Hedge funds now have a wide spectrum of technology offerings from service providers, but when technology can mean the difference between success and failure, how do they decide what to outsource and what they need to build themselves?
That was the topic of a panel held on Thursday at the High Frequency Trading World/Quant Invest conference in New York City. Moderating the panel, Louis Lovas, director of solutions for quant service provider OneMarketData, said hedge funds need to be careful in making technology decisions, as they can’t access the army of IT support some prop desks might have.
"Having the right blend of build versus buy can be as important as trading strategy," Lovas said. "Being smart about your technology can mean the difference between success and being a part of hedge fund failure statistics."
Ugur Arslan, founder and chief executive of hedge fund firm Aien Capital, said his firm had to build everything from scratch, as they couldn’t find anything on the market that properly fit the firm’s needs. He admitted, however, that there is no one right answer to the build versus buy question, since building your own system means a longer time to get to market.
John Lloyd, director of product marketing for technology vendor Traiana, noted that time to market can be vital for quantitative hedge funds, as their strategies can change so quickly.
"When new trading opportunities present themselves, they’re fleeting," Lloyd said. "You have to pursue them before they disappear."
Lloyd also noted that there can be hidden costs to a hedge fund firm owning its own system, as once the technology is built, the firm will have to support and maintain it. Also, even if a hedge fund’s infrastructure is sufficient, a quant fund doing rapid trading has to make sure its counterparties and clearers are up to handing high levels of volume as well.
Though some small funds might want to buy trading systems off the shelf, and large funds might want to build everything from scratch, most hedge funds fall somewhere in between, the panelists agreed.
David Rucker, managing partner of boutique asset management firm Golden Archer Investments, said some of the technology solutions available today simply aren’t worth the money. While his firm licenses some technology, it made more sense to build other pieces in house, he said.
"We do a lot with options, and we found it difficult to find a lot of vendors who could do what we were doing," Rucker said. "We’re a small firm, and we can do it correctly."
In building its own algos, Golden Archer at first hired additional programmers, but Rucker said now he and his partner just work on their algos themselves. That has the added benefit of not even raising the possibility that an outsider could make off with their proprietary trading secrets, he said.