at a remarkable speed within the past few months, Wall Street has become a meaningfully different place for hedge funds. In a new report, Hedge Fund IT Spending: The Inevitable Contraction, Celent assesses the consequences of the financial crisis and the resulting reorganization of capital markets on the hedge fund industry, hedge fund IT spending and technology priorities.
With uncertainty surrounding capital markets and the scarcity of credit likely to spill into 2009, a substantial contraction in IT spending is inevitable. Growth rates will drop across all regions and contribute to lower total spending. However, cuts will be more pronounced in Europe and Asia, given the particularly dire performance of both regions’ hedge funds.
The overarching theme of IT strategies in 2009 will be a focus on realizing efficiency wins from existing applications infrastructure while lowering maintenance costs or at least keeping the status quo. Spending on new technology will take a back seat. Unless faced with a collapsing platform, large scale system acquisitions or replacements are expected to be postponed.
Celent’s projections are tempered by trends in some specific areas where increased spending on either new or upgraded applications is expected. High priority items in 2009 include risk analytics, risk monitoring and control, legal and compliance, (risk) reporting, pricing and valuation, collateral management, liquidity risk management, performance measurement and attribution and front-end growth investments (i.e. algorithmic trading and SOR). Large scale system acquisitions, such as OMS/EMS and accounting systems, are considered secondary in an environment where many firms are in acute survival and ‘debacle avoidance’ mode.
"Approaches to thinking about and using technology will be transformed. Many of these changes will be transitory, some permanent. For the time being, cost-minimization and operational efficiency are at the top of the operational agenda,’" says Isabel Schauerte, an analyst with Celent’s Securities and Investments Group and author of the report.
"Yet, retrenchment is certain to be followed by reinvigorated spending. Today, generating alpha is, to some extent, a function of generating ‘operational alpha’," she adds.
The 44 page report contains 12 figures and one table. A table of contents is available online.
of Celent's Capital Markets research service can download the report electronically by clicking on the icon to the left. Non-members should contact firstname.lastname@example.org for more information.
Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].
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Table of ContentsNew York, NY, USA December 31, 2008
|Financial Crisis Impact||6|
|Long-Term Structural Developments||15|
|Technology Uptake and Market Segmentation||20|
|Hedge Fund IT Spending Trends||27|
|IT Spending Priorities||33|