As budgetary constraints clamp down on buy-side organizations, Anthony says that the vendor-hedge fund relationship may start changing.
At last week's Buy-Side Technology North American Summit, some hedge fund managers noted that they are now employing vendors to deploy individuals to be embedded inside the hedge fund to help, full-time, with specific projects.
When the project is done, that programmer, developer, technician or general tinkerer goes back to the vendor, or gets moved over to a new project. Either way, he is an outsourced entity for the hedge fund and if anything goes awry, that person is simply released from duty. There aren't any human resource meetings and there aren't any health insurance requirements or promotion issues to be addressed.
Maybe the firm needs a very specific talent set for three months: Thus hiring a full-time employee does not make sense. Outsourcing and near-sourcing options present language barriers and time zone issues, and responses are not as immediate as one an in-house worker could provide.
And a part-time consultant, while an expert, may not have the same skin in the game as someone coming from a vendor firm. The vendor's reputation and future business with that hedge fund are on the line. If that programmer, say, fails to complete his job to the best of his abilities, it's the entire vendor firm that takes the hit, whereas a consultant can simply move on to the next company and exclude that last failure from his resume.
According to a recent study conducted by Greenwich Associates, a Stamford, Connecticut-based consultancy, 44 percent of hedge funds cut their trading desk budgets this year over last, while 40 percent reported flat budgets. (For the purpose of this study, these budgets were a combination of technology spend and trader compensation, but excluded funds allocated to pay trading commissions.)
What that says is that it's not just the back office that is taking a hit when it comes to budgetary needs─even the front office is taking it on the chin. Hedge funds are also working with smaller staffs, both on the trader front and in IT.
As a result, there would seem to be an opportunity for vendors to enter into the mercenary realm and find new and inventive ways to embed their employees inside of hedge funds. These notoriously hands-off firms have come to be all-hands-on-deck after 2008.
This practice of embedding vendor employees inside of a fund has been a common practice when it comes to specific implementations for the vendor: If a hedge fund adds a new order management system, the vendor will add a full-timer to address any issues and make sure the transition from a legacy system to a vendor solution goes smoothly. But those relationships end.
As hedge funds continue to embrace outsourced offerings, it may be worth it for vendors to create mercenary teams inside the company that can bounce around from hedge fund to hedge fund helping with random projects.
If you're firm is already doing something like this, I'd be interested to hear about it. Give me a call (646-490-3973) or shoot me an email.
James talks about his trip to Chicago and some of the interesting topics that came up (including a look at disaster recovery demands). Then Anthony and James touch on ISDA's initial margin rules, with Phase 3 going live next year.Subscribe to Weekly Wrap emails