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August 23, 2005

OMS on a Budget: Vendor promotes all-in-one platform for small hedge funds

By Peter Chapman

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  • OMS on a Budget: Vendor promotes all-in-one platform for small hedge funds

(Traders Magazine, August 2005) -- Why buy a Ferrari if a Camry will get you there? That's the message from Advanced Financial Applications (AFA), a New York-based vendor marketing a combined order management and front-end trading system to budget-conscious hedge funds. The Ferraris of buyside technology are sold by such brand name firms as Lava Trading and Macgregor. They are large, complex, server-based systems often requiring several months to install and costing well into the hundreds of thousands of dollars. For small hedge funds managing only a few hundred million dollars in assets, the cost may be prohibitive.

For them, AFA claims to have built a sturdy alternative to the high-end systems of the upscale vendors. AFA has bundled order management and direct market access into one platform that it claims offers "integrated order processing."

Typically, order management systems are sold separately from front-end trading systems. OMSs, from such players as Macgregor and Charles River, enable buyside traders to keep track of their orders and trades. Front-ends, from the Lavas and the Neovests, enable the trader to interact with the market.

In recent years, the lines separating the two have started to blur. Portware, for example, sells a portfolio trading front-end with order management capabilities. The vendor calls it an execution management platform.

Now, AFA is taking the plunge. The vendor-one half of an organization that includes the small agency brokerage Electronic Global Securities-is marketing its Impact Pro system on a service bureau, or time-share, basis. AFA claims 13 hedge funds using Impact Pro and has cut deals with distributors such as Piper Jaffray and SunGard Trading Systems.

Founded in 1999 by Ameet Shah and Shams Karim, AFA's first product was the COMET front-end. Three years ago, with the hire of Nilesh Nanavati as president, the company mothballed COMET and built IMPACT Pro from scratch.

Traders Magazine Executive Editor Peter Chapman caught up with Shah and Nanavati to discuss their technology.

TM: So, you're selling Camrys?

Nanavati: We are not Rolls Royce. We are not competing with the Charles Rivers or the Macgregors.

Shah: Our clients don't have the technology staff to support [the bigger systems]. About 80 percent of the hedge fund market runs less than $150 million. Still they are growing at double digits. There are a lot of assets pouring into that segment. Think about the clients. Hedge funds map their needs to what a Macgregor or Lava has. You find you're giving a Ferrari to a guy who needs a Camry. He doesn't want to pay for the Ferrari. The functionality is too extensive.

TM: What does the budget of a small hedge fund look like?

Shah: Consider a $75 million fund. They get $750,000 in management fees per year based on a 1 percent fee. Assume, they are modeling the next three years. They won't be figuring in their performance fees because the search for alpha is difficult these days. So they cannot plan their operating P&L on an assumed return of 7 percent to 8 percent on that $75 million. From which they take a 20 percent performance fee. So, their budget is $750,000 a year.



"We are not Rolls Royce."

Nilesh Nanavati