Effective communications are vital to sophisticated asset management businesses, be it receiving prompt market alerts and accurate front-end data, or accurate reporting to investors. Yet once you move away from the trading desk, the hedge funds industry, like its big brother the long-only asset management industry, remains wedded to a large degree to paper-based processes and fax machines, as it was 10-15 years ago. Not much has changed, despite strenuous efforts on the part of many technology providers to introduce some kind of harmonised electronic interface between funds, their investors, and their service providers.

On top of that, on the trading desk itself, larger funds are increasingly finding themselves maintaining multiple broker relationships, as well as various other external interfaces (e.g. with liquidity providers) which require their own dedicated lines and terminals, leaving the embattled COOs and senior traders with a mind-boggling array of different formats to ingest. How they manage without dropping the ball at some point is anyone’s guess. Having sat on the same desk as traders in a previous incarnation, I can confirm that sometimes they do.

Swift: not just a big boy’s toy

One initiative which has recently appeared on the scene is that of SWIFT’s, which is currently making a big push to persuade more investment managers to make use of its electronic messaging services. A new service, based on SWIFT’s Member Administered Closed User Group (MA-CUG), has been tailored to provide access to the SWIFT network by investment funds, including hedge funds. Thanks to the newly introduced SWIFTNet infrastructure and its complementary messaging services, users will be able to employ a single, secure communications channel to send and receive messages. Other benefits include low cost connectivity, no requirement for full SWIFT membership, resilience (participants benefit from disaster recovery sites), independence (free choice of services and correspondents) and scalability.

Financial Tradeware, a provider of portfolio management and fund management STP solutions, is one of the half-dozen or so SWIFT accredited Member Concentrators. According to Graham Bright, Managing Director of Financial Tradeware, small to medium sized organisations may have limited message volumes, but the costs associated with supporting interfaces and communication channels for the transaction of business are increasing.

“We have a very rounded product,” Bright says. “We look at the way customers would like to run their systems. There are over 8000 hedge funds out there at the moment, many with no automation whatsoever, and many funds are folding after short trading periods. They know they need $15-$20m after two years, but they’re not finding the IT specialists to support that.”

Bright’s message is one of standardisation. He sees one of Financial Tradeware’s biggest offerings to the hedge fund community as its ability to confer sponsored membership of the SWIFT network. He realises that hedge funds will have a diverse range of reasons for making use of SWIFT, and will likely prefer to perhaps start out with just one or two functions being served this way. But he feels that eventually SWIFT could have relevance to both front and back offices. “There are a lot of different, competing prime brokerage systems out there,” he says. “[Hedge funds] can get locked in quite easily, but SWIFT can allow them to manage multiple counterparties. Architecture is not an issue.”

Many hedge funds do not seem to be focusing on the costs they are incurring in their back offices and their systems architecture, regardless of which area of IT functionality you happen to be surveying. While brows are sweating on the trading desk trying to earn that extra basis point of alpha, money is being thrown away via operation inefficiencies. Bright appreciates relationships between funds and prime brokers are important to managers, but feels firms should be looking for solutions that will help them to drive down operational costs. “It’s possible to maintain a standardised solution without spending an unbelievable amount on infrastructure,” he says. “We know fund managers want to talk to multiple counterparties, but they don’t need staff to watch over these links. There doesn’t have to be duplication of effort and data.”

Keeping a record – and not losing it!

While SWIFT and Financial Tradeware are working towards improving live communications between hedge funds and counterparties, and seeking to wean fund managers off their fax machines, at Eze Castle they are focusing on disaster recovery, and in particular the recovery of evidence of communication. Recent high profile FSA investigations in the hedge funds space have revealed how important it is to have a record of who said what to whom, but much of this can be lost in the event of a disaster. For example, the sudden flooding of an office building – and your typical basement office in a former townhouse in Mayfair with Victorian pipes would be a classic venue for this – could easily wipe out vital tapes. Reliance on tapes to chronicle conversations covered by regulatory requirements, and storage of single copies, even if they are off-site, could leave managers open to problems in the event of a disaster, says Eze Castle’s Bob Guilbert.

“It is prudent for firms to consider alternatives,” he says. He sees more fund managers in the US looking far more closely at the way they store, manage, and recover voice communications, particularly as some firms start to use broadband connections for their voice communications rather than the telephone, opening up new ways to duplicate and securely store that data. Just as the fax machine may soon be consigned to the waste-heap, so may physical tape.

The growth in the sheer volumes of data funds are producing are also raising IT challenges: the typical quant fund is running multiple price feeds, plus email communication, hours of telephone conversations, etc. and will need to store all that securely, in a comprehensible format, ideally in a facility beyond a 300km radius from its original office. Storage Area Networks, or SANs, are coming into vogue in the US with financial institutions, and are fulfilling just this kind of role for asset managers there. Guilbert says it is only a matter of time before they catch on in the UK.

Communication is not something to take for granted. Funds will need to work hard going forwards to make sure that they do not haemorrhage money from the business, and don’t end up compromising its future in the event of the loss of records.